Beauty products company Coty (NYSE:COTY) reported Q1 FY2024 results exceeding Wall Street analysts' expectations, with revenue up 18.1% year on year to $1.64 billion. It made a non-GAAP profit of $0.09 per share, down from its profit of $0.11 per share in the same quarter last year.
Coty (COTY) Q1 FY2024 Highlights:
- Revenue: $1.64 billion vs analyst estimates of $1.58 billion (3.9% beat)
- EPS (non-GAAP): $0.09 vs analyst expectations of $0.17 (47.3% miss)
- Free Cash Flow of $124 million, up from $38.1 million in the previous quarter
- Gross Margin (GAAP): 63.5%, in line with the same quarter last year
With a portfolio boasting many household brands, Coty (NYSE:COTY) is a beauty products powerhouse with offerings in cosmetics, fragrances, and skincare.
The company’s most iconic brands include CoverGirl, Clairol, OPI, and Rimmel London. In addition, Coty has licensing agreements in place to offer fragrances and select other products bearing the Gucci, Calvin Klein, Balenciaga, and Marc Jacobs brands. While there are differences between the brands, the unifying theme is quality at an attainable price.
Given the breadth of its offerings and brand portfolio as well as its mid-tier price points, Coty caters to a broad spectrum of beauty enthusiasts. Their core customer is a middle-income adult woman. She cares about her appearance and has strong brand preferences, but she also doesn’t want to break the bank by buying beauty and personal care products. To meet her needs, the company’s messaging mixes aspiration (celebrity endorsements), inclusivity (products for all ages and races), and trendiness.
Coty products enjoy wide distribution and are most commonly found in beauty retailers such as Ulta Beauty (NASDAQ:ULTA), department stores such as Macy’s (NYSE:M) and Kohl’s (NYSE:KSS), and drugstores such as CVS (NYSE:CVS). This mass distribution ensures that the customer base is never far from a Coty product and also reinforces the brand’s attainability and reasonable price points.
Personal care products include lotions, fragrances, shampoos, cosmetics, and nutritional supplements, among others. While these products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. As with other consumer staples categories, personal care brands must exude quality and be priced optimally given the crowded competitive landscape. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.Competitors that offer a wide range of beauty and cosmetics products include L’Oreal (ENXTPA:OR), Estée Lauder (NYSE:EL), Proctor & Gamble (NYSE:PG), and private company Revlon.
Coty is one of the larger consumer staples companies and benefits from a well-known brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 9.4% over the last three years was decent for a consumer staples business.
This quarter, Coty reported robust year-on-year revenue growth of 18.1%, and its $1.64 billion in revenue exceeded Wall Street's estimates by 3.9%. Looking ahead, analysts expect sales to grow 5.4% over the next 12 months.
Gross Margin & Pricing Power
All else equal, we prefer higher gross margins. They usually indicate that a company sells more differentiated products and commands stronger pricing power.
Coty's gross profit margin came in at 63.5% this quarter. in line with the same quarter last year. That means for every $1 in revenue, only $0.37 went towards paying for raw materials, production of goods, and distribution expenses.
Coty has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see above, it's averaged an exceptional 63.8% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it has stable input costs (such as raw materials).
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
In Q1, Coty generated an operating profit margin of 12%, down 1.8 percentage points year on year. Because Coty's operating margin decreased more than its gross margin, we can infer the company was less efficient with its assets and increased spending on discretionary activities such as corporate overhead and advertising.Zooming out, Coty has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer staples business, producing an average operating margin of 9.1%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Coty reported EPS at $0.09, down from $0.11 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2021 and FY2024, Coty's adjusted diluted EPS flipped from negative to positive. This is certainly a positive for the business and implies that consumer preferences are shifting in favor of the company.
Wall Street expects the company to continue growing over the next 12 months, with analysts projecting an average 85.4% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Coty's free cash flow came in at $124 million in Q1, up 40.6% year on year. This result represents a 7.6% margin.
Over the last eight quarters, Coty has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 6.3%, above the broader consumer staples sector. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Coty's subpar returns on capital over the last five years may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC was 2.2%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+ returns.
Key Takeaways from Coty's Q1 Results
With a market capitalization of $9.64 billion, Coty is among smaller companies, but its $317.7 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We enjoyed seeing Coty exceed analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its operating margin missed analysts' expectations and its EPS missed Wall Street's estimates. Overall, this was a mediocre quarter for Coty. The stock is flat after reporting and currently trades at $10.8 per share.
Is Now The Time?
Coty may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Coty, we'll be cheering from the sidelines. Although its impressive gross margins are a wonderful starting point for the overall profitability of the business, the downside is that its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its estimated revenue for the next 12 months is weak.
Coty's price-to-earnings ratio based on the next 12 months is 22.1x. While we think the price is reasonable and there are some things to like about Coty, we think there are better opportunities elsewhere in the market right now.
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