Coty’s Limited Exposure to China’s Disrupted Beauty Markets Leads to a Strong Q1; Shares Attractive

We have viewed no-moat Coty’s geographic mix less favorably, as its mid-single-digit exposure to China, the fastest growing large beauty market in the world, pales in comparison with the 34% and low-20% exposures for wide-moats Estee Lauder and L’Oréal, respectively. Coty’s modest exposure was a blessing in its fiscal first quarter, as China’s restrictive COVID-19 policies have upended the beauty market. Coty’s first-quarter like-for-like sales growth, excluding the exit of Russia, was 11%, comprised of 10% growth in prestige (62% of sales) and 12% growth in consumer/mass (38%). We plan to lift our 8% fiscal year like-for-like growth estimate for prestige to 9%, as its robust growth was constrained by input shortages that should moderate in the second half. We maintain our 3.5% annual like-for-like estimate for mass, as the first quarter benefited from the sell-in of new product launches under the Adidas licensed brand and Coty’s local Brazil brands. Coty’s mass beauty segment has now realized 10 consecutive months of market share gains per Nielsen, giving us further confidence in our 3.5% long-term growth forecast.