Analyst Note| Rebecca Scheuneman, CFA |
We increase our fair value estimate for no-moat Coty, which had been under review, to $5.50 from $4.54. In its September-ending first-quarter fiscal 2021, Coty exhibited sales recovery from the pandemic much faster than we anticipated and achieved permanent cost reductions that were more meaningful than we expected. While CEO Sue Nabi has only been at the helm a few months, we are impressed with the degree to which her strategies have stabilized the business. Her plan to focus initially on the areas of the business that are more resilient during the pandemic, such as health-oriented beauty, skincare, direct-to-consumer, and Asia, are bearing fruit. Coty’s first-quarter launch of clean products from CoverGirl and Sally Hansen, release of Kylie Skin direct-to-consumer websites in several markets, and expansion of skincare and makeup in China, all led to sales trends that were much better than we expected (organic sales fell 19% versus our expectation of a 43% drop). As such, we revise our fiscal 2021 organic sales forecast to 2.5% growth from our previous expectation of a 26% drop. We think sales will contract in the first half of the fiscal year on light store traffic but should rebound in the second half as the pandemic-related global shutdown is lapped.