Coty Inc. Navigates Profitability Challenges Amidst Fiscal 2026 Projections

Fiscal 2025 Performance and Near-Term Outlook

Coty Inc. (COTY) concluded fiscal 2025 with an adjusted EBITDA of $1.08 billion and an 18.4% margin, marking a 60 basis point increase year-over-year. This expansion is largely attributed to disciplined cost controls and productivity gains, notably stemming from the company's 'All-In To Win' program, which delivered approximately $850 million in cumulative savings between fiscal 2021 and 2025.

However, the company faces immediate profitability challenges, with management projecting adjusted EBITDA declines in the first half of fiscal 2026. A mid-to-high teens percentage decrease is anticipated for the fiscal first quarter, followed by a low-to-mid teens percentage decline in the fiscal second quarter. These projected declines are primarily attributed to factors including weaker sales, the negative impact from tariffs, and the restoration of variable compensation. A turnaround is expected in the second half of fiscal 2026, contingent on a resurgence in sales momentum, significant product launches, and enhanced benefits from tariff mitigation strategies.

Market Reaction and Stock Performance

COTY shares have recently experienced weakness, losing 12.2% in the past month. This underperformance stands in contrast to the broader Consumer Staples sector, which declined 3.4%, and the S&P 500, which advanced 4.3% over the same period. The market reaction suggests investor apprehension regarding the short-term headwinds and the sustainability of the company's profitability improvements.

Adding to the cautious sentiment, Berenberg recently downgraded the stock to Hold from Buy, significantly cutting its price target to $5.05 from $6.50. The investment firm cited concerns about a delayed sales growth recovery, a weaker consumer outlook, inventory destocking, and potential headwinds from tariffs as key drivers for its revised stance.

Strategic Initiatives and Broader Market Context

Coty's 'All-In To Win' program is a cornerstone of its strategic response, targeting an additional $370 million in savings over the next two years, with approximately $80 million in fixed cost reductions and $120 million in productivity gains expected in fiscal 2026. These measures aim to offset inflationary and tariff-related pressures while allowing for reinvestment in the business.

The company operates within a complex market environment characterized by macroeconomic uncertainty, tariffs, and increased promotional activity, which is leading to cautious retailer orders. Despite these challenges, demand for beauty products, particularly fragrances, remains solid. Coty's strategy includes rolling out major innovations, expanding its fragrance mist offerings, broadening fragrance distribution, rightsizing retailer inventories, and rebalancing its Consumer Beauty division towards more profitable segments like mass fragrances. Like-for-like (LFL) sales are forecast to decline by 6-8% in the fiscal first quarter and 3-5% in the fiscal second quarter, with a return to LFL growth anticipated in the second half of the fiscal year.

From a valuation perspective, Coty currently trades at a forward 12-month Price-to-Earnings (P/E) ratio of 9.28, which is below the industry average of 27.9 and the sector average of 16.92, suggesting a potential discount. Coty's situation reflects broader challenges faced by companies in the Consumer Staples sector, where tariffs and macroeconomic volatility can significantly impact profitability and necessitate adaptive strategies focused on cost control and strategic market positioning.

Outlook and Key Factors

The second half of fiscal 2026 is poised to be a critical period for Coty. The projected rebound in adjusted EBITDA and earnings per share growth is largely contingent on the successful execution of its strategic initiatives, including a return to sales momentum, the impact of new product launches, and effective tariff mitigation efforts. Investors will be closely monitoring the sustainability of the efficiency improvements derived from the 'All-In To Win' program and the company's ability to navigate external economic pressures. The interplay of internal strategic execution and external market factors will determine Coty's trajectory in the coming quarters.