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The stock of a multinational beauty company Coty Inc. (NYSE: COTY) has recovered since peaking in November 2021. The company manufactures and sells personal care products from some of the most well-known brands in the industry, including Calvin Klein, Sally Hansen, CoverGirl, OPI, and Rimmel.
Their products tend to sell at a higher price compared to competitors elf Beauty Inc. (NYSE: ELF) sells at department stores such as Macy’s Inc. (NYSE:M) and Nordstrom Inc. (NYSE: JWN). They also have a professional and luxury line consisting of Wella, ghd and the Clairol brand. Skin care has always been a strong category, even during the pandemic.
Unlike retail brands such as Lululemon Athletica Inc. (NASDAQ:LULU) Reporting margin compression, Coty experienced margin expansion while increasing prices with no adverse effect on volume, indicating elasticity with its products. The reopening has allowed makeup and fragrances to rebound as people get back to being busy in person, while traveling and at the office. Travel retail momentum drove like-for-like (LFL) growth of 11% to 12% in the EMEA and Asia-Pacific regions.
Significant Prestige and Consumer Beauty segment
While Coty licenses the brands, it recently sold the fragrance license back to French brand Lacoste. The company continues to see strong demand in the Prestige and Consumer Beauty segments, adding to supply chain challenges. Skincare sales in Lancaster experienced 400% year-over-year growth in China.
Component shortages are the main constraint on short-term growth. Exiting the Russian market is also expected to have a negative impact on sales (-2%). A strong US dollar is also expected to have a (-6%) to (-8%) impact as reported on Nov 8, 2022 fiscal Q1 earnings release. However, Coty states that it has not seen a drop in volume since implementing low to mid-single-digit price increases.
Steady as she goes
On November 8, 2022, Coty announced its fiscal results for the first quarter of 2022 for September 2022. The company reported adjusted earnings per share (EPS) of $0.11, excluding one-time items that match consensus analyst estimates for earnings of $0.11. Revenues rose 1.4% year over year (YOY) to $1.39 billion, beating analyst estimates of $1.38 billion. Despite inflationary pressures, Coty was still able to generate solid gross margins, up 70 basis points to 63.9% year-over-year.
Sue Nabi, CEO of Coty, commented: While Coty has benefited from a resilient beauty business, I am particularly pleased that our balanced growth strategy remains in full force. We delivered strong growth in our regions and key categories, including fragrance, cosmetics, skin care and body care, and both divisions.
This has enabled us to once again report sales growth well above the underlying beauty market and among the best in our competitive range.” They continue to expand their footprint across three Prestige fragrance brands, including Gucci, Burberry, and Kylie Cosmetics. Growth in skin care was driven by a 20% year-over-year growth in sales in Lancaster.
China saw sales return to LFL growth despite the lockdowns. This should improve even more as they lift zero COVID restrictions.
Confirms the guidance again
Coty sees earnings per share for fiscal year 2023 between $0.32 and $0.33, versus analyst estimates of $0.32. The company is seeing strong demand in all of its markets, especially in the Prestige Fragrances and Consumer Beauty segments.
On January 3, 2023, Piper Sandler upgraded their stock rating from Coty to Overweight from Neutral, raising the price target from $8 to $10. Analyst Korine Wolfmeyer suggests the high exposure to travel retail and China gives the company an edge over competitors. The diversified product portfolio provides a good recession hedge for consumer trade in a weak economic climate.
The Marketbeat MarketRank™ forecast gives Coty stock a 2 out of 5 star rating with a 4.8% upside price target and 21.88% expected earnings growth. Insiders also bought $761,000 worth of stock in the past quarter.
Weekly rounding from bottom to potential head and handle
COTY shares have formed a rounded bottom as it recovers to the edge of the potential cup-and-handle near $10.49. This journey took a little over a year. The weekly market structure low (MSL) was triggered on the $6.69 breakout as the weekly stochastic started climbing back up through the 20 band.
The weekly 20-period exponential moving average (EMA) support stands at $8.11, while it rose to $7.82 through the 50-period MA. The weekly stochastic made a full oscillation through the 80 band and is trying to mini-pup towards the 100 band. Stocks are overbought at these levels and need a breather.
Note a peak at the lip and a pullback to form a handle. The cup and handle pattern forms as stocks bounce back up through the lip level that forms the handle extension. Keep an eye on the pullback support levels at $8.42, $7.93, $7.35 and the weekly MSL trigger of $6.69.
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