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Can Coty Combat Key Potential Headwinds?

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Key challenges facing Coty’s businesses

Although Coty (COTY) has been aggressively scaling up this year, its core fragrances business remains challenged, as was discussed in Part One of this series. Calvin Klein, Coty’s largest fragrances brand, has been pressured in the current quarter, partly as a result of unsustainable launch activity in the past.

Other major brands such as Playboy and philosophy also reported a challenged quarter. More importantly, Coty’s sales have been pressured in some higher growth geographies and retail segments such as the United States and Brazil and in the travel retail (XRT) (RTH) channel.

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Doubling the top line

Coty’s sales base would more than double with the inclusion of Procter & Gamble’s (PG) and Hypermarcas’s brand portfolios. Due to the above-mentioned factors, considerable execution risk is likely to be prevalent as Coty battles to revive its core business, integrate new brands, and counter weak trends in key markets.

The appreciating US dollar will not help the top line either, considering the large exposure the company has to overseas markets.

Market reaction

Due to these factors, financial markets weren’t too impressed with Coty’s 1Q16 results. Coty’s stock price slumped 5.8% to $28.22 on November 5, 2015. Coty had risen by 2.5% to $29.66 on November 2 after its decision to acquire Hypermarcas’s brands was announced.

Competitor Estée Lauder (EL) delivered earnings and sales beats in its first-quarter results, which were declared on November 2, 2015. Its stock was up by 8.1% to $86.97 on the day in response to its positive earnings report.

Coty’s stock price is up by 36.6% year-to-date, however, the highest among its peer group. This is primarily due to the company’s aggressive moves to drive growth via both organic and inorganic means. The above chart provides the company’s returns performance over the past 12 months.

For more updates and analysis, please visit Market Realist’s Consumer Discretionary and Retail page.

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