Legacy Beauty Brands Will Decline Though Niche Demand Will Persist

Key Takeaways

• Shifting consumer preferences and digital-native competitors threaten Coty's legacy brands, market share, and pricing power across both mass and prestige segments.
  
• Macroeconomic headwinds, cost inflation, and operational risks from portfolio changes place pressure on profitability, margins, and sustainable earnings growth.
  
• Strong growth in Prestige fragrances, innovation, cost efficiencies, and a more agile structure are driving market share gains, margin expansion, and greater profitability despite headwinds.

Catalysts

Manufactures, markets, distributes, and sells beauty products worldwide.

• The shift in consumer preferences towards clean, organic, and transparent beauty ingredients poses a significant threat to Coty's legacy brands, many of which are seen as less sustainable than indie competitors; this could result in declining market share and impede long-term revenue growth for both the mass and prestige segments.
  
• Persistent macroeconomic challenges and widening income inequality threaten discretionary spending, especially in lower income tiers, which directly pressures revenue generation in Coty's Consumer Beauty division and limits the effectiveness of price increases to offset cost inflation.
  
• The accelerating success of digital-native and direct-to-consumer indie brands-along with influencer-led product launches-continues to fragment the market, eroding Coty's influence over traditional retail and compressing its pricing power, which may drive down both top-line growth and net margins over the coming years.
  
• Coty's strategy of pivoting away from underperforming brands and ongoing portfolio streamlining introduces execution risk and could result in further inefficiencies and elevated SG&A expenses, threatening progress in EBITDA margin expansion and sustainable earnings growth.
  
• Ongoing global supply chain volatility, including tariff increases, raw material cost inflation, and required investments in more sustainable packaging, will likely drive up cost of goods sold and increase compliance expenses, putting additional pressure on net margins and overall profitability into the medium term.

Coty Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Coty compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Coty's revenue will grow by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -6.8% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $478.7 million (and earnings per share of $0.63) by about July 2028, up from $-409.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from -10.9x today. This future PE is lower than the current PE for the US Personal Products industry at 19.6x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Coty Future Earnings Per Share Growth

Risks

• Coty's Prestige fragrance segment continues to grow robustly, particularly in the U.S. and Europe, with mid-single-digit gains sustained by increasing penetration among new consumer groups like Gen Z and male teens; this ongoing demand could drive higher revenues and offset declines in other categories.
  
• Strategic investments in innovation-such as game-changing blockbuster launches and new product formats in the Prestige category-are positioned to stimulate demand and drive both market share and earnings growth, helping to strengthen Coty's competitive edge and enhance net margins.
  
• The ongoing shift in organizational structure, emphasizing regional agility and market-specific decision making, is designed to regain momentum in underperforming markets, especially the U.S.; this increased nimbleness may yield improved operational efficiency and contribute to better revenue trends.
  
• Structural cost savings programs and technology-driven efficiencies (including S/4HANA and consolidation of support functions) are aimed at continuous EBITDA margin improvement, allowing Coty to reinvest in brand initiatives and weather macroeconomic volatility more effectively, thus boosting long-term profitability.
  
• Coty's ability to implement price increases in Prestige fragrances with minimal volume impact, due to category inelasticity, as well as agile sourcing and inventory strategies to mitigate tariff effects, positions the company to protect and expand gross margins even amidst external headwinds.

Valuation

• The assumed bearish price target for Coty is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Coty's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $478.7 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 9.3%.
• Given the current share price of $5.09, the bearish analyst price target of $4.0 is 27.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.