- While the low-end consumer struggles, spending from the high-end remains stout.
- Coty Inc. raised its profit outlook last May, so all eyes are on its earnings report due out in late August.
- The stock has a volatile history, but it could present a buying opportunity near $6.
Walmart (WMT) once again sent shockwaves through the retail world earlier this week when it drastically cut its Q2 and rest-of-year profit numbers. Inventory issues and over-buying during the last year-plus in the apparel and hardline areas will likely lead to sharp discounts as the back-to-school season continues. That might actually be a boon to lower-end consumers who are getting strapped for cash despite a strong jobs market. Investors might look to favor firms catering to the higher end of the consumer income spectrum.
Low-End Consumers Struggling Amid High Inflation
Goldman Sachs Investment Research
Retail will be key to watch this earnings season - most of the big chains report the week of August 15, according to Wall Street Horizon. But, as evidenced by Walmart, we might hear key preannouncements between now and then.
One retailer, Coty Inc. (COTY) catering more toward the middle and upper-end consumer, raised the bar on itself on May 9 when the New York-based $6.3 billion market cap Consumer Staples company boosted profit estimates based on resilient luxury demand.
Coty, together with its subsidiaries, engages in the manufacture, marketing, distribution, and sale of beauty products worldwide. The company provides prestige fragrances, skincare, and color cosmetics products through prestige retailers, including perfumeries, department stores, e-retailers, direct-to-consumer websites, and duty-free shops. It does not pay a dividend.
COTY shares, like some of its products, do not come cheap right now. Its forward P/E ratio is near 25. While well off sky-high valuations seen last year, that’s still a hefty price to pay in this market. The NTM P/E is above levels seen from 2018 through early 2020.
An Elevated P/E Versus History
On the bright side, COTY’s free cash flow yield is impressive near 10%. The question is how much might that retreat should higher costs and a weaker consumer hit the retailer’s margins? For now, value investors can point to strong FCF.
Robust Free Cash Flow
COTY reports its Q4 results late in the earnings season. According to Wall Street Horizon, it reports BMO on August 25, but that date is not yet confirmed.
COTY Q4 Results Due Aug 25 BMO
Data from Options Research show that COTY has beaten analyst earnings expectations in the last three quarters, but the previous two August earnings releases featured EPS misses.
COTY: An 8% Earnings Move Expected With Rising YoY EPS
The Technical Take
I see key support just a bit lower from here on COTY’s chart. I’d be a buyer in the $5.90 to $6.40 range. Assuming decent EPS growth, that level also yields an attractive valuation for this growing firm. Volatility is common with COTY, though. The stock fell below $3 in late 2020 and was cut in half earlier this year off its late 2021 peak.
I would also like to see the stock climb above a downtrending resistance line currently near $8. If that happens, then perhaps a move back toward $11 would be in play.
COTY: Support Around $6, Watching For A Breakout
The Bottom Line
All eyes will be on retail this earnings season and for the rest of the year as uncertainty around the consumer abounds. COTY’s valuation has improved this year as the stock price endures a big drawdown. A positive profit outlook issued last May is an encouraging sign, but we will see what August’s earnings report reveals as the prior two Q4 reports missed estimates. I would be a buyer in the low $6s or if the stock climbs above $8.
For further details see:
Coty: Expecting Earnings Growth From Luxury Retail