Coty Under Securities Investigation as Financial Struggles Deepen, Adding Legal Risk to High-Leverage Turnaround

What happened

Levi & Korsinsky has commenced an investigation into Coty Inc. for potential federal securities law violations, focusing on its quarterly loss that contrasts with resilient industry demand. This development compounds Coty's precarious financial state, as detailed in the DeepValue report, where FY25 revenue fell 4% and GAAP net income swung to a $368 million loss driven by trademark impairments and derivative losses. The company faces elevated leverage with net debt/EBITDA at 4.2x and interest coverage of only 1.06x, alongside persistent Consumer Beauty losses and tariff headwinds. While Coty trades at a discount to book value and DCF estimates, the equity is high-risk due to earnings volatility and execution challenges in its turnaround strategy. The investigation raises questions about prior disclosures and management integrity, introducing legal uncertainty that could further strain an already fragile balance sheet.

Implication

Firstly, the investigation could lead to significant legal costs or settlements, draining scarce cash and worsening Coty's leverage position, which is already a critical concern. Secondly, it may undermine investor confidence further, reducing liquidity and complicating capital access needed for deleveraging and strategic initiatives. Thirdly, management credibility is now at risk, potentially hindering execution of the turnaround plan, including the Consumer Beauty review and cost-saving measures. Fourthly, this aligns with and amplifies key risks from the DeepValue report, such as earnings volatility and balance sheet fragility, making the 'WAIT' recommendation more urgent. Finally, investors should monitor the investigation's progress closely, as any adverse findings could trigger additional sell-offs or credit downgrades, increasing downside risk beyond current operational challenges.

Thesis delta

The investigation introduces new legal and reputational risks that were not explicitly central to the previous 'WAIT' thesis, which already highlighted high leverage and earnings volatility. This shift amplifies the uncertainty around Coty's ability to execute its turnaround and achieve stabilization, potentially moving the stance closer to a 'POTENTIAL SELL' if the probe reveals material misstatements or further erodes financial flexibility. However, the core investment thesis remains speculative, with the added layer suggesting even greater caution until the investigation's outcome and its impact on operations and capital structure become clear.