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Why Coty Stock Was Climbing Today

By Jeremy Bowman – Updated Nov 6, 2019 at 9:15AM

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Shares of the cosmetics company gained as its earnings report showed its turnaround strategy was starting to pay off.

What happened

Shares of cosmetics maker Coty (COTY 0.92%) were looking attractive today, surging after the company turned in a better-than-expected profit in its first-quarter earnings report and showed progress in its turnaround strategy.

As of 12:12 p.m. EST on Wednesday, the stock was up 13.6%.

Different kinds of makeup in the drugstore aisle

Image source: Getty Images.

So what

The CoverGirl brand owner said organic sales, which exclude the impact of acquisitions, divestitures and currency exchange, fell 1.1%, and overall revenue slipped 4.4% to $1.94 billion, which missed estimates at $1.97 billion.

Its consumer segment continues to underperform as the company has struggled to integrate CoverGirl and the dozens of other brands it acquired from Procter & Gamble in 2016.  Organic sales in consumer dropped 9.7% in the latest quarter, though that was offset by mid-single-digit organic increases in the luxury and professional segments. Luxury brands have been a source of strength across the cosmetics industry lately. 

During the quarter, Coty sold off Younique, which had weighed on sales and accounting for 1 percentage point of its decline in organic sales and 2 percentage points in the consumer beauty segment.

Despite those challenges, adjusted gross margin rose 160 basis points due to a sales mix shift toward luxury and professional and improvements in those businesses. Adjusted operating income also rose 10% to $154.7 million, and the company posted an adjusted profit of $0.07 per share, equal to its result the year before after excluding a one-time tax benefit. That beat analyst estimates by a penny. 

Commenting on the quarter, CEO Pierre Laubies sounded optimistic about the future and the turnaround in the consumer business, saying:

Q1 marked the first quarter of implementing our turnaround plan. With Younique excluded from our results as of September, we have also begun to see some improvements in the consumer beauty division. These improvements include revenue growth and market share gains on select brands in Europe, strong performance in Sally Hansen U.S., and some early progress on CoverGirl.

Now what 

Investors should expect the company's results to be muddy for the next few quarters as Coty said just weeks ago that it was looking to sell its professional beauty business, one of its three major operating segments.

Still, the turnaround is progressing, and investors should feel good about the company's guidance for the fiscal year. Coty expects organic sales to be flat to slightly down and for adjusted EPS to increase in the mid single digits. While that guidance was mostly in line with expectations, it seemed to confirm that the company was on the right track in its turnaround strategy.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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