Coty (NYSE: COTY) stock is down 25% year-to-date. So, is now the time to invest in Coty shares as upbeat earnings and encouraging guidance give investors hope for a brighter road ahead?
What Is Coty?
Coty Inc. manufactures and distributes beauty products. The company offers fragrances, color cosmetics, hygiene, sun care, and skin treatment products. Coty supplies its products to department stores, specialty retailers, mass-market retailers, and duty-free shops in airports worldwide.
The family of Coty brands includes global icons like COVERGIRL, Max Factor, Rimmel, Sally Hansen, Adidas and Nautica. With more than one billion products shipped each year, they offer endless possibilities for self-expression.
Successful recent brand launches include Gucci Flora, Burberry Hero, Tiffany Rose Gold, CK Defy, Hugo Boss The Scent, and the global relaunch of Kylie cosmetics. Coty is also seeing continued success in Gucci Makeup, Gucci Guilty, Burberry Her, Gucci Bloom, Chloe Atelier des Fleurs, and Marc Jacobs Perfect.
Coty Inc. is a French-American multinational beauty company founded in 1904 by François Coty.
COTY Q4 Financial Results
Coty ended full-year 2022 with double-digit sales and profit growth ahead of guidance.
Meanwhile, for the fourth quarter of the fiscal year 2022, which ended June 30, 2022, Coty delivered its eighth consecutive quarter of results in-line to ahead of expectations while continuing to progress across each of its strategic growth pillars.
Q4 Net Revenues: $1.16bn (up 10% Y/Y)
Gross Margin: 61.8% (up 2.3% Y/Y)
Adjusted Operating Margin: 5.6%
Adjusted EBITDA: $132.4m
Adjusted EBITDA Margin: 11.3%
Operating Loss: $77.4m (a $31.4m in impairment charges and $45.9m in costs related to the Russia exit)
In Q4, Travel Retail did exceptionally well, as the surge in travel led to higher sales, particularly in high-end fragrances. Before the pandemic, Travel Retail was a one-category channel, mainly fragrances. Now, Travel Retail is fragrances, Prestige makeup and, of course, skincare.
In recent months, Prestige makeup sales have enjoyed fantastic results in top airports worldwide.
FY2022 Highlights
Net Revenues: $5.3bn (up 14.6% Y/Y)
EPS: $0.07
Adjusted EPS: $0.28 (above guidance of $0.23-0.27, and up from $0.05 last year).
Operating Income: $240.9m
Adjusted EBITDA: $905.3m (up 19% Y/Y)
Adjusted EBITDA Margin: 17.1%
In fiscal 2022, Walmart (NYSE: WMT), Coty's top retailer, accounted for approximately 6% of Coty Inc.'s net revenues from continuing operations.
The Q4 net revenue rise was more impressive given the negative impact of closing its Russian business, which mainly affected the Bourjois and Max Factor brands. During Q4, primary revenue growth came from Coty's Prestige division, which accounts for roughly 60% of Coty.
Coty has been impacted by the lockdowns in China, at the end of Q3 and during Q4. But, two months into Q1, Coty is witnessing strong signs of a rebound. The company is seeing double-digit growth and robust performance.
In 2022, Coty China had a plus 11% performance, compared with a negative -1% result in 2021.
Overall, Coty's full-year revenue growth came from an increase in net revenues driven by market growth in the US and Europe amid a post-COVID-19 recovery, as well as from travel reopening in many jurisdictions.
How Does Coty Make Money?
Coty makes money selling fragrances, cosmetics, skincare, nail care, and both 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 skincare brands Lancaster and philosophy.
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-term partnerships with top fashion houses, such as the luxury fashion giant Kering SA (OTCPK: PPRUF), from which it licenses 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 ratio (P/E) of 108. Its price-to-book-value (P/BV) is 1.9, which is well above the industry average of 0.2. COTY stock does not come with a dividend yield.
Over the past year, Coty Inc (COTY) has traded between $5.90 and $11.12. Today it trades for around $8. Year-to-date, COTY stock is down by -25.52%, while the S&P 500 is down by -15.4% over the same period.
FactSet analysts have a consensus Overweight rating on COTY stock with a target share price of $10.71.
Linda Bolton Weiser, an analyst at DA Davidson, 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 Coty's positive-sounding Q4 results.
Inflation Outlook
Coty predicts modest gross margin growth in Q1 and FY2023 due to continued inflationary pressure. The company expects fiscal 2023 Cost of Goods Sold (COGS) inflation to rise above 2% of sales. This is well above its former expectations, thus delaying progress in its All-In-to-Win program.
However, Coty believes that its target of around $170m of savings in fiscal 2023, along with the continued premiumization of its portfolio and new pricing actions, will more than offset the expected impact of continued inflationary pressure on its profit and loss figures.
Therefore, Coty expects to deliver profit expansion in fiscal 2023 and beyond.
Coty Growth Potential
Innovation is a pillar of Coty's business. The company innovates through brand-building, new product lines, and new technology. Through continuous R&D, it develops new products to bring to market quickly. Product launches are heavily backed by Coty's elevated digital presence, which includes e-commerce and digital, social media and influencer marketing designed to build brand equity and consumer engagement.
Coty has also introduced new ways to customize the consumer experience, including using artificial intelligence-powered tools to provide personalized advice on selecting and using augmented reality tools that invite customers to virtually try products with curated looks, tutorials, and product recommendations.
Sue Youcef Nabi, CEO & Director of Coty, Inc., said:
our brands are becoming darling brands on social media, specifically CoverGirl, of course, but also Rimmel.
We've done a recent launch called Thrill Seeker that happened at the end of the quarter and beginning of Q1, that's doing fantastically well, 100%, co-created with TikTokers. So, clearly, this part of the business is a key contributor, and you can imagine that in the coming quarter, it's going to continue to be a key contributor.
The company has seen retailers pivot and grow through Omnichannel marketing. Therefore, driving both online and offline sales is something Coty is focused on.
Although inflation is a headwind, beauty and makeup products are a staple in consumers' daily routines. This means it is often considered a personal and affordable indulgence, which is not so readily affected by economic cycles.
COTY Stock Risks
There are a couple of class action complaints against the company alleging violations of US securities laws concerning the P&G Beauty Brands acquisition.
Inflation is obviously a significant headwind. Big retailers like Walmart are looking to cut costs. Furthermore, consumers are likely to have less free cash for non-essential purchases.
While beauty and makeup are often considered essential, there are many brands to choose from nowadays, so shoppers may opt for more affordable products in a pinch.
Supply chain issues are also of ongoing concern to the company, and it is monitoring this daily.
Should You Invest in COTY?
Coty has assured shareholders it has developed resilient plans to support the business in the event macro conditions worsen.
Over the past five years, the COTY share price has struggled along through various fluctuations. The COTY share price is down 52% in five years and remains far below its pre-pandemic price.
The stock has seen a rebound in recent weeks, but overall, it's not been a particularly exciting investment to own. Despite its appealing fundamentals and upbeat earnings summary, its past performance leaves much to be desired.
Considering we're most likely headed into a global economic slowdown, with recession potential and rate hikes ahead, the bull case for COTY stock has several potential drawbacks.
Whether you should invest in COTY stock depends on your investing time horizon and belief in its ability to grow.