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Could Coty Benefit From This New Phase of Panic Buying?

By Pearl Wang – Apr 22, 2020 at 7:00AM

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First it was toilet paper and hand sanitizers. Now consumers are buying up hair coloring and grooming products. Will this pandemic-driven spending help Coty's revenue?

The next shortage in the coronavirus pandemic could be grooming products. New data show increased sales of hair dye, hair clippers, and more supplies with salons just about everywhere closed. Sales of hair-coloring products rose 23%, and hair clippers were up by 166% in the week ended April 4, according to Nielsen data. Walmart CEO Doug McMillon mentioned in an interview with The Today Show that the company is seeing spiking sales of home hair treatment and beauty products as people are stuck at home.

Could this help lift shares of Coty (COTY 0.51%) -- which owns Clairol, one of the largest consumer hair-color brands -- and other popular consumer beauty brands?

Reflection in a mirror of a woman using a beauty product.

Image Source: Getty Images

Coty isn't benefiting yet from increased demand for home beauty products

Given the uncertain timeline of states re-opening businesses categorized as non-essential, salons and barber shops may face long closures. This means U.S. consumers could be stuck without any professional beauty and grooming options for an extended time. More people may opt for do-it-yourself methods.

The beauty company hasn't seen a revenue uptick from beauty purchases thus far from U.S. quarantines. On March 20, Coty withdrew guidance for fiscal 2020 (which ends in June) and announced a 20% decrease in net revenues in the fiscal third quarter, both because of COVID-19. However, the consumer discretionary company said it would accelerate some initiatives like e-commerce activations at Amazon and the launch of Kylie Skin in Europe.

In the fiscal second quarter (ended Dec. 31, 2019), the company cited strength in e-commerce, noting its consumer beauty e-commerce segment grew 20% in the first half, driven by strong Amazon sales. Coty is also gaining share on Amazon in its core markets in the U.S., U.K., and Germany.

The uptick in demand for hair dye and other home-grooming tools began after Coty's March 20 update, so the company could be seeing better sales in its consumer beauty segment now. Coty's consumer beauty division makes up about 41% of its total revenue and focuses on color cosmetics, retail hair coloring and styling products, mass fragrance, mass skin care, and body care. Brands in the group include Clairol, Sally Hansen, and Wella.

The company's luxury beauty segment will likely see decreased revenue

Even with a pickup in consumer beauty, Coty's luxury beauty division will likely see lower results. With rising jobless claims and decreasing consumer confidence, shoppers are more likely to favor value beauty buys over luxury products. The global beauty company's luxury segment was about 38 % of total sales in 2019.

Coty has a highly leveraged balance sheet

Coty's debt-to-equity ratio is a sky-high 2.8, and its current ratio is low at 0.94 (a ratio under 1 means current liabilities outweigh assets), so its balance sheet is far from bulletproof. Coty is selling its professional beauty business to reduce its financial leverage , but it could face some headwinds or delays given the current climate. The deal is likely to take longer to complete given the current economic environment, and potential buyers are likely to be more cautious around acquisitions.

Overall, while Coty could see a bump in revenue from e-commerce and consumer beauty, this could be offset by decreases in its luxury segment. Given the high debt on its balance sheet, investors should look elsewhere for companies that have stronger balance sheets that can better weather the current recession.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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