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Why Coty Stock Rocketed Higher This Week

By John Ballard – Aug 26, 2021 at 3:15PM

Key Points

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Investors are optimistic about management's turnaround strategy.

What happened

Shares of Coty (COTY -2.11%) traded sharply higher over the last week following the company's fiscal fourth-quarter earnings report. Week to date, the stock was up 21.4% at 1:42 p.m. EDT on Thursday.  

In fiscal Q4, revenue grew 90% year over year to reach $1.06 billion, although the increase was against a weak year-ago quarter when sales fell 60% to $560 million. Revenue improved sequentially over the fiscal third-quarter's $1.027 billion. Although the company still reported an adjusted loss of $0.09 per share, investors were encouraged by the progress they are seeing in management's turnaround plan.

A group of friends in a bathroom putting on makeup.

Image source: Getty Images.

So what

Adjusted EBITDA (a measure of operating profit) for fiscal 2021 totaled $760 million, coming in ahead of management's guidance. Most importantly, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 16.4%, which was 300 basis points higher than pre-pandemic levels. This is encouraging since it reflects more than $330 million of cost savings.

Moreover, gross profit margin came in at 60%, back to pre-pandemic levels despite lower sales over the last year. This should set the stage for strong earnings growth as the business recovers from the pandemic.

Now what

Entering fiscal 2022, Coty is seeing strong momentum in CoverGirl after the brand gained market share for three consecutive quarters for the first time in five years. 

Management also called out momentum in China where Gucci and Burberry makeup are now among the top makeup brands in China. CEO Sue Nabi said, "We intend to capitalize on this momentum in fiscal 2022, significantly expanding both our distribution and assortment." 

Fiscal 2022 appears to be off to a robust start. Management cited strong demand for fragrance in the U.S. and China, and early signs of recovery in Europe. Recent product launches to capitalize on this momentum across major brands like Gucci, Burberry, and Calvin Klein are seeing a positive customer response. 

Coty is on track to cut $600 million in costs by fiscal 2023. But with the stock's price-to-sales ratio at 1.8 times, the company will need to continue to post strong gains in profitability over the next few years to deliver satisfactory gains to investors from this higher valuation level.

John Ballard 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.

Stocks Mentioned

Coty (Class A) Stock Quote
Coty (Class A)
$7.90 (-2.11%) $0.17

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