Is COTY stock a buy?

Quoted (NYSE: COTY) The stock is down 25% year-to-date. So, is now the time to invest in Coty shares, as upbeat earnings and encouraging forecasts give investors hope for a brighter road ahead?

What is Coty?

Coty Inc. manufactures and distributes beauty products. The company offers perfumes, color cosmetics, hygiene products, sun protection and skin treatment. Coty supplies its products to department stores, specialty retailers, mass market retailers and airport duty free shops worldwide.

The Coty family of brands includes global icons such as COVERGIRL, Max Factor, Rimmel, Sally Hansen, Adidas and Nautica. With over a billion products shipped each year, they offer endless possibilities for self-expression.

Recent successful brand launches include Gucci Flora, Burberry Hero, Tiffany Rose Gold, CK Defy, Hugo Boss The Scent and the global relaunch of Kylie cosmetics. Coty also has continued success in Gucci Makeup, Gucci Guilty, Burberry Her, Gucci Bloom, Chloe Atelier des Fleurs and Marc Jacobs Perfect.

Coty Inc. is a Franco-American beauty multinational founded in 1904 by François Coty.

COTY’s fourth quarter financial results

Coty ended 2022 with double-digit sales and profit growth ahead of expectations.

Meanwhile, for the fourth quarter of fiscal 2022, which ended June 30, 2022, Coty reported its eighth consecutive quarter of results in line with expectations while continuing to make progress on each of its strategic growth pillars.

  • 4th quarter net income: $1.16 billion (up 10% YoY)

  • Gross margin: 61.8% (up 2.3% YoY)

  • Adjusted operating margin: 5.6%

  • Adjusted EBITDA: $132.4 million

  • Adjusted EBITDA margin: 11.3%

  • Operating loss : $77.4 million ($31.4 million in impairment charges and $45.9 million in Russian exit costs)

In the fourth quarter, Travel Retail performed particularly well, as the boom in travel led to higher sales, particularly in high-end fragrances. Before the pandemic, Travel Retail was a mono-category channel, mainly perfumes. From now on, Travel Retail is perfumes, Prestige make-up and, of course, skincare.

In recent months, Prestige makeup sales have recorded fantastic results in the best airports around the world.

Fiscal 2022 Highlights

  • Net income: $5.3 billion (up 14.6% YoY)

  • EPS: $0.07

  • Adjusted EPS: $0.28 (above expectations of $0.23-0.27, and up from $0.05 last year).

  • Operating result: $240.9 million

  • Adjusted EBITDA: $905.3 million (up 19% YoY)

  • Adjusted EBITDA margin: 17.1%

In fiscal year 2022, walmart (NYSE: WMT), Coty’s primary retailer, represented approximately 6% of Coty Inc.’s net revenue from continuing operations.

The increase in net sales in the fourth quarter was more impressive given the negative impact of the closure of its activity in Russia, which mainly affected the Bourjois and Max Factor brands. During the fourth quarter, the main revenue growth came from the Prestige division of Coty, which represents approximately 60% of Coty.

Coty was impacted by the lockdowns in China at the end of Q3 and during Q4. But, two months into the first quarter, Coty is seeing strong signs of a rebound. The company is experiencing double-digit growth and solid performance.

In 2022, Coty China recorded a performance of more than 11%, compared to a negative result of -1% in 2021.

Overall, Coty’s full-year revenue growth came from an increase in net revenue driven by market growth in the US and Europe amid a post-COVID recovery -19, as well as the reopening of travel in many jurisdictions.

How does Coty make money?

Coty makes money selling perfume, cosmetics, skin care, nail care, and professional and retail hair care products.

Coty’s luxury brand portfolio includes renowned brands such as Alexander McQueen, Bottega Veneta, Burberry, Calvin Klein, Chloé, Davidoff, Gucci, Hugo Boss, Kylie Skin, Marc Jacobs, Miu Miu and Tiffany & Co, as well as Lancaster and Philosophy skincare brands.

Meanwhile, its consumer brands division includes COVERGIRL, Max Factor, Rimmel, Sally Hansen, Adidas and Nautica.

Some of these brands operate under license. Coty has long-standing partnerships with top fashion houses, such as the luxury fashion giant Kering S.A. (OTCPK: PPRUF), from which it dismissed Gucci, Alexander McQueen and Bottega Veneta.

This Kering contract is not yet up for renewal, so although speculation abounds, the partnership remains intact for now.

COTY Stock Financials

COTY stock has a price-to-earnings (P/E) ratio of 108. Its price-to-book (P/BV) ratio is 1.9, which is well above the industry average of 0, 2. COTY shares do not have a dividend yield.

Over the past year, Coty Inc (COTY) has traded between $5.90 and $11.12. Today it is trading around $8. Year-to-date, COTY stock is down -25.52%, while the S&P 500 is down -15.4% over the same period.

FactSet analysts have a consensus overweight rating on COTY stock with a price target of $10.71.

DA Davidson analyst Linda Bolton Weiser reiterated her buy rating on COTY stock on August 26, 2022. She raised her price target from $10.25 to $10.50.

Piper Sandler also raised its target price from $8 to $9, following positive fourth-quarter results from Coty.

Inflation outlook

Coty expects modest gross margin growth in the first quarter and for fiscal 2023 due to continued inflationary pressure. The company expects FY2023 cost of goods sold (COGS) inflation to exceed 2% of sales. This is well above his earlier expectations, thus delaying the progress of his All-In-to-Win program.

However, Coty believes that its target of approximately $170 million in savings in fiscal 2023, along with continued premiumization of its portfolio and new pricing actions, will more than offset the expected impact of inflationary pressure. continues on its profit and loss figures.

As a result, Coty expects to grow earnings in fiscal 2023 and beyond.

Coty growth potential

Innovation is a pillar of Coty’s business. The company innovates through the creation of brands, new product lines and new technologies. Thanks to continuous R&D, it develops new products to market quickly. Product launches are strongly supported by Coty’s elevated digital presence, which includes e-commerce and digital marketing, social media and influencers designed to build brand value and consumer engagement.

Coty has also introduced new ways to personalize the customer experience, including using AI-powered tools to provide personalized guidance on selecting and using augmented reality tools that invite customers to try virtually. products with selected looks, tutorials and product recommendations.

Sue Youcef Nabi, CEO and Director of Coty, Inc., said:

our brands are becoming darling brands on social media, including CoverGirl of course, but also Rimmel.

We did a recent launch called Thrill Seeker which happened at the end of the quarter and the beginning of the first quarter, which is doing wonderfully, 100%, co-created with TikTokers. So clearly this part of the business is a key contributor, and you can imagine that over the next quarter it will continue to be a key contributor.

The company has seen retailers pivot and grow through omnichannel marketing. Therefore, driving online and offline sales is a goal Coty is focused on.

Although inflation is a headwind, beauty and make-up products are a staple in consumers’ daily lives. This means that it is often seen as a personal and affordable indulgence, which is not so easily affected by economic cycles.

Risks Related to COTY Shares

  • There are a few class action lawsuits against the company alleging violations of US securities laws regarding the acquisition of P&G Beauty Brands.

  • Inflation is obviously a major headwind. Big retailers like Walmart are looking to cut costs. Additionally, consumers are likely to have less cash available for non-essential purchases.

  • While beauty and makeup are often seen as essentials, there are plenty of brands to choose from these days, so shoppers can opt for more affordable products in a pinch.

Should you invest in COTY?

Coty assured shareholders that it had developed resilient plans to support the company in the event of worsening macroeconomic conditions.

Over the past five years, COTY’s stock price has experienced various fluctuations. COTY’s stock price is down 52% in five years and remains well below its pre-pandemic price.

The stock has seen a rebound in recent weeks, but overall it’s not a particularly exciting investment to own. Despite its attractive fundamentals and upbeat earnings summary, its past performance leaves much to be desired.

Considering that we are most likely heading into a global economic slowdown, with the potential for a recession and rate hikes to come, the bullish case for COTY stocks has several potential downsides.

The decision to invest in COTY shares depends on your investment time horizon and your confidence in its ability to grow.

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James T. Quintero