Please ensure Javascript is enabled for purposes of website accessibility

Why Natura &Co Stock Dropped 20% in Early Trading Today

By Reuben Gregg Brewer – Nov 12, 2021 at 12:26PM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the beauty retailer got hit after it reported earnings. It was a tough comparison, but the outlook is probably the bigger problem.

What happened

Shares of cosmetics retailer Natura &Co (NTCO -2.85%), which owns the Avon, The Body Shop, Natura, and Aesop nameplates, fell sharply in the first 90 minutes of trading on Friday, dropping as much as 20%. The company's earnings release on Thursday, which hit Wall Street after it had shut for the day, was the main reason for the decline.

So what

On the top line, Natura's revenue fell 4.2% year over year in the third quarter of 2021. However, that has to be taken with a grain of salt, because the company posted record sales in the third quarter of 2020. In other words, it was a very hard comparison, and falling only 4.2% could actually, perhaps, be viewed as a solid showing, noting that sales were still 20.7% higher than they were in the third quarter of 2019. However, given the steep drop in the price of the stock, it seems that investors are taking a glass-half-empty view today.

A person putting on makeup.

Image source: Getty Images.

Digging in a little, its Latam division's sales dropped 2.4%, and Avon's top line declined 14.3%, with Aesop and The Body Shop posting sales gains of 12% and 0.4%, respectively. Digital sales increased to 52% of total sales, though that includes a number of different pathways, such as the company's websites and relationship selling via apps. The Brazilian company's underlying net income dropped to 46.5%. That's not a particularly good number, which likely fueled the market's negative take here. Notably, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) margins dropped across each of its business segments. The overall decline for the company was 6.2 percentage points. As you might expect, pandemic-related issues and supply chain constraints were both material headwinds. Management noted that synergies related to the early 2020 acquisition of Avon, which would usually be expected to flow through to the bottom line, are now, effectively, offsetting the pandemic and supply chain issues that Natura is facing. That, in turn, will push out the company's expected EBITDA margin improvement projections by a year, to 2024. That's not a particularly positive development, either.

Now what

All in, it wasn't a great quarter for Natura &Co, and investors reacted accordingly. Still, the worst update is probably the fact that the integration of Avon isn't going to produce the expected efficiencies in the originally hypothesized time frame. It seems that, for many investors, that might just have changed the investment thesis here.

Reuben Gregg Brewer 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.