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Strength in Core Priorities Aid Coty (COTY), High Costs Ail

Focus on six strategic pillars is working favorably for Coty Inc. COTY. The beauty products provider is committed to strategic partnerships to enhance its brand portfolio. Moreover, the company is optimizing the overall cost structure amid rising inflationary pressure.

Let’s delve deeper.

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What’s Working Well for Coty?

Coty is benefiting from its focus on six strategic pillars that are aimed at sustainable growth. These include stabilizing Consumer Beauty make-up brands and mass fragrances; accelerating luxury fragrances and setting up Coty as a core player in prestige make-up; establishing a skincare portfolio in prestige and mass channels; strengthening e-commerce and Direct-to-Consumer (DTC) capabilities; growing presence in China via Prestige and certain Consumer Beauty brands; and setting Coty as an industry leader in sustainability.

With respect to stabilizing the consumer beauty brands, the company is on track with repositioning campaigns and disruptive advertising. In its last earnings call, management highlighted that its Consumer Beauty business’ global market share was up 60, 80 and 70 basis points in January, February and March, respectively. The company is on track to reposition its fifth cosmetics brand, Bourjois, across its key French market. Management is on track with innovation amid the boom in the fragrance market. Recently, Coty launched SKKN BY KIM, an efficacious nine-product skincare collection by Kim Kardashian.

The Zacks Rank #3 (Hold) company has made several strategic partnerships to enhance its brand portfolio. On Nov 18, 2021, Coty signed a licensing agreement with Orveda — an ultra-premium skincare brand made in France. Prior to this, Coty entered into a multi-channel agreement with Perfect Corp. — a well-known beauty tech solutions provider. The partnership will help Coty’s customers shop in the most convenient and personalized manner online and offline. On Mar 3, 2021, the company signed a letter of intent to partner with LanzaTech — a pioneer in producing next-generation green and sustainable ingredients.

Coty is on track to mitigate the impact of inflation via cost savings and pricing actions. It Coty is progressing well with the All In to Win transformation program across five key work areas, driving notable improvement in cost, gross margins, sales growth and cash. Management is committed to its saving initiatives, pricing actions, persistent premiumization and portfolio mix management to counter inflationary headwinds.

Will Hurdles be Countered?

Coty is grappling with increased inflation and supply chain-related challenges. The company witnessed a step-up in inflationary pressure to the tune of nearly 1.5% of revenues in the third quarter of fiscal 2022. Although management is on track to mitigate the impact of inflation via continued favorable mix gains and pricing actions, it expects inflationary pressures to continue to increase in the fiscal fourth quarter. Management expects increasing inflationary headwinds to restrict year-over-year gross margin expansion in the fiscal fourth quarter.

Coty’s international presence keeps the company exposed to the risk of adverse currency fluctuations. On its last earnings call, the company stated that it expects unfavorable currency rates to impact reported sales by 4-5% in the fourth quarter.

It is yet to be seen if the aforementioned growth efforts can help Coty sustain its growth amid a rising cost environment. COTY’s stock has dropped 13.3% in the past three months compared with the industry’s 11.5% decline.

Better-Ranked Staple Stocks

Some better-ranked stocks are Sysco Corporation SYY, Medifast MED and Campbell Soup CPB.

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1 (Strong Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Sysco’s current financial year sales and earnings per share (EPS) suggests growth of 32.5% and 124.3%, respectively, from the year-ago reported number

Medifast, which manufactures and distributes weight loss, weight management, healthy living products and other consumable health and nutritional products, currently carries a Zacks Rank #2 (Buy). MED has a trailing four-quarter earnings surprise of 12.9%, on average.

The Zacks Consensus Estimate for Medifast’s current financial year sales and EPS suggests growth of almost 19% and 13.4%, respectively, from the year-ago reported figure.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2. Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial year sales suggests growth of 0.5% from the year-ago reported figure.

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