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Coty (COTY) Poised on E-Commerce Strength & Saving Efforts

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Coty Inc. COTY appears to be well placed, courtesy of its solid focus on core priorities. These include achieving robust e-commerce momentum; strengthening presence in China; solidifying foothold in white-space opportunities such as prestige, skincare and cosmetics; undertaking innovation and thereby enhancing the core prestige fragrance business; and stabilizing the mass beauty business market share.

Apart from this, the company’s cost-saving efforts have been yielding results. These upsides have been working well for the company amid softness in the travel retail network as well as a troubled mass beauty business due to the pandemic. Let’s delve deeper.

Coty’s Growth Initiatives Keep It Going

Coty’s e-commerce business has been performing impressively. In the second quarter of fiscal 2021, the company’s e-commerce sales surged 40%, with strength in all regions and channels. Also, its e-commerce penetration, as a percentage of sales, continued to increase in the Americas and the EMEA regions, with the latter being its biggest e-commerce region and largest growth contributor. Channel-wise, e-commerce sales rose 40% in the Prestige channel and by double-digits in the Mass channel, with the latter seeing continued growth at retailer sites as well as a robust performance on Amazon in the United States, Germany and the U.K. Notably, revenues on the Kylie Skincare direct-to-consumer website increased year over year in the second quarter.

With respect to the prestige fragrance category, the company is particularly benefiting from strength and innovation in Gucci, Burberry and Marc Jacobs brands. Also, Coty recently signed a letter of intent to partner with LanzaTech — a pioneer in producing next-generation green and sustainable ingredients. This partnership is aimed at introducing sustainable ethanol produced from captured-carbon emissions to Coty’s fragrance offerings.

Additionally, the company has made several acquisitions to enhance its brand portfolio. To this end, it acquired a 20% stake in Kim Kardashian West's business in January 2021. The deal will help Coty and Kim Kardashian West focus on fresh beauty categories along with expanding their worldwide presence beyond the current line of products. Further, Coty and Kylie Jenner unveiled their long-term alliance in January 2020, aimed at further building upon Kylie’s beauty business, which includes Kylie Skin and Kylie Cosmetics.

Moving to its saving efforts, management is committed to optimizing the overall cost structure. Incidentally, Coty delivered fixed cost savings of nearly $80 million in the second quarter and is now on track to generate savings of roughly $300 million in fiscal 2021 compared with more than $200 million expected before. The raised savings goal can be accountable to robust delivery in the first half and acceleration of various projects. This, in turn, is likely to lead to an adjusted EBITDA of $750 million for fiscal 2021. We note that the company has been focused on reducing people and non-people costs, alongside undertaking solid marketing cost management. Certainly, Coty’s robust cost discipline and cash-flow dynamics remain its main drivers.

Pandemic-Led Hurdles

Coty’s revenues have been bearing the brunt of soft traffic as well as a disrupted travel retail network amid the pandemic-led social distancing trends. In second-quarter fiscal 2021, net revenues from continuing operations decreased 15.9% year over year to $1,415.6 million. LFL net revenues from continuing operations slid 17.9%. LFL revenues were down across all regions and channels. Results were especially affected by continued softness in travel retail (in Asia-Pacific region and Prestige channel), the impact of the second wave of the pandemic that resulted in several market closures (in Prestige channel and EMEA region), lesser make-up usage occasions and lower store traffic (in the Mass channel).

Incidentally, the Mass channel has long been witnessing soft sales. In the second quarter, net revenues declined 23.3% year over year to $511.5 million, while LFL sales fell 21.6%. Sales continued to bear the brunt of reduced demand for color cosmetics due to lesser make-up usage occasions and lower store traffic amid the increased waves of the pandemic.

Wrapping Up

Coty’s focus on its core strategies along with its saving efforts is likely to help it keep its growth story going. In fact, the impact of its strategies was reflected in its second-quarter fiscal 2021 results, wherein both top and bottom lines came ahead of the Zacks Consensus Estimate. Although results declined year over year, the prestige channel witnessed significant growth on a sequential basis, on the back of the robust retail sales momentum in China and the United States, as well as broad-based e-commerce growth. Also, focus on cost reductions aided the company’s performance. Management remained pleased with the second-quarter show and said that the company’s January trends were also in tandem with its anticipations.

Shares of this Zacks Rank #3 (Hold) company have rallied 18.7% in the past three months compared with the industry’s growth of 8%.

Solid Consumer Staples Stocks

Estee Lauder EL has a Zacks Rank #2 (Buy) and a long-term earnings per share growth rate of 10.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The J.M. Smucker SJM has a Zacks Rank #2 and its bottom line outpaced the Zacks Consensus Estimate by 17.7% in the trailing four quarters, on average.

Medifast MED, which currently carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 17.4%, on average.

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