Back to top

Image: Bigstock

Will Coty's (COTY) Stock Sustain the Robust Momentum in 2021?

Read MoreHide Full Article

Coty Inc. (COTY - Free Report) appears to be in solid shape, courtesy of key drivers like prudent alliances, lucrative buyouts, solid innovation, cost-saving actions and e-commerce strength. In fact, improving sales trends in all channels and geographical regions, courtesy of robust e-commerce momentum and gains from innovative product launches, fueled the company’s first-quarter fiscal 2021 results, wherein both top and bottom lines came ahead of the Zacks Consensus Estimate. Also, the focus on cost reductions aided the company’s performance.

Notably, shares of this cosmetics giant have surged a whopping 148.3% in the past three months, easily outpacing the industry’s growth of 21%. Let’s delve deeper into the factors narrating Coty’s growth story and see if the Zacks Rank #3 (Hold) company can sustain its splendid run amid hurdles like a troubled travel retail network amid the pandemic as well as softness in the Mass unit.

Factors Behind Coty’s Growth Tale

Despite the pandemic-related challenges, Coty has made considerable progress on its core priorities, which include innovation and performance in its prestige and mass channels, a solidified position in its key markets, robust e-commerce momentum and a strengthened foothold in the skincare category (thanks to Kylie and Philosophy skincare) and the China region. Toward this end, the recent launches of Marc Jacobs Perfect, Gucci's Bloom Profumo di Fiori, Sally Hansen's good.kind.pure, and CoverGirl's Clean Fresh have been yielding results.

Notably, Coty has undertaken several alliances to enhance its brand portfolio. On Jun 29, the company announced a partnership with one of the most influential celebrities — Kim Kardashian West. Per the deal, the company will buy a 20% ownership stake in Kim Kardashian’s beauty business. The partnership, which is aimed at introducing new beauty categories, is expected to close in third-quarter fiscal 2021. Further, Coty and Kylie Jenner unveiled their long-term alliance in January 2020, aimed at further building upon Kylie’s beauty business, which includes Kylie Skin and Kylie Cosmetics. Kylie Skin Care sales tripled year over year in the first quarter of fiscal 2021, largely due to her solid following. Apart from this, the company’s buyout of the iconic Burberry brand in the second quarter of fiscal 2018 has been yielding results.

Additionally, Coty is committed to optimizing its overall cost structure. Incidentally, the company delivered fixed cost savings of nearly $80 million in the first quarter and is on track to generate savings of more than $200 million in fiscal 2021. The company has been focused on reducing people and non-people costs, alongside undertaking solid marketing cost management. Thanks to these factors, adjusted operating income from continuing operations came in at $81.1 million, up 24% year over year. Moreover, adjusted operating margin from continuing operations expanded 260 basis points to 7.2%.

Travel Retail Network & Mass Unit Under Pressure

Coty’s revenues have been bearing the brunt of store closures, soft traffic and a disrupted travel retail network amid the pandemic-led social-distancing trend. In first-quarter fiscal 2021, although revenues improved sequentially due to re-opened stores and better industry trends, they declined year over year on account of certain pandemic-related hurdles, especially continued softness in travel retail (in EMEA and Asia-Pacific regions and Prestige channel), still low consumer traffic (in the Prestige channel) and increased mask-wearing (in the Mass channel).  

Moreover, net revenues in Coty’s Mass channel declined 20.6% year over year to $479.8 million, while LFL sales fell 10.1% in the first quarter. Reported revenues were hurt by the absence of Younique’s revenues, which were included in the prior-year quarter. While sales improved from the previous quarter, mask-wearing and social-distancing trends amid the pandemic continued to put pressure on demand for color cosmetics. On its first-quarter conference call, management notified that the second quarter is likely to bear some impacts from the reimposed lockdowns in several nations across Europe, though the effect is expected to be much lesser than what was seen during the first wave.

Wrapping Up

While Coty saw soft sales in the fiscal first quarter due to coronavirus-led concerns, its e-commerce business was quite impressive. In fact, the company is seeing major market share gains, thanks to strength in its e-commerce business. In the first quarter of fiscal 2021, the company’s solid digital efforts helped its e-commerce penetration, as a percentage of overall sales, double to 13%. We note that Coty’s e-commerce penetration as a percentage of sales grew considerably in the Americas and the EMEA regions. Channel-wise, e-commerce sales were strong in the Prestige and Mass channels, with the latter seeing a robust performance on retailer sites like Amazon.

Building further on its e-commerce momentum, Coty unveiled the launch of direct-to-consumer flagship websites for Kylie Skin across the United Kingdom, Australia, Germany and France on Oct 7. The initial response has been quite impressive, per the first-quarter conference call. All said, we expect Coty to tide over the abovementioned hurdles and remain on the growth track.

3 Top Consumer Staple Picks

Sysco Corporation (SYY - Free Report) , which currently carries a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 20.4%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

B&G Foods (BGS - Free Report) has a Zacks Rank of 2 and a trailing four-quarter earnings surprise of 9.3%, on average.

Hain Celestial (HAIN - Free Report) has a Zacks Rank #2 and a trailing four-quarter earnings surprise of 24.6%, on average.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.  

Click here for the 6 trades >>