Summary
- The effects of new management and fixed cost reductions are starting to show.
- The sale of Wella significantly deleverages the balance sheet.
- Stakes in Kylie Cosmetics and KKW Beauty provide significant exposure to Gen Z.
- E-commerce momentum with percentage of total sales growing from 6% to 13%.
Thesis
Coty (COTY) has positioned itself for a tremendous recovery. New management, deleveraging the company and moves into Gen-Z preferred businesses have provided the keys for a comeback. The first sign of this turnaround was clear during the Q1FY21 quarterly earnings call. Both the top and bottom line came in ahead of estimates due to cost reductions and strength in the business. The company posted revenues of $1.12B and a profit of 122M. It is the first profitable quarter for Coty in over a year. Posting a profit during the pandemic surprised investors. As a result, the stock jumped 22%. It is the first step in a potential multi-year path of recovery. At the current share price of $4.79, investors should give Coty a second look and consider buying low.
Business
Coty is an American multinational beauty company founded by François Coty. With stakes in Burberry, Gucci, Covergirl, Adidas, Calvin Klein etc. the company has quite the assortment of luxury beauty products. The portfolio is split into three categories as shown below. Coty Luxury, Coty Consumer Beauty and Coty Professional Beauty.
Source: SEC.gov
The beauty industry is heavily intertwined with customer loyalty and new trends. Coty has unfortunately been missing the mark for several years. This has led to decreasing revenue dropping from a peak of $9.4B in FY17 to $4.71B in FY19. The ship has been very difficult to turn around with CEOs going in and out of the company at a record pace. The share price has suffered in accordance, falling from $30.40 in 2016 to a current share price of $4.79.
The latest change was announced in July of this year. Sue Nabi became CEO with Peter Harf taking the role of executive chairman. Sue Nabi comes with tremendous experience as she served as the worldwide president of L’Oreal for 20 years.
The new leadership is heavily influenced by KKR Capstone, a private equity company with close to $150B in assets under management. KKR closed a $4.3B deal for Coty’s Wella division and is adding Johannes Huth to the board with another experienced investor joining the board in the near future. The plan is to deleverage Coty’s balance sheet and sell certain divisions of Coty’s portfolio to significantly improve the capital structure. Along with that, Coty is growing e-commerce sales rapidly and getting into Gen-Z focused businesses such as Kylie Cosmetics and KKW Beauty. The latter two provide tremendous growth opportunities.
