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Value Line has initiated coverage of Coty Inc. (COTY) in its flagship product, The Value Line Investment Survey. Coty manufactures and sells beauty products in three segments: Fragrances, Color Cosmetics, and Skin & Body Care. It holds the # 1 global position in fragrances, # 6 global position in color cosmetics, and has a strong regional presence in skin and body care. The company was founded in 1904 in Paris, and is now based in New York City. As of September 2013, it had roughly 10,000 full-time employees in over 30 countries. The company has had its Class A common stock listed on the New York Stock Exchange since June 13, 2013.

Coty manufactures roughly 71% of its products in ten facilities located in the United States, Europe, and China. The remainder of goods are produced by third parties. The primary raw material used in the company’s products are oils, alcohol, and specialty chemicals. It sells its goods through retailers, including hypermarkets, supermarkets, drug stores, pharmacies, upscale perfumeries, department stores, and nail salons. Coty’s primary retailers in the mass distribution channel include CVS (CVS), Kmart, Target (TGT), and Walgreen (WAG). It also sells its products in Macy’s (M), Neiman Marcus, and Saks Fifth Avenue. No retailer accounted for more than 10% of total sales in fiscal 2013 (ended June 30th).

Coty’s top ten brands generated roughly 70% of total revenues in fiscal 2013. Some of its most popular brands include: adidas, Calvin Klein, Chloe, Davidoff, Marc Jacobs, and Sally Hansen. These products are sold in over 130 countries and territories. Revenues from Fragrances, Color Cosmetics, and Skin & Body Care were 54%, 31%, and 15%, respectively, in fiscal 2013.

Sales are generally seasonal and increase in the December quarter, owing to increased demand by retailers during the holiday season. Revenues in 2013 were generated from the following regions: 47% from EMEA (Europe, the Middle East, and Africa), 41% from the Americas (North, Central, and South America), and 12% from Asia Pacific (Asia and Australia).

Coty faces significant competition in its business. Some of its biggest challengers are: L’Oreal, Avon Products (AVP), Estee Lauder (EL), and Revlon (REV). Aside from these large multinational names, the company also competes with smaller niche brands, as well as private labels sold by apparel and mass distribution retailers.

The company faces several risks in its business. Rapid changes in market trends and consumer preferences in the beauty market industry mean that Coty must adjust quickly in order to remain competitive. The company also needs to continuously develop new products to maintain relevance. R&D costs were 1.0% of total revenues in 2013. The company has more than 40 license agreements, which accounted for roughly 59% of 2013 sales. As a result, the termination of any of these licenses could adversely affect business.

In addition, since the company’s products are discretionary, nonessential items, an economic downturn, and resulting decrease in consumer spending, will typically dampen demand for Coty’s products. Coty also has a sizeable amount of debt on its balance sheet. At the end of fiscal 2013, it had nearly $2.6 billion in long-term debt, or about 63% of total capital.

Coty’s near-term business prospects remain challenging. The company reported a 3% year-over-year sales decline in the September quarter, owing to a sluggish macro economy. A large amount of destocking in the U.S., along with heavy promotion in Europe, also hurt results. However, despite near-term challenges, management expects business prospects to improve in the second half of the fiscal year, thanks to improving emerging market partnerships and new product launches. We look for continued solid growth at the Fragrances group, as well. 

Subscribers interested in learning more about this beauty products company are advised to consult Value Line’s quarterly reports for Coty, as well as any supplemental reports and relevant articles that may arise as important news comes to light.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.