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Coty Inc Class A COTY

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Coty’s Turnaround Efforts Should Improve Its Profit Trajectory, but a Moat Remains Elusive

Analyst Note

| Rebecca Scheuneman, CFA |

After reassessing Coty’s new strategic direction, and the likely impact these initiatives should have on the firm’s top line, we are revising our three-year (fiscal 2022-24) average annual organic sales growth forecast to 6% from 3%, taking our fair value estimate to $6.40 from $5.50. Sue Nabi was named Coty’s CEO in September and, under her leadership, the firm is seeking to 1) stabilize its mass beauty business; 2) accelerate its luxury fragrance core while establishing it as a key player in prestige makeup; 3) build out a skincare portfolio across prestige and mass; 4) enhance its digital capabilities; 5) expand in China; and 6) establish it as an industry leader in sustainability. These initiatives should expand Coty’s presence in high-growth markets where the firm has been minimally exposed, such as prestige makeup, skincare, e-commerce, and China. The program will be funded by the elimination of $600 million in fixed costs by fiscal 2023, which we continue to expect will lead to operating margins of over 14% by 2030 (up from 7% pre-pandemic) despite the aforementioned new investments.

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Company Profile

Business Description

Coty is a global beauty company that sells fragrances (56% of fiscal 2020 revenue), color cosmetics (31%), and skin/body care (13%). The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular color cosmetic brands are CoverGirl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a 40% stake in a salon and retail haircare business, including brands Wella, Clairol, OPI, and ghd. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble's beauty care business. This nearly doubled the firm's revenue base, and launched it into mass channel cosmetics and professional hair care.

350 Fifth Avenue
New York, NY, 10118
T +1 212 389-7300
Sector Consumer Defensive
Industry Household & Personal Products
Most Recent Earnings Mar 31, 2021
Fiscal Year End Jun 30, 2021
Stock Type Distressed
Employees 18,260

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