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Coty (COTY) Well Poised on Core Priorities & Prudent Alliances

Coty Inc. COTY appears to be well-placed due to the company’s focus on six strategic pillars, which aim at sustainable growth. Prudent alliances and divestitures are also working well for the company. However, like many other consumer staple players, this cosmetics biggie is battling inflation and supply-chain headwinds. However, management’s focus on optimizing the cost structure remains an upside.

The impact of these factors was visible in the second quarter of fiscal 2022 results, wherein the top and bottom lines grew year over year and the latter beat the Zacks Consensus Estimate. Coty gained from the strong performance across the Prestige and Consumer Beauty segments. Coty saw solid trends across the Prestige fragrance portfolio, with double-digit sell-out growth coupled with strategic launches like Gucci Flora and Burberry Hero. COTY’s sturdy performance witnessed during the second quarter exemplifies the successful execution of the company’s key strategic growth pillars. Management expects fiscal 2022 sales at the higher end of its previous guidance range. It also raised its adjusted earnings per share (EPS) view.

Fiscal 2022 adjusted EPS is expected in the range of 22-26 cents, up from the earlier guidance of 20-24 cents. In the third quarter of fiscal 2022 and the second half, the LFL sales growth is envisioned in the mid-teens range.


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Focus on Core Priorities

Coty’s strategic pillars include stabilizing Consumer Beauty make-up brands and mass fragrances, accelerating luxury fragrances and setting up Coty as a core player in prestige make-up, establishing a skincare portfolio in prestige and mass channels, strengthening e-commerce and Direct-to-Consumer capabilities, growing the company’s presence in China via the Prestige and certain Consumer Beauty brands and setting Coty as an industry leader in sustainability. On its second-quarter fiscal 2022 conference call, the company said that it is making solid progress concerning every priority and has several initiatives planned for the future. This instills further confidence in the second-half prospects. Management is particularly impressed with the turnaround in the Consumer Beauty space due to key mass cosmetics brands.

For stabilizing consumer beauty brands, COTY is on track with repositioning campaigns and disruptive advertising. The company has also been on track with product launches under the prestige unit.  Management is on track to boost its leading brands through innovations as well as renovations of key icons for the fragrance business. The company’s Gucci Flora and Burberry Hero innovations have been very successful in this regard. Coty is also making strong progress with the expansion of the skincare portfolio. In the first half of fiscal 2022, the company’s e-commerce sales rallied 16%, with robust growth in Consumer Beauty.

Prudent Alliances & Divestitures

Coty made several strategic partnerships to enhance its brand portfolio. On Nov 18, 2021, the company signed a licensing agreement with Orveda – an ultra-premium skincare brand made in France. Before this, Coty entered into a multi-channel agreement with Perfect Corp. – a well-known beauty tech solutions provider. The partnership will help Coty’s customers shop in the most convenient and personalized manner, both online and offline. Further, the company acquired a 20% stake in Kim Kardashian West's business in January 2021. Coty and Kylie Jenner unveiled their long-term alliance in January 2020, aiming at further building upon Kylie’s beauty business, which includes Kylie Skin and Kylie Cosmetics. Apart from this, the company’s buyout of the iconic Burberry brand has been yielding favorably.

Is All Rosy for Coty?

Coty continues to see a volatile operating landscape, including inflation as well as supply-chain bottlenecks. Management anticipates the impact of inflation to be higher in the second half of fiscal 2022, though it remains on track with saving and inflation-mitigation endeavors. Management stated that though it witnessed a gross margin expansion in the first half of the year, it does not expect to see a similar level of expansion in the second half. This can be attributed to increased inflation levels, a seasonality factor as well as tough comparisons with the year-ago period’s one-time benefit.

That said, the overall fiscal 2022 gross margin is likely to be higher than fiscal 2021 due to the strong growth witnessed in the first half. Management is committed to optimizing the overall cost structure. Coty achieved cost savings worth more than $40 million during the second quarter, driven by reduced fixed costs and a gross margin improvement. Management expects neutral net savings in the second half of fiscal 2022, though it anticipates to more than offset the escalated inflation in the second half with pricing actions and a portfolio mix. Coty has several saving plans for fiscal 2023 and it remains on track to achieve its savings target of $675 million by fiscal 2024.

Shares of this Zacks Rank #3 (Hold) company have increased 7% in the past six months against the industry’s decline of 37.2%.

Looking for Consumer Staple Stocks? Check These

Some better-ranked stocks are Inter Parfums, Inc. IPAR, Tyson Foods TSN and Flowers Foods FLO.

Inter Parfums, which manufactures, markets and distributes a range of fragrances and fragrance-related products, sports a Zacks Rank #1 (Strong Buy). Shares of Inter Parfums have moved up 21.2% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Inter Parfums’ current financial-year sales and EPS suggests growth of 10.9% and 9.8%, respectively, from the year-ago reported number. IPAR has a trailing four-quarter earnings surprise of 46.7%, on average.

Tyson Foods, a renowned meat products company, carries a Zacks Rank #2 (Buy) at present. Shares of Tyson Foods have surged 15.1% in the past six months.

The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2. Shares of Flowers Foods have risen 8.6% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 6%, on average.


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