Incorporated in 1904, Coty Inc. (COTY) is one of the leading beauty companies in the world, with a well-known portfolio of fragrance, color cosmetics, and skin and body care brands. The company is a global leader in fragrance and ranks third in color cosmetics. COTY’s stock has gained 200% over the past year and 15.4% year-to-date to close yesterday’s trading session at $8.10. Its robust top-line growth and progress across all business segments, fueled by major product launches, have driven its share price so far this year.

However, the stock has retreated 16% over the past month. Though the company is adopting digital options, from advertising to e-commerce platforms, to keep up with the changing preferences of consumers and drive its growth, its stretched valuation could cause its shares to retreat further.

Here’s what could shape COTY’s performance in the near term:

Strategic Partnership

This month, COTY announced a multi-channel partnership with Perfect Corp., a leading beauty tech solutions provider, to integrate a suite of best-in-class augmented reality and artificial intelligence experiences into its beauty brands' digital marketing toolkits. With this collaboration, the company aims to add a new dimension to its digital journey, combining some of the best augmented and virtual reality technology to assist the whole portfolio of brands to unleash the greatest digital user experience and improve social selling.

Selling Shares

This month, COTY announced the pricing of its secondary offering of 50 million shares of its outstanding Class A common stock by KKR Rainbow Aggregator L.P. at $8.53 per share. After completing the offering, 568,367 shares of COTY’s convertible preferred stock, representing roughly 10.9% of its outstanding Class A common stock, will be retained by KKR. However, selling shares could negatively impact the stock price and lead to bearish investor sentiment.

Mixed Financials and Profitability

COTY’s revenue increased 89.5% year-over-year to $1.06 billion in its fiscal fourth quarter ended June 30. Its operating income came in at $1.8 million, compared to an operating loss of $920.5 million. In addition, its adjusted EBITDA came in at $127.3 million, compared to a negative adjusted EBITDA of $246.6 million. However, the company reported a net loss of $186 million, while its loss per share amounted to $0.27 over this period.

Its trailing-12-month cash from operations of $318.7 million is 42.4% lower than the industry average of $553.2 million. COTY’s net income and ROA are negative 4.4% and 1.5%, respectively. However, its gross profit margin of 60% is 74.5% higher than the industry average of 34.4%.

Impressive Growth Prospects

Analysts expect COTY’s EPS to rise 2,000% from the same period last year to $0.21 in the current year. Also, Street expects COTY’s revenues to grow 14.4% year-over-year to $5.3 billion in the fiscal year 2022. Moreover, the company’s revenue is expected to rise 4.9% year-over-year to $5.56 billion in fiscal 2023, while its EPS is expected to increase 52.4% from the same period last year to $0.32 next year.

Stretched Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 46.01x, which is 136.5% higher than the industry average of 19.46x. Also, its forward EV/Sales multiple of 2.53 is 27.8% higher than the industry average of 1.98. Moreover, COTY’s trailing-12-month EV/EBIT of 83.72x compares with the industry average of 16.86x.

POWR Ratings Reflect Uncertainty

COTY has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. COTY has a C grade for Quality and Growth. The company’s mixed financial and profitability are consistent with these grades.

Of the 62 stocks in the A-rated Fashion & Luxury industry, COTY is ranked #56.

Beyond what I’ve stated above, you can view COTY ratings for Value, Stability, Sentiment, and Momentum here.

Bottom Line

With an impressive product portfolio and an international market presence, COTY is among the leading beauty companies. However, the company’s operational inefficiencies and stretched valuation are a cause for concern. Despite substantial top-line growth, COTY’s ROA is negative. Thus, we think investors should wait for the company’s financials to stabilize before investing in the stock.

How Does Coty Inc. (COTY) Stack Up Against its Peers?

While COTY has an overall C Rating, one might want to consider looking at its industry peers, Genesco Inc. (GCO) and Movado Group Inc. (MOV), which have an overall A (Strong Buy) grade.

COTY shares were trading at $8.04 per share on Tuesday morning, down $0.06 (-0.74%). Year-to-date, COTY has gained 14.53%, versus a 17.48% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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