Coty Leaves Little Room for Optimism

Coty Leaves Little Room for Optimism

Fragrance giant Coty has only been on the market for a few months, and just today delivered its first earnings report. The company's IPO was one of the biggest consumer products offerings in recent history, raising more than $1 billion. Initial response was tepid, perhaps because investors were not convinced by the supposed valuation or the use of offering proceeds (none went to the operating business). Today, however, the company was able to narrow its losses and come in above Wall Street's expectations. Is Coty a rosier pick today?

Earnings recap
For its fiscal fourth quarter of 2013, Coty lost a little more than $62 million, or $0.16 per share. This was a far, far greater result than last year, when the company lost an impressive $357 million. On an adjusted basis, which excludes the offering costs and other restructurings, it actually earned a profit of $0.03 per share. Analysts expected $0.02 in adjusted EPS.

Revenue climbed slightly above 3%, hitting $1.06 billion. Fragrances, skin, and body care products led the charge with 6% sales growth.

While the first quarter was a nice surprise to investors and analysts, the good news ended there. Coty management saw market growth in the United States and Europe slowing down, and now expects revenue to drop in the first quarter of fiscal 2014 compared to the first quarter of the just-ended year.

While short-term drops in income or sales are hardly a reason to panic (unless you're Mr. Market himself), the troubling trend here is market share, as the fragrance and body care business is incredibly competitive, with near commodity-like conditions.

Tough business
Coty is the fragrance manufacturer behind many celebrity-endorsed brands and other big names -- from Davidoff to Playboy. In this line of business, name is nearly everything, as most consumers are not strict olfactory connoisseurs of seasonal floral blends. If the company is struggling to grow, or even maintain, its market share, this would spell trouble. At its mature state and size, Coty relies on acquisitions to meaningfully grow the business. Recently, it tried to buy multilevel marketing company Avon for $11 billion.

Management will certainly continue to shop for companies that would fit well under the Coty empire, but there will soon be pressure to make a deal happen if its current products are not holding up in stores.

At nearly 18 times its projected earnings and with an EV/EBITDA of 11.6 times, not to mention a balance sheet with more than $2.5 billion in debt, Coty is a tough stock to love at the moment. Its brands are impressive and the company holds some qualities of a long-term, steady-earning business. But considering its valuation, an IPO that did little for the business, and questions regarding its ability to grow market share, this stinking rose is not a buy in my book.

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