Coty vs Estée Lauder: Which Beauty Stock Is A Better Buy Amid The Pandemic?

The beauty industry is facing tough times as the demand for makeup products has drastically been impacted by the COVID-19 pandemic. Physical distancing, remote working, mask-wearing and fewer social events have impacted the use of makeup products and are significantly pulling down the sales of companies like Coty, Estée Lauder and Ulta Beauty.

However, the skincare category has been more resilient comparatively. A study by The NPD Group indicates that about 40% of facial skincare users are using their products, like cleansers and moisturizers, more often amid the pandemic. Also, beauty companies are witnessing a sharp rise in their e-commerce sales as customers are avoiding shopping at physical stores due to COVID-19 fears.

Amid these changing dynamics, we will use the TipRanks Stock Comparison tool to analyze Coty and Estée Lauder and see which beauty company is well-positioned for long-term growth.  

Coty (COTY)

The pandemic has added to the woes of beleaguered beauty giant Coty. The company has been under tremendous pressure since it acquired over 40 beauty brands from Procter & Gamble in 2016. The addition of P&G’s struggling brands dragged down Coty’s performance and the deal also added huge debt to its balance sheet. In fiscal 2019 (ended Jun. 30, 2019), the company recorded asset impairment charges of $3.7 billion mainly related to the acquired brands.

Last year, JAB Holding, Coty’s largest shareholder, increased its stake in the company to 60% from 40% in an attempt to control the operational missteps and send a signal to the investors that it is confident of Coty’s turnaround.

Frequent changes in the executive suite have also impacted the company. On Sept. 1, Sue Y. Nabi assumed the position of Coty’s CEO. Nabi has rich experience in the beauty space, notably a 20-year tenure at L’Oréal. Nabi is the fifth CEO appointed by Coty since the company acquired P&G Brands in 2016.

Last year, Coty announced a multi-year turnaround plan to optimize its operational model, accelerate its e-commerce growth and deleverage its balance sheet. Coty also aims to reduce its cost base by 25% by the end of FY23.

But, the pandemic has made the company’s turnaround a difficult task. Coty’s revenue fell 63% Y/Y to $560 million in 4Q FY20 (ended June 30) reflecting the impact of COVID-19, especially on the cosmetic and professional beauty categories. Revenue fell 60% on an organic basis. The company posted an adjusted loss per share of $0.51 in 4Q FY20 compared to adjusted EPS of $0.16 in 4Q FY19.  

Coty stated that it experienced significant improvement in July and August across its portfolio and expects to return to profitability in 1Q FY21.  

To lower its debt, Coty has secured a $1 billion direct investment from KKR through convertible preferred shares and inked a deal to divest 60% of its professional beauty and retail hair businesses including the Wella, Clairol, OPI and ghd brands for $2.5 billion to KKR. (See COTY stock analysis on TipRanks)

To capture the demand for digitally-native brands, Coty acquired a 51% stake in Kylie Jenner’s cosmetic line and recently announced a strategic partnership with Kim Kardashian West to buy a 20% stake in the celebrity’s make-up brand KKW for $200 million. The company also intends to address its under-exposure in growth areas like skincare, Northern Asia, and e-commerce.   

Last week, Jefferies analyst Stephanie Wissink upgraded Coty to Buy from Hold but kept the price target unchanged at $4. The analyst commented, “We are upgrading to Buy based on prospects for directional improvement & stock trade higher. We expect NT [near term] fundamentals to remain weak; trimming estimates accordingly.”

“A new CEO brings needed depth of industry expertise and recent bold actions signal a sense of urgency to derisk costs & the balance sheet. We’re still unresolved on Kylie & KKW and the weight to the turnaround; we’d much prefer improvement in the core.”

Coty stock has tanked 68.4% year-to-date and the average analyst price target of $4.54 indicates a recovery of about 28% from the current levels. The Street is sidelined about Coty. Two Buys, 7 Holds and no Sells add up to a Hold consensus.

The Estée Lauder Companies (EL)

Estée Lauder Companies, which owns popular brands like Estée Lauder, La Mer, Tom Ford, Clinique, M·A·C and Bobbi Brown, has fared better than its peers amid the pandemic due to its strong skincare business and digital presence.

The company’s fiscal 4Q (ended Jun. 30) revenue declined 32% Y/Y to $2.43 billion as the temporary closure of stores, weak traffic after the gradual reopening of stores and work-from-home trend dragged down sales of the Makeup, Fragrance and Hare Care categories by 62%, 57% and 35%, respectively, while sales of the Skincare category grew 1%. Lower sales led to an adjusted loss per share of $0.53 in 4Q FY20 compared to adjusted EPS of $0.64 in 4Q FY19.

Last year, Estée Lauder acquired Have & Be Co. Ltd., a South Korea-based skin care company that owns Dr. Jart+ skin care brand and men’s grooming brand Do The Right Thing. Excluding the impact of the Dr. Jart+ acquisition and currency headwinds, Estée Lauder expects its sales to decline in the range of 14% to 15% in 1Q FY21.  

Estée Lauder’s fiscal 1Q guidance reflects improved business trends and strong e-commerce sales. Organic e-commerce sales grew by almost triple digits in 4Q FY20. The company is significantly investing in its e-commerce business and aims to attract more customers by expanding its virtual try-on option to more categories and live-streaming events with make-up artists and brand ambassadors.

Meanwhile, the company is focusing on growth prospects in Mainland China, where sales increased by about 60% in 4Q FY20. Indeed, Estée Lauder’s premium and luxury segments of skincare are seeing robust demand in the region. (See EL stock analysis on TipRanks)

On Sept.28, Goldman Sachs analyst Jason English upgraded Estée Lauder to Hold from Sell and increased the price target to $231 from $147 on strength in the company’s China business. In a research note to investors, the analyst explained that although Estée Lauder could witness headwinds in the US, this weakness is likely to be offset by the expansion of its China business from 20% of the company’s consumption in 2019 to an estimated 40% in 2021.

Estée Lauder stock has risen 8.7% year-to-date (as of Oct. 11) and the average analyst price target of $225.79 suggests that the stock is fully valued at the current levels. The Street is cautiously optimistic about Estée Lauder with a Moderate Buy consensus based on 10 Buys versus 3 Holds and 1 Sell.

Bottom line

Estée Lauder has fared better than Coty amid the pandemic and is well-positioned to recover faster from the COVID-led slowdown. Coty is implementing several transformational measures but it might take a long time for the company to get back on the sales growth track.

What’s more, Estée Lauder scores a better Street consensus compared to Coty based on its operational performance and strong exposure to growth areas like e-commerce and key markets like China. Currently, the upside potential in Coty stock looks better than Estée Lauder. However, as indicated by the Street’s sentiment, Estée Lauder appears to be the better long-term investment.

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment