Beauty product manufacturer Coty (COTY +2%) is avoiding the current market sell-off today after receiving an upgrade to “Overweight” from “Neutral” at Piper Sandler. Shares of COTY, which fell roughly 18% in 2022, have not seen the same outperformance as its less-expensive competitor, e.l.f. Beauty (ELF), which saw its stock soar by over 65% in 2022.
Therefore, with supply chain woes continuing to improve and China returning to growth in Q1 (Sep), COTY may be staring at much prettier numbers in the quarters ahead.
COTY noted last quarter that its presence in China makes up only 4% of its net revenue, so the weakness throughout much of FY22 (Jun) did not have a glaring negative effect on results. Furthermore, with such a small footprint in the region, COTY is looking to possibly step on the throttle, capitalizing on a massive total addressable market and a robust rebound as COVID-19 restrictions ease.
COTY already saw positive results with its Lancaster skincare brand, where sales exploded by 400% yr/yr in Q1, underscoring the brand’s desirability toward the most demanding Chinese consumers.
COTY added that it has also not seen any volume decline despite implementing low-to-mid single-digit price hikes, which has helped drive gross margin expansion by 70 bps in Q1.
Bottom line, 2023 may bring lingering supply chain woes and some demand pressure as inflationary pressures remain elevated. However, COTY’s possible aggressive penetration into the enormous Chinese market and its brands’ defensive premium characteristics give it a solid footing to overcome these headwinds.
