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The Past Financial Results Of Coty Inc. (NYSE:COTY): Should You Consider Buying Coty Inc. (NYSE: COTY)?

Coty Inc. (NYSE:COTY), one of the biggest beauty companies globally, offers a wide range of classic brands, ranging from skin and body care products to cosmetics and perfumes. Its renowned collection is divided into premium brands and consumer beauty brands. Its consumer beauty brands include Adidas, Beckham, Sally Hansen, and many more, while its prestige brands include Burberry, Kylie Jenner, Hugo Boss, Davidoff, and others.

COTY sold a 60% ownership stake in Coty's Professional and Retail Hair division, which includes the Wella company, in fiscal year 2021. Prestige brands will make up around 60% of net sales by 2023, with consumer beauty making up the remaining 40%, per RL insights. Especially with brands like Burberry, Marc Jacobs, and Kylie Jenner, luxury scents are expanding by double digits globally.

Coty recently announced that it has inked a long-term license arrangement with Lena Gercke, a German television presenter and model, to create, produce, and market her debut fragrance. The partnership is a result of Coty's ongoing efforts to grow and improve its line of business by introducing fresh products, labels, and technological innovations.

Stefano Curti, Coty’s Chief Brands Officer, Consumer Beauty, said:

Coty has consistently increased its annual revenue over the last three years. Net revenue was around $4.63 billion in 2021 and jumped to $5.3 billion in 2022, a 14.57% rise, as a result of stores reopening and a surge in leisure travel when COVID-19 limitations were eased. The demand and foot traffic in the consumer beauty and prestige divisions both grew, with the prestige category growing at the fastest rate. With names like Calvin Klein, Burberry, Hugo Boss, Gucci, and Marc Jacobs in the fragrance category, as well as strong success in body care, skincare, and cosmetics, net sales increased to $5.55 billion in 2023, up 4.71% from 2022. Overall, the annual revenue has grown by 19.87% since 2021.

In comparison to rival cosmetics behemoth L'Oreal, growth in prestige divisions has improved the company's position in the market. Unlike Coty, its European rival, L'Oreal, had reported challenges in the luxury segment in the same era.

Over the previous three years, the company's adjusted EBITDA margin and adjusted net income margin both showed strong performance in terms of profit margins. In 2022, their adjusted EBITDA margin increased to 17.1% from 16.5% in 2021. The drop in fixed costs as a proportion of net revenue and the decline in marketing and consumer promotional expenses as a percentage of net revenue in 2023 were the main drivers of the margin growth. Furthermore, the adjusted net income margin attributable to COTY climbed from 4.4% to 8.2% in 2023. Its underlying net income has improved, which is the main driver of this robust increase. Higher operational income is the main factor driving the increase in net income.

The beauty company posted strong growth, exceeding Wall Street's forecasts for operating income and net sales for the third quarter of FY2024. COTY's net sales jumped 8% compared to the previous year in 3Q24, reaching $1.38 billion. Over the quarter, both of its revenue divisions increased. Net sales in the prestige market rose by 8%, while consumer beauty saw a 6% gain. Positive price effects and volume increases propelled the expansion in its premium sector. The net revenue gain for the consumer beauty market was also boosted by a favorable pricing effect and higher volume.

In terms of margins, COTY saw an increase from 62.9% to 64.8% for its gross profit margin. Reduced inflation, premiumization, and supply chain productivity gains were cited as the reasons for this improvement.

The quarter saw a 10% improvement in COTY's adjusted EBITDA compared to the same quarter last year, due to higher sales and gross profit. The adjusted EBITDA margin climbed from 14.1% to 14.4%. Its adjusted net income margin, however, dropped from 13% to 3.2%.

According to Coty, the strong global demand for both mass-market and premium goods would likely allow it to achieve the upper end of its yearly goals. In aftermarket trading, the company's shares rose by about 3%.

As per Circana’s US Beauty Industry research, the mass beauty market expanded by 6% year-over-year in 2023, while the US prestige beauty industry had double-digit growth, up 14%. Prestige perfumes and cosmetics, especially lip makeup, experienced notable developments. Coty has been growing its prestige business by entering the prestige cosmetics industry and developing a wide range of products to take advantage of this rapidly increasing market. Coty's product offerings are elevated by strategic relationships with Kim Kardashian and Kylie Jenner, which utilize the impact of digital native superstars to propel development.

Coty has been attempting to improve its leverage ratio and reduce its net debt. In 2023, the leverage ratio was around 3 times, compared to 6.8 times in 2021. Coty still has a 25.8% interest in Wella, valued at around $1.08 billion. If Coty sells this stake, the leverage ratio may fall to around 2 times. Coty has around $3.9 billion in net debt at the end of Q3 FY2024. By expanding EBITDA, the company hopes to lower the leverage ratio to about 2.5x by the conclusion of 2024 and to 2x in 2025.

For the past four quarters, Coty has experienced substantial cash growth consistently. Free cash flow is $260.2 million, up 6.20% from the same quarter last year, and is predicted to remain stable in 2024 and increase in 2025, per analysts.

Due to the pandemic, Coty’s sales declined by the start of 2020, from $12.02 in February 2020 to $2.90 by October 2020. During the pandemic, as working from home and staying in became the new standard, makeup sales suffered, as per JP Morgan. L'Oréal reported that the global beauty market had shrunk by 13-14% in the first half of the year, with sales of cosmetics, fragrances, professional beauty, and luxury beauty all down by about 25%. However, efforts were made by Coty in 2020 to combat the pandemic crisis. Its stock price dropped 70% during the pandemic, and the business attempted to win back investors, unlike Estee Lauder. The latter was able to raise prices throughout the pandemic. Its share price, therefore, doubled.

After the pandemic, Coty's sales have improved annually, but the company's stock price ($10) is still low when compared to Estee Lauder and L'Oreal. As of June 31, 2024, Coty's stock had dropped more than 17% last year and 18% YTD, underperforming the 16% gain made by the S&P 500.

Coty has become more reliant on a smaller number of important merchants as retailers in the United States and Western Europe have developed. Brick and mortar stores have closed as a result of internet shopping's surge and declining in-store visitation. This might be detrimental to Coty if retailers restrict its product selection or offer rival companies more shelf space. For instance, shelf space for Coty's CoverGirl brand has already decreased.

However, with a 12-month price objective of $13.04, 12 analysts recommend buying Coty, suggesting an increase of more than 30.47% from the current stock price of $10.00. DA Davidson, an investment banking company, has modified its Coty Inc. outlook, keeping a “Buy” rating although cutting its price target from $17.50 to $16.50. DA Davidson expects an acceleration in Q1 FY2025 and underlines Coty's successful execution and financial leverage reduction, while marginally decreasing its projections for the fourth fiscal quarter of 2024 owing to difficult year-over-year comparisons.

In Q1 FY 2024, 22 hedge funds reported holding shares in Coty Inc. (NYSE:COTY), up from 21 funds the previous quarter, indicating bullish sentiments among investors. John Hockin's Sea Cliff Partners is the largest stakeholder in the company, with 2,434,296 shares worth $29.11 million.

Conclusion: 

Notwithstanding the difficulties, Coty's net revenue has increased steadily over the previous three years due to expansions in profitability margins and growth in both revenue areas. Both the prestige and mass market beauty channels in the US saw an increase in 2023 compared to the previous year, with the prestige channel growing at a faster rate. Coty is concentrating on its prestige division by entering the prestige cosmetics market and developing a strong portfolio in order to take advantage of this trend.

While we acknowledge the potential of Coty as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an Al stock that is as promising as Coty but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. 

With that said, here are the  Most Successful Celebrity Beauty Company in the World.

Methodology:

To pick out the 15 Most Successful Celebrity Beauty Company in the World, we searched the internet for the most successful celebrity beauty companies and ranked them based on their number of social media followers (Instagram). We have used annual revenue as a tie-breaker in cases where two or more companies had the same number of followers.

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1. Huda Beauty

No. of Social Media Followers: 54 million 

Since 2013, Huda Kattan, a famous beauty blogger based in Dubai, has been running Huda Beauty. The company started off with a beauty blog and has now turned into the Most Successful Celebrity Beauty Company in the World with 54 million Instagram followers. Natural components are promoted by Huda Beauty in their products. Popular Huda Beauty items include a selection of skincare products, colored eyeshadow palettes, lip contour pencils, liquid lipsticks, and artificial lashes. Recently, the brand introduced five shades of Blush Filter Liquid Blush.

Click to see the entire list of the 15 Most Successful Celebrity Beauty Companies in the World. 

You can also check out the list of the 15 Best Patchouli Perfumes That Smell Seriously Luxurious.

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Disclosure: None. 15 Most Successful Celebrity Beauty Companies in the World is originally published on Insider Monkey.