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Why Does Coty Use Acquisitions to Expand Geographically?

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Wide geographical presence

Coty (COTY) markets its beauty and cosmetic products in more than 130 countries and territories. Coty derives its revenue from three geographical regions.

  1. Americas
  2. EMEA (Europe, the Middle East and Africa)
  3. Asia-Pacific

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Fiscal 2Q16 revenue for all of the regions

The net revenue for the Americas region fell by 6.5% to $0.4 billion in fiscal 2Q16 due to declines primarily in the US, Latin America, and travel retail. However, key growth brands in this segment include power brands Marc Jacobs, Sally Hansen, Rimmel, and philosophy.

The EMEA region’s net revenue fell by 1.6% to $0.6 billion on a reported basis. However, it rose by 8% on a constant-currency basis. This was the highest among all of the regions. The increase was mainly driven by growth in Eastern Europe and the Middle East. It was also driven by regional exports. It was partially offset by declines in the United Kingdom and Germany.

The Asia-Pacific region’s revenue came in at $0.1 billion—a decrease of 5.8% from the same quarter last year. However, its revenue rose by 2% on a constant-currency basis. It rose 3% in fiscal 2Q16. The revenue was driven by Australia and Japan. It was partially offset by declines in China.

Geographically vulnerable

Other companies like L’Oreal (LRLCY), Estee Lauder (EL), and Shiseido (SSDOY) also have a wide geographic presence. Procter & Gamble (PG) and Estee Lauder derive ~63% and ~63.2% of their revenue, respectively, from markets outside the US. As a result, they’re vulnerable to the negative impact of foreign currencies.

On February 1, Coty announced the completion of the Hypermarcas beauty and personal care business acquisition. Hypermarcas is a profitable business. It has operating margins above Coty’s levels. The transaction will strengthen Coty’s presence and infrastructure in Brazil—one of the largest beauty markets in the world.

Coty accounts for 0.1%[1. Updated as of February 4, 2016] of the iShares Russell Mid-Cap Growth ETF’s (IWP) total weight.

In the coming parts, we’ll focus on Coty’s margins, stock performance, and valuation multiple.

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