Coty (COTY) is showing initial signs of a turnaround despite the Middle East impact on its Q3 results, RBC Capital Markets said in a note Thursday.

The note said Q3 results missed like-for-like sales expectations while beating profitability consensus. It added that like-for-like growth would have exceeded expectations excluding the 1.4% headwind due to conflict in the Middle East.

The report pointed to positives such as its Sell Out focus that is starting to bear fruit in consumer beauty. It said one main pillar of Coty.Curated is the shift toward a sell-out oriented culture.

While there is significant work to be done, its prestige fragrance remains one of the fastest growing beauty categories, it said.

"Considering that current valuation is similar to 2020 levels when the company was in financial distress, we believe that shares are undervalued," the report said.

RBC kept its $8 price target and outperform rating for Coty.

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