Coty (COTY 2.15%) pleased investors with earnings for its fiscal second quarter that beat expectations, and the company is on the road to pleasing consumers with its focus on sustainability. The owner of brands including Cover Girl and Wella recently gave an update on its "Beauty That Lasts" program, which it considers part of its current turnaround plan. Goals include positive change on societal, ethical, and environmental levels -- exactly the points important to today's biggest buyers of beauty products.
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Spending power is growing
Who is buying makeup and skincare products these days? TABS Analytics' annual color cosmetics study shows the highest number of "heavy" buyers -- people who buy at least 10 types of makeup per year -- are between ages 18 and 34. That means primarily millennials. According to Coresight Research, these buyers tend to spend less on beauty products than older generations, but as younger millennials start working and older millennials progress in their careers, the entire generation's spending power is growing.
Now here's the key data point from Coresight: More than older generations, millennials tend to care about a company's social values, such as ethics or respect for the environment. And a report by Nielsen called millennials "the future of sustainability in the U.S.," as 75% of those surveyed said they likely would change buying habits to be more environmentally friendly.
Coty's Beauty That Lasts effort directly targets these customers, who aim to align their values with their spending decisions. The company this year promises to ensure all new products are made according to its sustainability criteria. By 2022, Coty aims for all of the mica it purchases to be responsibly sourced. After press reports linking the sourcing of this mineral used in cosmetics to child labor in India, Coty joined forces with peers to launch the Responsible Mica Initiative. By 2025, Coty pledges to make packaging recyclable, reusable, or compostable. By that year, the company will also ramp up its inclusive training of staff, commit to gender balance in high-level positions, and reduce gender pay gaps. And finally, by 2030, the company aims to cut C02 emissions by 30% compared to 2017 and use renewable energy.
Does sustainability equal sales?
We know today's buyer cares about sustainability, and Coty has outlined a detailed plan. Now the question is: Will the sustainability factor actually translate into sales? A Nielsen study indicates "yes," but the extent of sales growth may depend on the product and the sustainability claim. For instance, bath oils with environmental claims showed an 8% increase in dollar sales growth, while those labeled organic saw a 6% gain. Coffee with environmental claims saw a 25% increase in dollar sales growth. Though consumers base buying decisions on other factors as well, such as price or quality, it's clear that sustainability has a growing role to play into the future.
Now, what's important for Coty is communication -- with millennials specifically. When they buy any of the Coty brands, they don't have to recognize the Coty name, but they should begin to identify the particular brand they're buying with sustainable actions. A look at advertisements, social media posts, and packaging across brands will give investors an idea of how well Coty is passing along the message to potential customers.
An extra boost
On its own, the sustainability plan can't propel Coty out of the rough patch that stalled the shares last year. Though the stock jumped more than 70% in 2019, it fell 35% in the two months after the company announced it would write down $3 billion linked to its earlier acquisition of beauty brands from Procter & Gamble (PG +0.38%). But if paired with a successful turnaround in earnings, sustainability may offer an extra boost.
So far, things are looking up. In the recent earnings report, Coty reported earnings per share of $0.27, surpassing analysts' forecasts for $0.24. Another bright spot was in the professional beauty and luxury divisions, where the company saw like-for-like sales growth of 2.2% and 1.3% respectively. Consumer beauty lagged, with a 6.7% like-for-like decline, yet the area is showing progress. In the previous quarter, sales in the division fell 9.7%.
Though it may be tempting to buy Coty shares right now and bet on the turnaround story, investors in consumer discretionary stocks might want to wait a few more months: Coty began a strategic review late last year, exploring the possible divestment of its professional beauty business and its Brazilian operation to pay down debt and return money to shareholders. A decision is expected this summer and may provide the extra dose of visibility a long-term investor needs.
