Like with so many other companies, the coronavirus took the blame for weak sales in Coty’s (COTY) latest financial report.
In FQ2, the beauty products maker generated net revenue of $1.42 billion, a 16% year-over-year decline and just below the consensus estimate of $1.43 billion.
Although there was a $0.10 year-over-year drop on the bottom-line, adjusted earnings came in at $0.17 per share, beating the Street’s call for $0.07 per share.
Nevertheless, investors were disappointed with Coty’s latest quarterly results and sent shares down by 13% in the subsequent session.
Deutsche Bank analyst Faiza Alwy thinks the negative investor sentiment is down to two specific factors.
“The stock had run up post EL’s print last week which showed fragrance sales +7%, raising hopes that Coty’s results may be much better than feared, and second, Coty’s EBITDA beat was driven by significant cut backs in Advertising, making for a lower quality beat and raising questions around FY22 EBITDA (or earnings power),” said the analyst.
However, Alwy believes Coty is heading in the right direction. The company “seems to be doing the right things under the leadership of CEO Sue Nabi.”
Nabi took hold of the helm in September 2020 and has already made her presence felt via several initiatives. These have included upgrading digital capabilities, expanding in the “fast-growing and structurally attractive Chinese market and focusing on incremental innovation for brands like CoverGirl.” Importantly, says Alwy, Coty “finally seems to be making progress on cutting fixed costs.”
Year-to-date, the company has managed $160 million in savings and is on target to save $300 million in FY21, and by FY23 savings are expected to reach $600 million.
But while Alwy thinks Coty has the makings of a “potentially compelling recovery story,” there is one glaring issue.
The company has “high leverage levels,” which could impact its ability to make the strategic investments needed to rapidly deliver on top-line growth. Alwy says the issue could potentially put Coty at a “continued competitive disadvantage.”
So, although the company’s improving financials might be obscured by Covid-related headwinds, Alwy is looking “for further evidence and consistency before turning more bullish on the stock.”
Accordingly, Alwy’s rating stays a Hold, although the price target gets a bump upwards. The figure moves from $6 to $8 and represents possible upside of 18% from current levels. (To watch Alwy’s track record, click here)
Wall Street appears to agree with Fadem that caution is required here. The analyst consensus on this stock is a Hold, based on 13 ratings that include 3 Buys, 5 Holds, and a single Sell. The average price target among these ratings stands at $7.78 and implies ~15% upside from current levels. (See COTY stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
