Coty Inc

We will discontinue analyst coverage of Coty on or about April 20.

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We have lowered our fair value estimate for Coty to $5.60 per share from $6.60 to reflect near-term demand challenges in the mass makeup business, as well as higher investments in innovation, marketing, and working capital as the firm looks to shore up its position in premium fragrance and grow distribution selectively in Asia-Pacific and in travel retail. Our updated intrinsic valuation implies a fiscal 2026 enterprise value/adjusted EBITDA multiple of 11 times.

Organic sales fell 3% in the second quarter of fiscal 2026 (6% drop in mass) and adjusted EBITDA dropped 15%. Although it withdrew fiscal 2026 guidance on the CEO change, it expects sales and margin pressure to persist in the near term. Coty's weakness stems from its exposure to the challenged mass makeup market and lackluster premium fragrance innovation. New executive chairman and interim CEO Markus Strobel's growth plan on innovation and commercial execution looks prudent, but the turnaround will take time. On fragrances, we agree with Strobel that Coty needs to narrow its focus on core innovations rather than overstretching on many fronts. The lack of impactful recent launches likely drove discounting pressure for Coty, but we expect a lift from new offerings from Kylie Jenner and Calvin Klein. We remain cautious about its mass makeup business. Despite Strobel's plans to step up digital presence and innovation around CoverGirl and Rimmel, we doubt Coty can gain much traction with its target consumers amid competition from influencer-backed brands and low-price rival e.l.f.

For fiscal 2026, we model sales to fall 2% on an 8% drop in mass makeup that is partially offset by a 1% rise in premium fragrances. For the remainder of our 10-year forecast period, our 2% average sales growth forecast is driven by our expectation that Coty will speed up growth in the premium segment to a 3% annual pace via a better managed fragrance presence, more impactful launches that lift the overall brand performance, and more consistent marketing. We think its efforts to diversify into premium skin care will continue but expect sales contribution to remain negligible in the coming years given a high entry barrier in the category and a lack of strong brands. On the other hand, we expect growth in mass business will likely remain subdued given its exposure to the more challenged cosmetics category and the lack of on-trend brands.

We think the firm will likely look to expand and diversify beyond premium fragrance via acquisitions, but this won't be a priority in the next few years given the turnaround focus, and the timing and size of the transactions are difficult to predict. Therefore, we have refrained from making projections with little visibility into such deals.

On the profitability front, we have modeled adjusted operating margins to fall to 11.1% by the end of our 10-year forecast period, compared with 12.2% in fiscal 2025. The bulk of margin contraction takes place at the gross margin line, as we believe the metric was inflated during recent years of above-average growth in premium fragrance demands, and should normalize over the next decade on more competition and higher brand investment needs to support. To a lesser extent, we also assume its struggling mass makeup business to remain a drag on profitability. As such, we have modeled the metric to end the 10-year period at 64.0%, lower than the 64.8% level in fiscal 2025 but still above the 63% average for the 2020-2025 period on a favorable mix and efficiency gains.

We model some expense leverage on the selling and labor expense line as Coty rationalizes cost structure and raises operating efficiencies, with such expenses as a percent of sales falling to 23.0% by fiscal 2035, versus 23.5% in fiscal 2025. However, we expect the firm will have to invest the savings into more spending in marketing and product development to shore up its competitive position in the core fragrance category and support diversification into other premium categories and channel expansion in Asia. As such, we model such expenses at 27.5% and 2.4% of sales, respectively, by fiscal 2035, higher than the respective 27.0% and 2.2% seen in fiscal 2025, but comparable to the averages of 25% and 2% in our global beauty coverage.

We don’t believe Coty has carved out an economic moat around its beauty business based on either intangible assets or cost advantages. Despite a 65% sales contribution from prestige products as of its June-ended fiscal 2025, Coty’s narrow focus on the small fragrance subcategory (18% of the $400 billion global beauty spending in 2024, per Euromonitor), coupled with a heavy reliance on licensed brands, has constrained the firm’s ability to build and maintain tight retailer relationships and consumer loyalty that can underpin intangible assets. The remaining consumer segment is unlikely to have any brand-driven intangibles either, given the commoditized nature of the mass beauty market and fierce competition from larger rivals such as wide-moat L’Oreal. Furthermore, with a $6 billion revenue base that’s materially smaller than that of global beauty leaders L’Oreal ($50 billion) and Estee Launder ($14 billion), we are skeptical that Coty benefits from any cost advantage in procurement, research, or marketing. As such, the firm has struggled to extract economic profits in the past five years, with returns on invested capital (ROICs, including goodwill) averaging 5%, well below our assumed 8% weighted average cost of capital. Although we have modeled investment returns to gradually expand over the 10-year forecast horizon, we attribute the improvements to better operational efficiencies, not any durable competitive edge in its underlying business.

We view Coty’s focus on the small fragrance category as handicapping the firm’s ability to cultivate and maintain brand intangibles based on tight retailer relationships. While Coty’s sales concentration in the high-end segment (two thirds of sales) aligns with premiumization trends among beauty consumers, over 95% of its premium sales are from fragrance. We think such a narrow focus has diminished Coty’s appeal to important retail partners, including high-end department stores and multi-brand specialty beauty retailers globally. We believe these retailers are much keener to maintain a close long-term relationship with the likes of L’Oreal, Estee Lauder, and LVMH that have top brands across the skincare, cosmetics, and fragrance categories to provide full coverage of beauty needs, leaving Coty with limited bargaining power in the relationship. Even in Coty’s premium fragrance niche, we’d note the firm lost its market share leadership to L’Oreal in 2020 (14%, versus the latter at 15%) and continued a downward trajectory in recent years holding just 11.6% share in 2024, behind L’Oreal (16.5%) and LVMH (12.4%).

Furthermore, we believe Coty’s pricing power is constrained by inherently weak brand affinity and pricing power in fragrance. Relative to skincare and cosmetics that deliver visible benefits to skin health and appearance, benefits from fragrance are less visible, and switching costs are likely lower. As such, we surmise that consumers tend to be more price sensitive in making purchase decisions for fragrance and are more likely to remove fragrance from daily beauty routines in a pinch or switch to lower-priced substitutes, including mass brand fragrances or even body sprays. We think Coty’s sales concentration in fragrance is at least partly responsible for the notable gap in Coty’s gross margins (averaging 64% in the past three years) versus those of L’Oreal (74%) and Estee Lauder (72%). For reference, fragrance makes up 9% of sales at L’Oreal and 16% at Estee. We acknowledge Coty’s intention to diversify beyond fragrance, as evidenced by its ambitious $12.5 billion acquisition of more than 40 beauty brands from wide-moat Procter & Gamble in 2016. However the transaction has failed to deliver, in our view, due to sub-optimal execution and pandemic interruptions. The dearth of desirable, independent premium skincare and makeup brands, combined with Coty’s lack of strong retailer ties, likely makes the firm a less attractive buyer (or investor) in the eyes of potential targets. As such, we suspect fragrance will remain Coty’s core business for the foreseeable future.

In addition, we think Coty’s reliance on licensed brands further limits the firm’s ability to effectively manage brand equity. Roughly 90% of its fragrance business is concentrated in seven licensed luxury or premium brands, including Gucci, Burberry, Hugo Boss, and Calvin Klein, all of which enjoy solid brand standing in their core apparel and leather goods categories, but do not stand out in the beauty aisle. In fact, we think fragrances, like sunglasses, are often viewed as an ancillary category for luxury brands to monetize consumer loyalty. As such, we surmise Coty has limited autonomy in the advertising and marketing of those licensed brands to differentiate them in the fragrance category and build connections with consumers.

Moreover, we don’t think the firm benefits from any scale-driven cost advantage against its larger peers, given Coty’s small revenue base at 12% of L’Oreal’s and 40% of Estee’s total. With a significant overlap in the procurement basket for ingredients and packaging material, we suspect the firm has no edge against its main rivals in sourcing at a lower cost and will likely be given lower priority when the supply of rare ingredients (such as plant-based extracts used in high-end perfume) is disrupted due to natural disasters or logistics bottlenecks. Coty’s estimated advertising and research spending allocation (at 27% and 2% of 2025 sales, respectively) is comparable with beauty peer averages of 25% and 2%, but the dollar spending of $1.6 billion and $130 million is dwarfed by those of L’Oreal ($17 billion and $1.7 billion) and Estee ($3.6 billion and $320 million). This puts the firm at a disadvantage in investing in research, bidding for coveted media time slots and event sponsorships, and forging relationships with digital media influencers.

We think new executive chairman and interim CEO Markus Strobel can leverage his three decades of consumer experience at P&G, including his success at premium brand SK-II in the important Asia market, to revive growth at Coty.

As a global beauty maker with a decadeslong presence, Coty can leverage its brands and distribution networks to tap into growing beauty demand.

With low exposure to Asia, just 12% of fiscal 2025 sales versus more than 20% at global peers, Coty has ample room to grow in the region aided by innovation focusing on local needs and investments in channels

Coty’s lack of premium skincare and makeup brands handicaps its ability to benefit fully from the premiumization trends in beauty.

As Coty will lose the Gucci licensing rights in 2028 to L'Oreal, and owners of other premium brands including Burberry might decide to take their brands back in-house, we see uncertainties around the long-term prospects of its fragrance portfolio.

As Coty continues to look for acquisitions to diversify beyond fragrance, we see risks that the firm may overpay, impairing its returns.