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Coty (COTY) Gains on Brand Strength & E-Commerce Amid Low Traffic

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Coty Inc. (COTY - Free Report) has been benefiting from its focus on core priorities. The company has made solid progress on its strategic objectives even amid the pandemic-led challenges. These include innovation and performance in prestige and mass channels, a solidified position in key markets, robust e-commerce momentum and a strengthened foothold in the skincare category (thanks to Kylie and Philosophy skincare) and the China region.

These upsides have been aiding the company amid headwinds such as challenged travel retail network amid the pandemic and softness in the Mass unit. Shares of the company have soared as much as 114.9% in the past three months compared with the industry’s rise of 14.6%. Let’s delve deeper.

Coty Rides on Portfolio Strength, E-Commerce

Coty, which shares space with Estee Lauder (EL - Free Report) , has made several acquisitions to enhance its brand portfolio. To this end, the company recently acquired a 20% stake in Kim Kardashian West's business. The deal will help Coty and Kim Kardashian West focus on fresh beauty categories, alongside expanding their worldwide presence beyond the current line of products. 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. Incidentally, Kylie Jenner is an iconic personality with more than 300 million followers on social media.

Apart from these, the company’s buyout of the iconic Burberry brand, in the second quarter of fiscal 2018, has been yielding results. This acquisition has been supporting growth in the Prestige segment. Additionally, its buyout of Procter & Gamble’s (PG - Free Report) global fine fragrances, salon professional, cosmetics and retail hair color businesses, along with select hair styling brands (the P&G Beauty Business) in 2016 has been noteworthy. On the flip side, Coty completed the sale of a majority stake in its Professional and Retail Hair business to KKR on Nov 30, 2020. This is likely to help the company focus on areas with better growth potential.

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

Hurdles on Way

Coty’s revenues have been hurt by temporary store closures, soft traffic and a disrupted travel retail network amid the pandemic-led social-distancing. 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).  

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 of 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.

Finally

The abovementioned growth endeavors, together with a focus on cost-saving efforts, are likely to help Coty battle the barriers on its path and fuel growth. Incidentally, this Zacks Rank #3 (Hold) 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.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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