Beauty products and fragrance maker Coty (NYSE:COTY) stock has been in a treacherous multi-year slide further accelerated by the COVID-19 pandemic in 2020. Shares may have finally hit a bottom on the hopes of a turnaround with a new CEO and the $2.5 billion sale of its Wella, Professional and Retail Hair business which includes brands like Clairol and OPI, to private equity firm KKR & Co LP (NYSE:KKR) completing on Nov. 30, 2020. With shares still underperforming the benchmark SPDR S&P 500 (NYSE:SPY), there’s much more upside if the turnaround is successful. The restart initiatives combined with COVID-19 vaccine approvals can drive the recovery in the fragrance and cosmetics segment. A new management team at the helm and reduction in debt from the KKR deal are catalysts to help drive share momentum into the end of the year. Prudent investors can watch for opportunistic pullbacks to gain exposure.
Q1 Fiscal 2021 Earnings Release
On Nov. 6, 2020, Coty released its fiscal first-quarter 2021 results for the quarter ending September 2020. The Company reported an adjusted earnings-per-share (EPS) profit of $0.24 excluding non-recurring items versus consensus analyst estimates for a loss of (-$0.22), beating estimates by $0.46. Revenues fell (-42.14%) year-over-year (YOY) to $1.12 billion, beating analyst estimates by $45.84 million. The earnings beat was attributed to tax benefits associated with the relocation of its tax principal. The Q1 2021 adjusted net loss was (-$15.9 million) compared to (-$7.5 million) in the prior year period. Net revenues have been improving every month sequentially since the last quarter as restart initiatives accelerate. Fixed cost savings are expected to generate over $200 million in fiscal full-year 2021. Total adjusted EPS including Wella grew to $0.11, up 57% YoY, while reported EPS was $0.24. The Company expects to reduce LT debt by years end taking proceeds from the Wella divestiture combined with positive cash flow in Q2 fiscal 2021 to $5 billion from the current $7.9 billion.
Conference Call Takeaways
Coty CEO, Sue Nabi, elaborated on the highlights of the quarter and regained momentum, “Our stringent cost control enabled 20% growth in our adjusted operating income and over 50% growth of total company EPS.” Ecommerce penetration doubled to 13% of total sales. The launch of Marc Jacobs Perfect, Gucci Profumo di Fiori, Sally Hansen good.kind.pure and CoverGirl Clean Fresh helped the Company gain market share in prestige fragrances across the U.S., U.K. and Germany. The Company is committed to “reigniting” the CoverGirl mass color cosmetics and accelerating the designer prestige portfolio of brands including Gucci and Burberry in Asia. The Kylie (Jenner) skincare line carries 25% margins due to the cost-effective nature of social media follower marketing. The Company ended the fiscal year with $535.7 million in cash and immediate liquidity of $1.72 billion.
No Gap
Backing out the tax benefit for Q1 fiscal 2021 actually results in a net loss for the quarter. Normally, the market would gap and crap the share price the following morning. However, COTY shares continued to grind higher looking forward to the prospects of a solid turnaround lead by new management, debt reduction and cost savings. It is worth noting the new CEO Sue Nabi was the youngest CEO for skincare giant L’Oréal and largely credited for the success and transformation of the brand. Skincare is the hottest segment in personal care during the pandemic and there is more upside for Coty to grow market share. Competitor Estee Lauder (NYSE:EL) receives 52% of its revenues from skincare.
KKR and JAB
Coty is spinning off its Wella Retail and Professional hair care division in a deal with KKR for $2.5 billion in proceeds for a 60% stake, keeping the remaining 40% stake ($1.3 billion current value). This drops Coty net debt to under $4 billion. The deal is composed of selling convertible preferred stock to KKR with a 9% coupon and conversion price of $6.28 per share. The deal is expected to close on Nov. 30, 2020. This makes KKR a 17% owner of COTY stock with the potential to expand the float by an additional 200 million shares. The largest owner is private equity firm JAB with a 50% ownership stake with an average price of $11 per share. Coty is a top four player in the global beauty products industry. Prudent investors looking for a turnaround play still on the cheap can monitor COTY shares for opportunistic pullback levels.
COTY Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for COTY stock. The monthly rifle chart downtrend stalled as the stochastic attempts to cross up at the 10 band. The monthly market structure low (MSL) buy triggers above $4.83. The monthly channel tightening can form if the stochastic can reach the 20-band with its rising 5-period moving average (MA) at $3.54 with the destination 15-period MA at the $6.72 Fibonacci (fib) level. The weekly rifle chart is breaking out with a rising 5-period MA at $3.68 and stochastic mini pup rising through the 60 -band. The weekly upper Bollinger Band is at $5.54. Upon reaching the weekly upper BBs, or if the daily stochastic crosses back down, COTY shares can present opportunistic pullback levels at the $4.45 fib, $3.83 fib, $3.67 weekly 5-period MA/fib and the $3.32 fib. Keep an eye on the Nov. 30, 2020, date of Wella deal closing for prices to peak or rise into as a press release is expected. The $6.28 conversion price for KKR and $11 average price for JAB presents a good upside trajectory range for shares.