Kylie Cosmetics is one of Coty’s well-known brands.
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It’s not every day a company slumps after releasing earnings and Wall Street walks away more confident than before. That seems to be the case with Coty.
Coty (ticker: COTY) hasn’t had an easy time of late. The parent company of Cover Girl, Kylie, Max Factor, and other well-known beauty brands has had too much debt, too little growth, and too many CEOs since the start of 2020. The Covid-19 pandemic hit its consumer brands hard, and the stock, down 38% last year, was removed from the S&P 500. Still, things appeared to be turning a corner under CEO Sue Nabi, who took over in September, helping Coty rally 88% since the end of August.
Then it reported second-quarter earnings. They weren’t so terrible: a profit of 17 cents a share, beating analyst forecasts for seven cents, though sales of $1.42 billion were a touch light compared with the $1.43 billion consensus. Yet the stock plunged 15% on Tuesday, the day results were released, before closing the week down 11% at $6.78.
What caused the meltdown? Some of it was surely high expectations—Coty stock had gained 25% in the six days before the release. But there was more than that, explains Citigroup analyst Wendy Nicholson, who rates the stock a Buy.
Sales from the Kylie brand—Coty paid $600 million for a 51% stake in the company last year—flatlined. Like-for-like sales growth, which Nicholson expects to grow by 4% in Coty’s fiscal third quarter, is sluggish, especially compared with competitors like Estée Lauder (EL) and Inter Parfums (IPAR). Guidance for $750 million in second-half earnings before interest, taxes, depreciation, and amortization “might have looked light to some,” Nicholson says.
Still, she remains optimistic about Coty’s prospects. “We view the share price weakness following today’s print as an attractive buying opportunity and reiterate our Buy rating,” Nicholson wrote after the results.
Even better, Evercore ISI analyst Robert Ottenstein upgraded Coty shares to Outperform from In Line. He cited accelerating growth in its fragrances division, which makes up more than 50% of sales, and growth in online, which now makes up 19% of sales and is closing the gap with Estée Lauder, which gets a quarter of its sales from the web. Ottenstein also cited continued growth in China and the company’s plans to cut costs by $300 million in 2021.
But the upgrade really came down to one thing: an upgrade in management. Writes Ottenstein, who put a $10 price target on the stock, up more than 40% from Friday’s $6.78 close, “CEO Sue Nabi…has quickly attracted high quality talent to unlock the value trapped in Coty’s brands.”
And perhaps in the stock, too.
Write to Ben Levisohn at [email protected]
