Unlocking Coty's Value: The Case for a Strategic Division into Luxury and Consumer Goods Segments

Coty (COTY), the global beauty giant, stands at a crossroads. Its first-half 2025 results reveal a stark dichotomy between its luxury (Prestige) segment, which thrives on fragrance innovation, and its mass-market (Consumer Beauty) division, hamstrung by inventory overhang and category declines. This divergence raises a critical question: Could splitting the company into two distinct entities unlock shareholder value? Let's explore the strategic and financial logic behind this hypothesis.

Performance Divide: Luxury Shines, Mass Struggles

Coty's fiscal 2025 first-half results highlight a clear segmentation of fortunes:

• Prestige (Luxury) Segment:
• Revenue Growth: LFL sales rose 4%, driven by double-digit gains in prestige fragrances like Burberry Goddess and Hugo Boss.
• Margin Strength: Gross and operating margins expanded significantly due to supply chain efficiencies and reduced fixed costs.

• Growth Catalysts: Strong “sell-out” trends (retail sales to consumers) in fragrances suggest pent-up demand, particularly in Europe and the U.S.

• Consumer Beauty (Mass) Segment:

• Revenue Declines: LFL sales fell 2% in the first half, with mass color cosmetics and body care dragging performance.
• Structural Challenges: Retailers are reducing inventory in these categories, and the mass beauty market is slowing. Only adidas Vibes, Coty's largest mass fragrance launch in a decade, offered bright spots.

Valuation Opportunities: Separating the Wheat from the Chaff

Investors often struggle to value Coty as a single entity because its two segments operate in fundamentally different markets. A strategic division could unlock sector-specific multiples:

1. Luxury (Prestige) Segment:
2. Growth Prospects: Fragrance sales are resilient, with prestige fragrances growing at mid-single to double-digit rates. Brands like Swarovski, Marni, and Etro have untapped potential.

3. Valuation Multiple: Luxury goods typically command higher EV/EBITDA multiples (e.g., LVMH's ~25x vs. Coty's current ~10x). A standalone entity could trade closer to peers like Estée Lauder (EL), which trades at ~20x forward EV/EBITDA.

4. Consumer Beauty Segment:

5. Turnaround Potential: A spin-off or sale could attract a buyer focused on cost-cutting or niche categories like mass fragrances (adidas Vibes).
6. Valuation Risk: Mass beauty faces secular declines in commoditized categories, but restructuring could improve margins.

Operational Efficiency Gains: Focus and Flexibility

A division would allow Coty to optimize operations for each segment's unique needs:

• Luxury:
• Invest in Innovation: Redirect resources to fragrance R&D, licensing (e.g., Swarovski), and sustainability initiatives (e.g., CDP A- climate score).

• Channel Optimization: Address the “sell-in vs. sell-out” gap in China and Travel Retail Asia by aligning production with retailer demand.

• Consumer Beauty:

• Cost Discipline: Focus on supply chain savings and discontinuing underperforming SKUs (e.g., legacy color cosmetics).
• Category Shifts: Double down on mass fragrances and skin care, which grew despite broader declines.

Risks and Roadblocks

1. APAC Recovery: Coty's luxury segment remains exposed to China's weak Travel Retail and discretionary spending. A prolonged slowdown could undermine valuations.
2. Retail Inventory Dynamics: Global retailers' cautious inventory management could persist, dampening “sell-in” performance.
3. Execution Risks: Dividing the company would require significant management bandwidth and capital allocation decisions.

Investment Thesis: Buy the Split, but Wait for Catalysts

Coty's stock has underperformed peers like Estée Lauder and LVMH in recent quarters, partly due to its mixed portfolio. A strategic division could:
- Unlock ~20%+ upside: By applying luxury multiples to the prestige segment and restructuring the mass division.
- Reduce investor confusion: Allowing investors to bet on growth (luxury) or turnaround stories (mass) independently.

Recommendation:
- Hold COTY while awaiting clarity on division plans or APAC recovery.
- Buy if: Management announces a formal split, or luxury sales rebound in China/Asia.
- Avoid if: Mass segment declines worsen, or margins stall due to FX pressures.

Conclusion

Coty's dual identity is both its strength and its Achilles' heel. By separating its luxury and mass segments, Coty could finally let its premium brands shine while addressing the structural challenges in mass beauty. Investors should watch for catalysts like a formal division announcement, China's recovery, or margin expansion beyond 20% in Q2. For now, patience is key—but the potential reward of a revalued Coty is worth the wait.