Niche Brands Continue To Threaten The Mass Beauty Industry; Analyst Downgrades Coty

A near-term recovery for Coty Inc (NYSE: COTY) seems unlikely, according to a new analyst report.

The Analyst

Bank of America analyst Olivia Tong downgraded Coty from Buy to Underperform and lowered her price target from $16 to $10.

The Thesis

Bank of America’s original thesis on Coty centered around the company’s ability to reaccelerate results in undernourished brands like CoverGirl and leverage its Proctor & Gamble Co (NYSE: PG) deal synergies for earnings and reinvestment to drive organic sales growth.

“We no longer hold this view as tenable, as inconsistent execution and mounting disruption across mass beauty weigh on COTY’s ability to drive a turn in its Consumer Beauty division, while tough comps in Luxury and Professional create a high bar for FY19,” Tong said in a note.

The mass beauty industry is being threatened by a host of niche brands that have emerged, and it's not just Coty being affected. L’Oreal Co/ADR (OTC: LRLCY), e.l.f Beauty Inc (NYSE: ELF) and Revlon Inc (NYSE: REV) have all seen organic sales decelerate linearly in recent years, Tong said.

Coty is highly leveraged, meaning the company has little flexibility to deploy additional capital to make acquisitions of many of the niche brands it's threatened by.

“As such, although COTY shares have been pressured and expectations are already low with majority shareholder JAB”s standstill set to expire on 10/3, we would view any short-term upturn in shares as short-live with both earnings and multiple risks ahead,” Tong said.

Price Action

Coty shares fell as much as 3 percent Thursday, but traded down only marginally at time of publication to $11.41.

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