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Thank Kylie Jenner for Sending Coty Stock Higher on Friday

By Jon Quast - May 22, 2020 at 5:21PM

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Can one person really raise the company's market cap by $300 million in one day?

What happened

Shares of Coty (COTY 0.00%) popped today, after the company announced its Kylie Skin products are now available in Europe. The stock closed 13% higher for the session, but had topped out at 17% higher earlier in the day.

The announcement boosted Coty's valuation by a full $300 million, and shareholders will undoubtedly be thanking celebrity Kylie Jenner for that. The stock has been one of the hardest-hit on Wall Street, down over 70% in the past year.

COTY Chart

COTY data by YCharts.

So what

Coty is a cosmetics company in transition. With revenue growth stalled and net income falling, the company is making big moves. It's spinning off the Wella division of its business for $3 billion. It's also trying to reduce fixed costs by $700 million by 2023. But the turnaround also includes acquiring a majority-ownership stake in Kylie Jenner's company.

The November deal cost Coty $600 million, so it clearly figures heavily into the company's plans. The deal increased the company's debt load, but management expects its return on invested capital to exceed the associated cost by 2023. In other words, it expects to make more money from Kylie's products in three years than it cost to borrow that money. 

Considering Kylie Jenner has 270 million followers on social media, it's easy to understand Coty's enthusiasm. The Kylie Skin line will launch at Douglas, a beauty retailer with around 2,400 locations across Europe. This gives Coty a very large presence on the continent.  

A woman throws money off a pile of cash on her hand.

Image source: Getty Images.

Now what

It's odd for Coty stock to rise on today's news, since this was already known beforehand. On the third-quarter earnings call, the company's COO said Kylie Skin was launching on May 22. So today's announcement shouldn't have caught anyone off guard.

Perhaps it's just a case of investors trying to quantify what the opportunity means for Coty. Wall Street apparently thinks it's worth quite a bit, but I'm not sure today's pop in stock price is justified. The company still has a long way to go in its turnaround, and today's news doesn't change that for this consumer-discretionary retailer.

That said, making your celebrity-backed products available in more locations is never a bad thing.

Jon Quast 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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