Company Reports

We think CEO Sue Nabi has whipped Coty into better shape since taking office in 2020, as the beauty industry veteran sharpens the firm’s focus on innovation and reinvigorates its brand marketing while upholding cost discipline. Top-line growth and margins both rebounded from pandemic troughs as a result. That said, we are not yet convinced that Coty has carved out an economic moat, given its lack of brand strength and tight retailer relationships, in addition to a small revenue base relative to moaty global peers L’Oreal and Estee Lauder.

We don't plan any material changes to our $10.50 and EUR 9.50 fair value estimates for no-moat Coty after absorbing the beauty maker’s second-quarter results in fiscal 2024. Organic sales and adjusted EPS were up 11% and 14%, respectively, edging our 10% and 11% projections due to successful new launches, broadening retail distribution in the premium fragrance aisle, and cost discipline. However, we remain unenthused about Coty’s long-term prospects given its reliance on the small fragrance category and a lack of compelling premium brands in the larger skincare category that offers more attractive growth and margin potentials. We are maintaining our 10-year forecasts for 5% sales CAGR and 14% average operating margins, and view shares as richly valued.

We think CEO Sue Nabi has whipped Coty into better shape since taking office in 2020, as the beauty industry veteran sharpens the firm’s focus on innovation and reinvigorates its brand marketing while upholding cost discipline. Top-line growth and margins both rebounded from pandemic troughs as a result. That said, we are not yet convinced that Coty has carved out an economic moat, given its lack of brand strength and tight retailer relationships, in addition to a small revenue base relative to moaty global peers L’Oreal and Estee Lauder.

We are initiating coverage on Coty with fair value estimates of $10.50 and EUR 9.50 per share, which implies 18 times multiple against our adjusted fiscal 2025 (ending in June) earnings estimate and a fiscal 2025 enterprise value to adjusted EBITDA multiple of 12 times. However, we don't see an attractive risk/reward in shares at present.

We are dropping coverage of Coty. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We were not enthralled with Coty's leadership prior to the pandemic, which lacked beauty experience, but we think Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. We are impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

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.

We were not enthralled with Coty's leadership prior to the pandemic, which lacked beauty experience, but we think Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. We are impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

After no-moat Coty laid out its skincare strategy Sept. 21, we have a deeper level of conviction that the firm can achieve our forecast for 6% sales growth and 15% operating margins over the long term, which underpins our $10.30 fair value estimate. Shares look compelling, trading at a 20% discount to our valuation and we suggest long-term investors build positions.

We were not enthralled with Coty's leadership prior to the pandemic, which lacked beauty experience, but we think Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. We are impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

Coty continues to progress with its turnaround, which entails expanding into high-growth markets where it has been underexposed (China, skincare, prestige makeup, e-commerce), stabilizing its mass beauty business while accelerating prestige fragrance, and becoming an industry leader in sustainability.

The global beauty market has realized 4%-5% annual growth over the past decade (excluding the pandemic), and we expect a modest acceleration to 5% in the next 10 years as China becomes a bigger portion of the mix (from 19% of the global market in 2021 to 29% in 2031 by our estimate) and as makeup continues to recover post-pandemic. China should continue to be a driving force of growth for years to come, as consumers in this region are just beginning to expand into makeup, fragrance, and haircare, although the skincare market is more developed. Further, as other emerging markets (Brazil, India, Mexico) experience rising incomes, this should boost their per capita consumption of beauty, providing additional growth potential beyond China.

Having had three CEOs in two years, Coty's strategic direction has been in limbo, but we are optimistic that Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. We are impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

With no-moat Coty’s fiscal third-quarter results largely as expected, we don’t plan a material revision to our $8.80 per share fair value estimate. Shares are starting to look attractive, given the 30%-plus drop in the stock year to date, driven by overall stock market weakness and investor risk aversion, in our view. That said, we think shares are best suited for long-term investors willing to endure some volatility, as we assign Coty a high uncertainty rating due to limited visibility on the results of its turnaround efforts. Risks stem from the broad scope of changes being addressed, as we think the plan is strategically sound, with savings from significant operational inefficiencies being deployed into brand-building initiatives under the keen eye of CEO Sue Nabi (named in 2020), who seems to have a clear sense of what today’s beauty consumers are seeking (high-quality products with clean ingredients and a noble purpose, i.e., cruelty-free).

Coty’s December-ended fiscal 2022 second-quarter results confirmed the company’s turnaround is on track, reinforcing our conviction in our long-term forecast for 6%-7% annual sales growth and operating margins that reach 15% over the next decade. For fiscal 2022, management increased like-for-like sales growth guidance to mid-teens (up from low- to mid-teens), reiterated EBITDA of at least $900 million, and increased EPS guidance by $0.02 to $0.22-$0.26. This outlook compares with our estimates of 14%, $944 million, and $0.37, respectively. We plan to raise our fiscal 2022 marketing expense forecast, which will reduce our EBITDA and EPS estimates, but should not materially alter our $8.80 per share fair value estimate, leaving shares fairly valued after the 8% surge on the report.

We are increasing our fair value estimate for no-moat Coty, which had been under review, to $8.80 per share from $8 after digesting the strategy management laid out at its Nov. 18 investor day. We’re increasing our long-term organic sales forecast to 6.5% annually, at the low end of Coty’s 6%-8% guidance but above our previous 3%-4% projection. Coty’s sales growth should accelerate as it increases its revenue mix to faster-growing markets such as skincare, prestige makeup, China, and e-commerce. But we think sizable exposure to slower-growing mass beauty (41% of fiscal 2021 sales) will make it difficult for Coty to achieve growth at the middle to upper end of its guidance.

Coty's strategic direction has been in limbo, with three CEOs in two years, but we are optimistic that Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the helm in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. We are impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

At its investor day, no-moat Coty demonstrated progress on each of its six strategic pillars to: 1) stabilize its mass beauty business; 2) accelerate prestige fragrances while establishing a key presence in prestige makeup; 3) build a skincare portfolio across mass and prestige; 4) enhance its digital capabilities; 5) further penetrate China; and 6) become an industry leader in sustainability. It issued new long-term guidance for organic sales growth of 6%-8%, a fiscal 2025 gross margin of 65%, and 2025 adjusted EBITDA of $1.2 billion. As this outlook generally compares favorably with our estimates of 3%-4%, 61%, and $1.2 billion, respectively, we expect a material increase in our $8 fair value estimate, and we are placing the shares under review. While these goals strike us as aggressive, our confidence in Coty’s ability to execute its strategy successfully is buoyed by the firm’s new lineup of seasoned executives with impressive track records, and the remarkable progress CEO Sue Nabi has made since she joined the firm just over a year ago. Further, Coty’s current gross margins are subpar, suggesting inefficiencies, having averaged 60% the last three years, compared with 73% for L’Oréal and 76% for Estee Lauder (both wide-moat).

Coty's strategic direction has been in limbo, with three CEOs in two years, but we are optimistic that Sue Nabi (a successful 20-year veteran of wide-moat L’Oréal), who took the helm in September 2020, has the qualifications to right the ship. We think her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to 1) accelerate Coty's prestige division by expanding from its core fragrance portfolio into makeup, 2) build a skincare portfolio across mass and prestige, 3) enhance its digital capabilities, 4) further penetrate China, 5) stabilize its mass beauty business, and 6) become an industry leader in sustainability. We are impressed with the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and we expect further progress in the years to come.

No-moat Coty’s fiscal 2022 first-quarter results were solid, with sales that grew 22%, driven by the prestige segment (63% of sales), which boasted 35% growth as it filled the channel for the launch of Gucci Flora and Burberry Hero fragrances, with both experiencing strong demand. Coty is also making strides in prestige makeup with Kylie and Gucci, which are gaining traction globally, although they remain relatively small. Similarly, Coty’s efforts to expand into skincare are succeeding with the Lancaster brand, which is establishing a strong presence in Hainan, although it does not yet move the needle. Meanwhile, mass beauty sales (37% of total) grew 4%. We are encouraged CoverGirl’s and Rimmel’s clean and cruelty-free lineups are making these brands more relevant to consumers. We forecast 15% sales growth for the segment in fiscal 2022 as mask mandates relax, driving a recovery in makeup.