Coty's FQ4 results meets an ugly market reaction, but plans to regroup emerge

Coty Inc. has experienced a significant stock decline of over 20%, reaching its lowest value in nearly five years, following an unexpected loss in the fourth quarter and dismal forecasts for the first half of fiscal 2026.

Analysts express concerns about Coty's performance, with downgrades from firms like Citi and Evercore ISI, indicating challenges from the destocking by U.S. retailers and seasonal trends impacting the fragrance market, which is crucial for Coty's profitability.

In response to these challenges, Coty plans to revitalize its cosmetics sector and enhance productivity, targeting $200 million in total cost savings by FY26 while introducing strategic changes such as new leadership and modifying bonus structures to improve regional performance.

The company aims to diversify its production sourcing by FY27, enhancing its competitive position against rivals and adapting to market conditions, while maintaining a conservative outlook to prevent further negative revisions ahead of new product launches.

Recommendation Rating: Caution Advised

Coty Inc. (NYSE:COTY) has faced significant challenges recently, with its stock value plummeting over 20% on Thursday, marking its lowest point in nearly five years. This decline follows an unexpected loss in the fourth quarter coupled with disappointing forecasts.

Coty's Chief Financial Officer, Laurent Mercier, shared insights during the company's earnings call, citing a combination of factors impacting sales. He noted that as the fiscal year 2025 commenced, the overall beauty market experienced diminishing profits due to shifts in consumer behavior toward value-seeking purchases, a fatigue with innovation, and external influences like anti-theft measures and immigration policy changes.

Analysts like Filippo Falorni from Citi Research highlighted the severity of Coty’s fiscal Q4 results, stating they fell short of expectations. The soft guidance for the upcoming fiscal first half of 2026 indicates that the company may face obstacles for at least the next two quarters. This led Citi to downgrade its rating on Coty from Buy to Neutral.

Similarly, Robert Ottenstein of Evercore ISI concurred that the first half of 2026 is likely to be tough for Coty. U.S. retailers are engaged in destocking in addition to seasonality trends within the fragrance market, which is critical as it constitutes 90% of Coty’s profits. Ottenstein also noted that expectations for fiscal 2026 appear to be back-loaded, presenting a challenging scenario for Coty’s stock, even if it seems undervalued now.

In response to its declining profitability, Coty aims to revitalize its cosmetics sector, which accounts for 20% of its sales but boasts gross margins exceeding 60%. Coty's CEO, Sue Nabi, emphasized the need for this segment to contribute positively to the company's overall financial health rather than detracting from it.

To achieve this, Coty plans to leverage a surge in the lip product category as well as multitasking beauty items. The company has also appointed new leadership in the U.S. and has modified its bonus structure to better incentivize regional performance. These strategic adjustments have already begun yielding results, with approximately $140 million identified in productivity savings, and efforts are underway to reduce fixed costs further, aiming for $200 million in total savings by FY26.

While there is a sense of optimism regarding Coty’s recovery strategy, the company has opted for a conservative outlook to prevent further downward revisions. This approach allows Coty to monitor the market reception of its upcoming Prestige product launches in the second quarter of FY26, which will include the transfer of fragrances from brands like Adidas and Nautica. By the third quarter, Coty is set to finalize the shift of additional entry-level prestige fragrance products.

Nabi indicated that by FY27, the company plans to diversify its production sourcing and key input materials across most of its fragrances, which would position Coty favorably against competitors who typically source from Europe. This strategy aims to bolster the company’s resilience and enhance its cost advantages in a challenging market environment.