Coty: Don't Miss the Forest for the Trees
Coty CEO Sue Nabi’s turnaround plan continues to take hold.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
* If you’re focusing on the $0.01 EPS miss with Coty’s March quarter, you’re missing the bigger picture
* Double-digit Prestige growth, Consumer Beauty margin expansion, and an accelerating outlook
* Our price target for COTY shares remains $14, and our rating a One
After moving higher in aftermarket trading following the release of its March quarter results, following the conclusion of Coty’s COTY earnings call this morning, the shares are down more than 3%.
Weighing on the shares was the mixed results for the March quarter, with the company besting top-line expectations but falling a tad short on the bottom line relative to the consensus forecast.
When we look below the surface of the earnings report on a like-for-like basis, Coty’s revenue rose 10% year over year led by the 13% increase at the higher margin Prestige business. While the Consumer Beauty business posted slower revenue growth of 6%, management efforts to drive its profitability continued to make progress. Consumer Beauty's EBITA margin hit 5.2% in the March quarter compared to 2.6% in the year-ago quarter.
And while it doesn’t get talked about much, Coty’s e-commerce business grew 20% year over year with Prestige up 20% and Consumer Beauty growing 30%.
Stepping back and comparing the revenue performance for Coty’s two business segments against the corresponding ones from Ulta Beauty ULTA, Esteé Lauder EL, and LVMH’s LVMHF, tells us the company is taking market share.
That led Coty to boost its fiscal 2024 revenue growth guidance to the high-end of its 9%-11% prior forecast. Coty also sees its EBITDA margin guidance at the upper end of its prior guidance as well as its EPS for the fiscal year at the upper end of its $0.44-$.47 range. With one quarter to go in the company’s fiscal year, that puts current quarter EPS in the range of $0.07-$0.08, well ahead of the $0.04 consensus forecast.
Those share gains, newer products, and leveraging Coty’s Prestige line led management to give an initial look at 2H 2024 even though it won’t give formal fiscal 2025 guidance until August. For the back half of this year, Coty sees a sequential acceleration on a like-for-like basis led by fragrance in the US and Europe. That along with what we’re seeing in the company’s margins supports the consensus view that calls for 16% EPS growth in 2H 2024 compared to 2H 2023. Much like we’ve shared with PepsiCo PEP, the first half of the calendar year is the slower part of the year for Coty.
During the earnings call management touted some of its lineup including Burberry, and Burberry Goddess as well as upcoming offerings that include Cosmic by Kylie Jenner and Daisy Wild from Marc Jacobs. Alongside the company’s earnings call, it also announced it signed a long-term license agreement with Lena Gercke to develop, produce, and distribute LeGer’s debut fragrance. New offerings in Consumer Beauty, including color cosmetics, and body skin care as well as markets outside the US are expected to drive that outperformance as well.
The bottom line is that Coty shares were trading off today, likely due to the penny miss for March quarter EPS. Focusing on that takes one’s eyes off all the right things that are happening at Coty as CEO Sue Nabi’s turnaround plan continues to take hold.
When Nabi was named CEO in mid-2020, the company’s adjusted EBITDA margin was 11.64% and for fiscal 2024 it is closing in on 18% with more room to expand in the coming quarters. Turnaround plans can be a slow burn, but as the momentum builds the results become increasingly evident. We are starting to see that at Coty, and we want to capture that value creation in COTY shares. We admit we may be early in seeing this, but over time the market should catch up to our thinking.
Our COTY price target remains $14, and we continue to rate the shares a One.
At the time of publication, TheStreet Pro Portfolio was long COTY, PEP.
