Restructured Divisions Will Open New Fragrance And Beauty Frontiers

Key Takeaways

• Reallocation towards the profitable fragrance segment and organizational changes aim to improve growth prospects and efficiency, potentially boosting margins and earnings.
  
• Anticipated growth in the U.S. fragrance market, driven by demographics, and planned price increases are set to sustain revenue growth and expand margins.
  
• Coty faces financial pressure from global cosmetics market declines, competitive U.S. market dynamics, inventory issues, and potential tariff impacts on costs and earnings.

Catalysts

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

• Coty plans to clean up its Prestige division's baseline to make way for new innovations in fiscal '26, aiming to stimulate demand and drive future growth, likely impacting future revenue positively.
  
• The company is reallocating efforts and resources to focus on its highly profitable mass fragrance category, which has stronger growth prospects and higher gross margins compared to color cosmetics. This shift is expected to boost net margins.
  
• Coty's plan involves structural organizational changes to grant regional markets more power, aiming to improve agility and decision-making. This should enhance operating efficiency and potentially improve earnings.
  
• The company anticipates continued mid-single-digit growth in the U.S. fragrance market driven by increased penetration in demographics like male teens and Gen Z, particularly towards niche fragrances, which should sustain revenue growth.
  
• Implementation of mid-single-digit price increases on Prestige products, along with strategic revenue management to protect brand equity, is expected to maintain gross margin expansion despite potential tariff impacts.

Coty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coty's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.8% today to 7.0% in 3 years time.
• Analysts expect earnings to reach $443.7 million (and earnings per share of $0.57) by about August 2028, up from $-409.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $552 million in earnings, and the most bearish expecting $282 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from -10.4x today. This future PE is lower than the current PE for the US Personal Products industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.88%, as per the Simply Wall St company report.

Coty Future Earnings Per Share Growth

Risks

• The Prestige Cosmetics market is under pressure, particularly in Asia and China, which may impact Coty's revenue and growth prospects in these regions.
  
• Coty's Consumer Beauty division is experiencing a mid-single-digit decline in the global cosmetics category, with continued pressure on color cosmetics sales, potentially affecting overall net margins.
  
• There are challenges with inventory management and retailer replenishment in the U.S., resulting in a disconnect between sell-in and sell-out trends, which could impact Coty's financial efficiency and earnings.
  
• Coty faces risks from elevated tariff levels affecting their Prestige division, potentially increasing costs and putting pressure on earnings unless mitigated by price increases or other measures.
  
• The U.S. color cosmetics market is highly competitive, with the rise of indie and dupe brands capturing market share, posing a risk to Coty's revenue growth and market positioning in this key segment.

Valuation

• The analysts have a consensus price target of $6.438 for Coty based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $6.3 billion, earnings will come to $443.7 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 9.9%.
• Given the current share price of $4.89, the analyst price target of $6.44 is 24.0% higher.
• 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.