What happened

Shares of Coty (NYSE:COTY) were climbing for the second day in a row today after the cosmetics maker announced the launch of Kylie Skin in the U.K., France, Germany, and Australia under a direct-to-consumer model this morning. The gains also came as the company got an analyst upgrade yesterday.

The stock closed today's session up 12.3% after a 9.5% gain yesterday.

So what

The struggling cosmetics giant has staked its turnaround bid on Kylie Cosmetics, the company founded by celebrity Kylie Jenner that Coty paid $600 million to acquire a 51% stake in. The beauty industry has been significantly impacted by the pandemic, but skin care sales have held up better than segments like fragrances and cosmetics, which are used more for work and social events.

A woman dries her face with a white towel.

Image source: Getty Images.

The Kylie Skin launch therefore gives Coty a chance to capitalize on a rare growth trend during the pandemic as the direct-to-consumer channel has boomed as consumers remain reluctant to venture into stores. Coty said the new DTC website would allow for faster delivery and use local languages and currencies. It also touted the popularity of Kylie products, noting that some collections have sold out in as little as 18 minutes on the website.

Also yesterday, Coty stock was upgraded from hold to buy at Jefferies as analyst Stephanie Wissink was optimistic that new CEO Sue Nabi could lead a turnaround and believes improving fundamentals will lift a beaten-down share price.

Now what

There is certainly an argument to be made that Coty is a turnaround play, as the stock is down by two-thirds year to date after crashing when lockdowns swept the globe in the early days of the pandemic. The company is one of the biggest cosmetics companies in the world and the global leader in fragrances, but has struggled after acquiring Procter & Gamble's beauty business for $12.5 billion in 2015. That segment has underperformed and the deal saddled the company with debt. The stock is down 86% over the last five years, roughly since the deal was completed, and Coty carried $8 billion in debt as of its most recent earnings report.

A recent partnership with private-equity firm KKR to get a cash infusion and an agreement to sell a majority stake in its professional hair care business, Wella, to KKR is a step in the right direction, but pandemic-related headwinds remain and a turnaround won't be easy. More asset sales could be on the way as the company looks to shore up its financial position.

 
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