Coty's Q2 Loss and Legal Probe Intensify Turnaround Uncertainty

What happened

Coty disclosed a $126.9 million net loss for Q2 FY2026, with non-GAAP EPS of $0.14 falling $0.04 short of consensus estimates. This aligns with the DeepValue report's warning of earnings volatility, where FY25 saw a 4% revenue decline, high leverage, and persistent Consumer Beauty losses. The announcement triggered a 15% stock decline to a 52-week low of $2.66, reflecting heightened investor skepticism about the company's recovery path. Additionally, law firm Levi & Korsinsky is investigating, adding potential legal and reputational risks to Coty's already strained profile. These developments reinforce the assessment that Coty remains a high-risk, speculative turnaround, with critical watch items on balance sheet health and segment performance.

Implication

The earnings miss and investigation likely delay any near-term upgrade from the current 'WAIT' stance, as they highlight persistent operational and governance challenges. High leverage and low interest coverage, at 4.2x net debt/EBITDA and 1.06x coverage, become more concerning amid cash flow pressures from losses and potential legal costs. Consumer Beauty's strategic review gains urgency, but the Q2 loss may complicate divestiture or partnership opportunities, prolonging segment drag. Prestige fragrance growth, a key catalyst, faces headwinds from the broader revenue decline and market skepticism, necessitating clearer evidence of conversion to reported growth. Overall, the stock's further decline may offer a deeper discount, but without signs of stabilization, the risk of additional impairments or financial strain remains elevated.

Thesis delta

The DeepValue thesis identified Coty as a speculative turnaround with high leverage and earnings volatility; the Q2 loss and investigation confirm these risks are materializing, shifting the outlook slightly more negative. This increases the urgency for monitoring balance sheet deleveraging and Consumer Beauty resolution, but does not fundamentally alter the 'WAIT' recommendation without new positive catalysts emerging.