Coty (COTY)

Beauty products company Coty (NYSE:COTY) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 5.6% year on year to $1.58 billion. Its non-GAAP profit of $0.12 per share was 19.4% below analysts’ consensus estimates.

Company Overview

With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse spanning cosmetics, fragrances, and skincare.

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Competitors that offer a wide range of beauty and cosmetics products include L’Oreal (ENXTPA:OR), Estée Lauder (NYSE:EL), Proctor & Gamble (NYSE:PG), and private company Revlon.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $5.80 billion in revenue over the past 12 months, Coty carries some recognizable products but is a mid-sized consumer staples company. Its size could bring disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, Coty’s sales grew at a sluggish 2.9% compounded annual growth rate over the last three years. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

This quarter, Coty reported a rather uninspiring 5.6% year-on-year revenue decline to $1.58 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.1% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and indicates its newer products will not accelerate its top-line performance yet.

Coty has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 64.8% gross margin over the last two years. That means Coty only paid its suppliers $35.24 for every $100 in revenue.

In Q3, Coty produced a 64.5% gross profit margin, down 1 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Coty was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.5% was weak for a consumer staples business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Coty’s operating margin decreased by 6.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Coty’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, Coty generated an operating margin profit margin of 11.7%, down 2.5 percentage points year on year. Since Coty’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

In Q3, Coty reported adjusted EPS of $0.12, down from $0.15 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Coty’s full-year EPS of $0.19 to grow 141%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Coty has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.5%, subpar for a consumer staples business.

Taking a step back, an encouraging sign is that Coty’s margin expanded by 1.3 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Coty broke even from a free cash flow perspective in Q3. This result was good as its margin was 1.2 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Coty historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.

Coty reported $273.1 million of cash and $4.23 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.02 billion of EBITDA over the last 12 months, we view Coty’s 3.9× net-debt-to-EBITDA ratio as safe. We also see its $106.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Coty narrowly top analysts’ gross margin expectations this quarter. Guidance for topline and EBITDA were aso encouraging. On the other hand, its organic revenue fell slightly short of Wall Street’s estimates. Overall, this was a mixed quarter, but the outlook seemed to please investors. Still, the stock traded up 10.7% to $4.14 immediately after reporting.

Updated: December 4, 2025 at 9:50 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Coty.

We cheer for all companies serving everyday consumers, but in the case of Coty, we’ll be cheering from the sidelines. For starters, its revenue growth was uninspiring over the last three years, and analysts don’t see anything changing over the next 12 months. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets. On top of that, its declining operating margin shows the business has become less efficient.

Coty’s P/E ratio based on the next 12 months is 7.7x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $4.83 on the company (compared to the current share price of $3.41).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.