Coty (COTY 0.35%), maker of cosmetics and hair-care products, was in big trouble way before anyone ever heard of the novel coronavirus. The company's brands seemed out of touch, and mismanagement played a part in falling sales.
But now on its third chief executive in 2020, Coty displayed surprisingly positive quarterly results on Nov. 6, and CEO Sue Nabi is confident in the company's recovery. Should you buy in?
Making it way back up
Coty has been in the headlines frequently over the past few months as it's gone through new CEOs and sold high-profile brands. But while the spectacle was interesting to observe, the company was in obvious turmoil, and the changes did not bring about the desired improvements.
Image source: Getty Images.
One of the moves was creating several partnerships with the Kardashian clan to acquire or develop cosmetics and skincare lines. The company is hopeful that these brands will boost its image among the coveted millennial shopping crowd.
More recently, Coty sold 60% of its Wella hair care brand to KKR management, and the money from the sale is going to pay down some of the company's almost $8 billion in debt. The new CEO and her team implemented strict cost-saving measures that paid off in the latest quarter (the first quarter of the company's fiscal 2021 ended Sept. 30). Although sales decreased 13%, there was monthly sequential improvement, continuing into October.
The company was well-positioned to deal with current trends toward clean ingredients and an emphasis on skin care, and its luxury section is poised to do well as customers begin to spend again. The premium brands are already back to doing well in the Chinese market.
Some struggling companies, such as Gap and Bed Bath & Beyond, have been pushed to fast-track digital investments during the pandemic, and Coty joins these companies in performing better post-pandemic.
What does the future hold?
Nabi said: "Our first-quarter results are a testament that a stronger, more focused and more flexible Coty, is emerging in the middle of the COVID-19 pandemic and better prepared to face any future market disruptions."
The company owns a large range of brands, from discount cosmetics brand Cover Girl to perfumes from high-end fashion names Gucci and Burberry. These are brands with a lot of leverage, in addition to the newer Kylie and Kim Kardashian brands. The market is theirs for the taking, and it does look like Nabi is coming through to stabilize operations and make the most of the company's potential. Management is also focusing on its direct-to-consumer business, which is a small part of the whole but performed very well under lockdown conditions.
That said, Coty is still digging out. And it might take a long time to get back to growth. The economy is still reeling, and there may be new surprises and lockdowns, despite the company's confidence in the future. Coty is one of the biggest cosmetics brands in the world, but it faces competition from companies such as Estee Lauder, which owns many of the world's premium brands and performed much better during the pandemic.
Coty's stock is down about 35% this year at Wednesday morning's prices, while similar companies that had sales declines are already seeing positive stock movement. Coty hasn't been a great stock to hold over the past few years, and while there's great potential, the company's business is not compelling enough at this time to justify a buy. While the stock is super-cheap right now, it's too risky to be considered a buy-low opportunity. I'd hold off on this one until the recovery is more stable.
