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Will Coty’s Turnaround Plan Drive Improved Performance?

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Growth expectations under new plan

Coty (COTY) announced its turnaround plan on July 1. Under the plan, the company will streamline its organizational structure and operations as well as revamp its Consumer Beauty business. Coty will record a $3 billion impairment charge to write down its intangible assets primarily related to the beauty brands acquired from Procter & Gamble (PG) in 2016. For fiscal 2020, Coty expects a moderate decline in its net revenue and growth in its adjusted operating income in the 5% to 10% range (on a constant currency basis). The company expects moderate improvement in its fiscal 2020 free cash flow.

From a long-term perspective, Coty expects its net revenue growth in the range of 0% to 2% in fiscal 2023 on a constant currency basis. The company expects its fiscal 2023 adjusted operating margin in the range of 14% to 16%. Coty aims to generate free cash flow of about $1 billion in fiscal 2023 compared to the expected $200 million to $300 million free cash flow in fiscal 2019. Coty also aims to bring its leverage (measured as net debt to EBITDA) below 4x in fiscal 2023.

Performance so far and analysts’ estimates

Coty announced its results for the third quarter of fiscal 2019 (ended on March 31) in May. Coty’s net revenue declined 10.4% to $1.99 billion in the third quarter and missed analysts’ estimate of $2.06 billion. The dismal performance of the Consumer Beauty business continued to be a drag on Coty’s revenue. Coty’s adjusted EPS was unchanged on a year-over-year basis at $0.13 in the third quarter as the company’s cost management efforts offset lower revenue. Coty’s third-quarter adjusted EPS exceeded analysts’ forecast of $0.12.

Analysts expect Coty’s fourth-quarter revenue to decline 7.5% to $2.13 billion and adjusted EPS to rise 14.3% to $0.16. For full-year fiscal 2019, analysts expect Coty’s revenue to fall 7.7% to $8.68 billion and adjusted EPS to decline 7.2% to $0.64.

YTD movement

Coty stock fell 13.5% on July 1 in reaction to the company’s announcement of a turnaround plan. Investors are perhaps concerned about the company’s long-term growth expectations and the state of its consumer beauty business. As of July 1, Coty stock was up 76.7% on a YTD basis in comparison to an 18.2% rise in the S&P 500 Index.

The YTD rise in Coty stock was mainly triggered after the company reported better-than-expected second quarter results in February and when JAB holdings increased its stake in Coty earlier this year.

As of July 1, the average 12-month price target for Coty stock was $12.55, which reflects an upside potential of 8%.

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