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Morningstar’s Analysis

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No-Moat Coty Makes Progress on Its Strategic Imperatives, but Stock Priced for Perfection

Analyst Note

| Rebecca Scheuneman, CFA |

After digesting no-moat Coty’s fiscal third quarter, we don’t expect a material change to our $5.50 fair value estimate, which assumes long-term annual sales growth of just over 3% and operating margins exceeding 14% by 2030 (compared with a 2.4% average annual organic sales decline and 7% margins the three years prior to the pandemic). Even with the stock’s 13% drop on the report to $9 (given overzealous expectations, in our view), the shares trade well above our valuation, and we suggest investors await a better risk/reward. While we are not keen on valuation, we do have a favorable view of Coty’s six strategic priorities, which drive our forecast for materially improved sales trends and profit margins. Coty is seeking to: 1) stabilize its mass beauty business; 2) accelerate its prestige division by expanding from its core fragrance portfolio into 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. Coty made progress on many of these initiatives during its quarter, most notably on the first item on the list. CoverGirl realized its first month of market share gains in four years, on the strength of its renewed focus on clean beauty products. While Coty’s overall mass beauty business is still losing market share, the gap has narrowed materially and upcoming revitalization efforts for the Max Factor and Rimmel brands should further close the gap.

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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, and Davidoff for its fragrance portfolio. Coty’s most popular color cosmetic brands are CoverGirl, Max Factor, Rimmel, Sally Hansen, and Kylie. 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 Slow Growth
Employees 18,260