Expect Limited Gains From Coty Stock In The Near Term

Having gained more than 35% since the March 23 lows of last year, at the current price of $7 per share, we believe Coty Stock (NYSE: COTY) has limited upside in the near term. Coty Inc., one of the biggest cosmetics brands in the world with licensed fashion labels like Gucci, Calvin Klein, Burberry, Adidas, etc. and owned brands like Rimmel and Philosophy among others, has seen its stock rally from $5 to $7 off the March bottom compared to the S&P which moved around 70% – the stock is lagging the broader markets by a large margin and has lost 35% of its value over the last 12 months. The negative investor sentiment could be attributed to a significant drop in the company’s top-line over the recent quarters – Coty revenues have fallen 31% to a consolidated figure of $5.6 billion for the last 4 quarters from the consolidated figure of $8 billion for the 4 quarters before that. Despite this, the company reported an earnings beat in the FY 2021 first-quarter results (FY July – June).

Coty’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite some growth since the March 2020 bottom, we believe that Coty stock has limited upside, as in reality, demand will likely be lower than the last year.

Coty revenues fell 31% over FY 2018-2020 due to lower unit volume and a negative foreign currency exchange translation. It increased the net loss from -$168.8 million in FY 2018 to -$1 billion in FY 2020.

While the company has seen negative revenue growth over recent years, its Price to sales (P/S) multiple has decreased. We believe the stock has limited growth potential after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove A 51% Change in Coty Stock between 2018-End and now? has the underlying numbers.

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COTY’s P/S multiple changed from just below 2x in FY 2018 to close to 1x in FY 2020. While the company’s P/S is around 1x now, it is unlikely to see a significant upside in the near term.

So Where Is The Stock Headed?

COTY is on a negative trajectory for the last few years – its revenues have decreased across product categories and net loss has widened. While the company was already struggling, the Covid-19 crisis and the economic slowdown further increased its problems – net revenues decreased by 25% y-o-y in FY 2020. The impact was significant on the prestige products range, due to the closure of retail malls and travel retail channels. The mass category brands, which are sold in drug and grocery stores (essential businesses), also faced hurdles due to reduced store hours, and other social distancing measures. That said, COTY offers a wide range of brands and has made some recent leadership changes at the helm. The company reported better than expected first-quarter FY 2021 results. While the revenues did decrease by 20% on a year-on-year basis, it almost doubled on a sequential basis. Moving forward, we expect the top-line to see some improvement in the subsequent quarters, mainly driven by higher consumer spending and COTY’s focus on e-commerce channels. However, complete recovery is expected to take time and till then COTY Stock is unlikely to see a significant upside in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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