Coty Inc. COTY, a major player in the beauty industry, is grappling with rising costs and weaker-than-expected demand, especially in its key markets like China, Travel Retail Asia and the United States. During the second quarter of fiscal 2025, the company saw a decline in both top and bottom-line results and also missed the Zacks Consensus Estimate. Despite strong holiday sales in core markets, Coty couldn't capitalize on the momentum as retailers maintained tight inventory control, impacting sales growth.

Such challenges have led to a notable 25.7% drop in its share price in the past three months. The stock underperformed the industry, the broader Zacks Consumer Staples sector and the S&P 500 in the said time frame. While the industry and the S&P 500 declined 21.4% and 3.3%, respectively, the sector rose 1.5%.

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Challenges in Asia and Travel Retail Hurt COTY

The macroeconomic environment remains challenging, with the exceptional beauty market growth of recent years transitioning into a more normalized phase. Coty continues to face headwinds in markets like the Chinese mainland and Asia Travel Retail. China and the Asia Travel Retail sector continue to face challenges as market demand remains weak. Retailers are further adjusting their orders, putting additional pressure on the market.

For the second quarter of fiscal 2025, Coty’s Asia Pacific segment reported net revenues of $191.5 million, which marks an 11% decline on a reported basis on lower revenues stemming from tough dynamics affecting the market in the Chinese mainland and the regional Travel Retail channel, further led by major retailer inventory reduction. On a like-for-like (LFL) basis, Asia Pacific net revenues also declined 11%. The ongoing pressure within the China ecosystem, coupled with the continued tight order and inventory management by retailers, is expected to persist for a few quarters. As a result, beauty sell-in is likely to track below sell-out in the near term, impacting the overall market performance.

Rising Costs Put Pressure on COTY

Coty has been experiencing higher advertising and consumer promotions (A&CP) spending for a while now. In the fiscal second quarter, the A&CP percentage remained in the high 20s, showing a year-on-year rise. With A&CP costs expected to stay at these elevated levels, the continued increase of such expenses, if not effectively managed, could further impact Coty’s margins and profitability in the coming quarters.

A Challenging Path Ahead for Coty

Coty anticipates a challenging road ahead, with the uncertain beauty market environment expected to keep LFL sales trends in the second half of fiscal 2025 broadly consistent with the fiscal second quarter’s trend, ranging from a negative 1% to negative 2%. The strengthening U.S. dollar is expected to create a significant foreign exchange headwind of roughly 3% in the second half, leading to a low single-digit percentage decline in reported sales for fiscal 2025. Furthermore, considering the dynamic retail demand landscape, management forecasts a similar market environment for fiscal 2026.

Coty: A Guide for Investors

While Coty continues to push forward with innovative product launches and strong marketing campaigns, its performance in key international markets, combined with rising operational costs, suggests that its recovery may take longer than anticipated. Until Coty can demonstrate a clear turnaround in its major markets and better control its cost structure, investors should stay cautious. At present, COTY carries a Zacks Rank #4 (Sell).

Top Three Picks

Nu Skin Enterprises, Inc. NUS engages in the development and distribution of various beauty and wellness products worldwide. It delivered a trailing four-quarter earnings surprise of 38.6%, on average. NUS currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nu Skin Enterprises’ current financial-year earnings indicates growth of 25% from prior-year reported levels.

Ulta Beauty, Inc. ULTA operates as a specialty beauty retailer in the United States. It currently carries a Zacks Rank #2 (Buy). ULTA delivered an earnings surprise of 6.2% in the trailing four quarters, on average.

The Zacks Consensus Estimate for Ulta Beauty’s current fiscal-year sales implies growth of 0.5% from the year-ago reported numbers.

Deckers DECK, a footwear and accessories dealer, currently has a Zacks Rank #2. DECK delivered an average earnings surprise of 36.8% in the trailing four quarters.

The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 15.6% from the year-ago figure.

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This article originally published on Zacks Investment Research (zacks.com).

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