Coty (COTY)

Beauty products company Coty (NYSE:COTY) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 6.2% year on year to $1.30 billion. Its non-GAAP profit of $0.01 per share was 81% 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.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $6.00 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 grew its sales at a tepid 4.9% 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 missed Wall Street’s estimates and reported a rather uninspiring 6.2% year-on-year revenue decline, generating $1.30 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.6% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and indicates its products will face some demand challenges.

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 64.7% gross margin over the last two years. That means for every $100 in revenue, only $35.33 went towards paying for raw materials, production of goods, transportation, and distribution.

In Q1, Coty produced a 64.1% gross profit margin, in line with the same quarter last year but missing analysts’ estimates by 0.6%. Zooming out, Coty’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Coty has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer staples business, producing an average operating margin of 11.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Coty’s operating margin rose by 2.3 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Coty generated an operating profit margin of 17.4%, up 11.8 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

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.

Coty’s EPS grew at a decent 7% compounded annual growth rate over the last three years, higher than its 4.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Coty reported EPS at $0.01, down from $0.05 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Coty’s full-year EPS of $0.24 to grow 128%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Coty has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 5.4% over the last two years, slightly better than the broader consumer staples sector.

Taking a step back, we can see that Coty’s margin expanded by 1.2 percentage points over the last year. This is encouraging because it gives the company more optionality.

Coty burned through $168.4 million of cash in Q1, equivalent to a negative 13% margin. The company’s cash burn slowed from $234.3 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 2.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.

Coty reported $243.5 million of cash and $4.03 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 $1.12 billion of EBITDA over the last 12 months, we view Coty’s 3.4× net-debt-to-EBITDA ratio as safe. We also see its $122.5 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.

We were impressed by how significantly Coty blew past analysts’ EBITDA expectations this quarter. On the other hand, its revenue and EPS missed (though its organic revenue beat). Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The areas below expectations seem to be driving the move, and the stock traded down 2.6% to $5.03 immediately following the results.

Updated: May 22, 2025 at 10:42 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Coty, you should also grasp the company’s longer-term business quality and valuation.

We cheer for all companies serving everyday consumers, but in the case of Coty, we’ll be cheering from the sidelines. To kick things off, its revenue growth was a little slower over the last three years, and analysts expect its demand to deteriorate 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 relatively low ROIC suggests management has struggled to find compelling investment opportunities. 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 9x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $6.53 on the company (compared to the current share price of $4.97).

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.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.