Coty Inc (COTY), Estee Lauder Companies Inc (EL), Inter Parfums, Inc. (IPAR): Market Leadership Doesn’t Mean High Profits for This Beauty Company

In addition, Coty’s gross margins of 60% pale in comparison to Estee Lauder Companies Inc (NYSE:EL), which sports gross profit margins of 80%. This is the result of Estee Lauder’s product mix tilted toward higher-margin skincare and makeup products vis-à-vis fragrances, which represented 82% of its net sales. Taking into account the superior growth prospects of Estee Lauder, it is relatively cheaper with a 1.9 PEG compared with Coty’s PEG of 2.5.

Among listed peers, Inter Parfums, Inc. (NASDAQ:IPAR) is the only pure-play marketer of perfumes with almost its entire sales contributed by fragrances. Historically, it has been dependent on Burberry-licensed products, which accounted for more than 50% of its revenue. With Burberry buying back its license from the company in December 2012, Inter Parfums’ net sales fell 19.3% to $117.5 million for the second quarter of fiscal 2013.

In view of this, Inter Parfums, Inc. (NASDAQ:IPAR) has made efforts to invest in new profitable brands and it secured an exclusive 12-year worldwide license with China’s leading luxury brand, Shanghai Tang, effective from July.

Looking ahead, Inter Parfums, Inc. (NASDAQ:IPAR) has targeted long-term organic revenue and EPS growth rates in excess of 10% and 12% to 15%, respectively. While Inter Parfums has the strongest balance sheet of the three businesses with a net-cash financial position, it is expensive, trading at a premium to Estee Lauder Companies Inc (NYSE:EL) and Coty with a forward P/E of 25.

Conclusion

When I assess a company with leading market share as an investment candidate, I evaluate the relative market share of the company compared with its strongest competitor and the overall profitability of companies in the industry. Coty fails on both counts.

The global fragrances industry is highly competitive, with companies operating in the industry sporting lower gross margins vis-à-vis their peers in the skincare industry. Moreover, Coty is highly geared at 208% and trades at a higher PEG over its peer Estee Lauder Companies Inc (NYSE:EL). For the reasons mentioned above, I will not buy into Coty, despite its market leadership in the global fragrances industry.

The article Market Leadership Doesn’t Mean High Profits for This Beauty Company originally appeared on Fool.com and is written by Mark Lin.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.