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Coty Inc. (NYSE:COTY) jumped 1.8% Friday afternoon after increasing its fourth-quarter and fiscal year revenue outlooks.
The beauty products purveyor said it expects up to 15% organic growth for Q4, up from 10%, thanks to recovery in China and its prestige products, which include Burberry and Tiffany & Co. fragrances. COTY also raised core revenue growth for the fiscal year to up to 11% from between 9% and 10%.
“We think this signals their increased confidence in the growth outlook,” DA Davidson analysts Linda Bolton Weiser and Christina Xue wrote in a note. The company also sees “significant white space growth opportunity in mass fragrances in Brazil,” which has the largest mass fragrance market globally at around $4B.
BofA Global Research reiterated a Buy rating on COTY and a $14 price objective based on a sum-of-the-parts valuation for the prestige and consumer beauty segments.
J.P. Morgan was less enthusiastic, noting that some forecasts were unchanged, including: FY23 gross margin of 64%, adjusted operating margin of about 13%, and FY23 adjusted EPS (excluding MTM on equity swap) of $0.38 to $0.39.
While the prestige fragrances are helping with growth, there is also risk as the top seven brands that make up over 90% of sales in the segment are not owned by COTY but licensed, J.P. Morgan analysts led by Andrea Teixeira wrote in a note.
“It remains a top concern in particular as Gucci is an important part of the portfolio and its brand owner (Kering, covered by Chiara Battistini) has been investing more in beauty through acquisitions and new hires,” the analysts said. “Contracts can be renegotiated and break-up fees are not unheard of in the industry if Kering decides to unwind the contract.”
COTY’s product portfolio also “skews off-trend,” with traditional brands like Covergirl, Max Factor and Sally Hansen struggling to attract younger consumers. J.P. Morgan maintained a Neutral rating on the company.
