Let's Review Coty's Solid Quarter and Why the Stock Is Down Thursday (original) (raw)

* Coty delivered a solid quarter as management continues to execute on CEO Sue Nabi's turnaround plan.

* We continue to see upside relative to its guidance, but the shares are trading off because Coty reiterated its previous outlook.

* The portfolio has a full COTY position, but the shares have strong support at $11.50.

* Coty will be presenting at two upcoming conferences, which should give more color on the first half of 2024.

Coming off Coty's (COTY) earnings call, the shares have given back their initial gains, but are still trading above early January lows. We attribute that to management only reiterating its outlook for fiscal 2024, not boosting it higher like it did several times in calendar 2024. We, too, had hoped Coty would have boosted its outlook, but we also know the management team, led by CEO Sue Nabi, are savvy operators, which has helped them increasingly deliver better-than-expected quarterly results.

Our take on the quarter is it was another one of solid execution, following the turnaround plan laid out when Nabi took over. However, given the 33% move since late October heading into today's earnings call, we can understand why the hot money and those not as familiar with Coty are disappointed. While we have a full COTY position in the portfolio, the shares have had nice support at the 11.50level,whichofferspotential3011.50 level, which offers potential 30% upside to our 11.50level,whichofferspotential3015 target.

Next week, Coty management will be presenting at the TD Cowen Glowing Ahead: Beauty & Wellness Summit on February 13. Soon thereafter, the team will be presenting at the Consumer Analyst Group of New York on February 20.We would not be surprised to find Nabi and the team tweak their outlook higher as they roll up the first half of the current quarter.

Coty's December Quarter

Coty delivered adjusted EPS of 0.25beatingthe0.25 beating the 0.25beatingthe0.20 consensus forecast and 0.22postedintheyear−agoquarter.Revenuecameinat0.22 posted in the year-ago quarter. Revenue came in at 0.22postedintheyear−agoquarter.Revenuecameinat1.727 billion, up 13% year over year and up nicely compared to the September quarter.

Prestige segment revenue rose 17% to 1,122.6millionwithdouble−digitgrowthacrossallregionswhileConsumerBeautyrevenuegrew71,122.6 million with double-digit growth across all regions while Consumer Beauty revenue grew 7% to 1,122.6millionwithdouble−digitgrowthacrossallregionswhileConsumerBeautyrevenuegrew7605 million led by color cosmetics, mass fragrance, and mass skincare. On a like-for-like basis, revenue rose 11% compared to the year-ago quarter led by a 15% like-for-like increase in the higher-margin Prestige business and a 5% gain in Consumer Beauty.

The company's top line was powered by higher pricing and strong demand for its high-end Burberry and Gucci fragrances and fresh launches of cosmetics in the U.S. during the holiday season. Newer products such as Burberry Goddess and CoverGirl Clean Fresh Yummy Gloss helped pull in customers in the U.S from rivals like Estée Lauder (EL) . As we've discussed before, China is a very small part of Coty's revenue mix, which shielded it from the demand hit reported by other companies, including Estée. Meanwhile, Coty's investments in social media promotions and collaboration with influencers helped its prestige and consumer beauty businesses gain market share in the e-commerce segment.

Coty's efforts to improve the profitability at Consumer Beauty are starting to pay off with the segment's operating margin rising to 12% in the December quarter from 7% in the previous one and 11% in the seasonally strong year-ago quarter. The company joined a growing number of companies calling for improved gross margins as input cost inflation continues to ease.

Management also boosted its fiscal 2024 cost savings target to 110million−110 million-110million−120 million from its prior 100milliontarget,butnotallthat100 million target, but not all that 100milliontarget,butnotallthat45 million-$55 million in Coty's H2 2024 will flow to its bottom line as reinvestments are made to support continued top-line growth. That is a smart move, in our opinion, as the beauty market growth returns to more normalized levels following the post-pandemic reopening.

Sue Nabi has proven to be a savvy CEO and, in our view, and recognizes the importance of supporting existing products while launching new ones and growing in new markets to drive future growth. Coty continues to target an additional $75 million in cost savings for its fiscal 2025, which begins this July.

Balance Sheet

Coty ended the December quarter with net debt of approximately $3.3 billion, putting its leverage at 3.1x down from 3.8x exiting this past September. Management remains committed to reaching an investment-grade profile, targeting leverage of approximately 2.5x exiting calendar 2024 and approximately 2x exiting calendar 2025. As that occurs, more of Coty's operating profits should fall to its bottom line.

During the earnings call, management shared that it continues to target divesting its remaining 25.9% stake in Wella by the end of calendar 2025. At the end of the September quarter, that stake was worth an estimated 1.07billionperCoty′sfilingswiththeSEC.Thatdivestitureshouldnotonlyhelpimprovethecompany′sbalancesheetleveragebutalsobuildupcashonthebalancesheet,whichstoodat1.07 billion per Coty's filings with the SEC. That divestiture should not only help improve the company's balance sheet leverage but also build up cash on the balance sheet, which stood at 1.07billionperCoty′sfilingswiththeSEC.Thatdivestitureshouldnotonlyhelpimprovethecompany′sbalancesheetleveragebutalsobuildupcashonthebalancesheet,whichstoodat483.5 million at the end of December.

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