Coty Accelerates Supply Chain to Address Sales Slump, but High Leverage and Consumer Beauty Woes Persist

What happened

Coty is grappling with sagging sales, as FY25 revenue fell 4% and the company swung to a net loss due to impairments and derivative losses, highlighting operational challenges. In response, the company is cutting its product development timeline to speed up its supply chain and better align with fast-changing consumer demand, as reported in recent news. This initiative aligns with existing strategies from SEC filings, such as regionalizing production and cost reductions aimed at mitigating tariff impacts and improving agility. However, the DeepValue report underscores persistent issues, including high leverage with net debt/EBITDA at 4.2x, low interest coverage, and a structurally loss-making Consumer Beauty segment. While supply chain acceleration could enhance responsiveness, it does not directly address core financial risks or the need for a credible turnaround in weaker business units.

Implication

Speeding up the supply chain may help Coty capitalize on trend-driven demand in prestige fragrances, its core growth area, potentially boosting short-term sales if executed well. However, without meaningful progress in reducing high leverage or resolving Consumer Beauty losses, margin improvements could be capped, limiting overall profitability gains. The elevated net debt/EBITDA ratio of 4.2x and interest coverage near 1x continue to strain cash flow and increase equity volatility, as highlighted in the DeepValue report. Investors must monitor whether this operational efficiency translates into sustained revenue growth and consistent free cash flow, key watch items from the report's WAIT stance. Given the speculative nature of the turnaround, the stock remains high-risk, and any position should await demonstrable improvements in balance sheet health and segment performance.

Thesis delta

The thesis remains unchanged: Coty is a speculative turnaround with exposure to growing prestige fragrances but burdened by high leverage and operational instability. The supply chain acceleration is an incremental operational adjustment within the existing strategy, reinforcing execution focus but not altering the fundamental risk-reward profile. Continued vigilance on key metrics—such as leverage reduction, Consumer Beauty resolution, and cash flow consistency—is critical for any potential upgrade from the current WAIT stance.