No-Moat Coty Laid out Lofty Sales and Profit Goals at Its Investor Day; We Place Shares Under Review

At its investor day, no-moat Coty demonstrated progress on each of its six strategic pillars to: 1) stabilize its mass beauty business; 2) accelerate prestige fragrances while establishing a key presence in prestige makeup; 3) build a skincare portfolio across mass and prestige; 4) enhance its digital capabilities; 5) further penetrate China; and 6) become an industry leader in sustainability. It issued new long-term guidance for organic sales growth of 6%-8%, a fiscal 2025 gross margin of 65%, and 2025 adjusted EBITDA of $1.2 billion. As this outlook generally compares favorably with our estimates of 3%-4%, 61%, and $1.2 billion, respectively, we expect a material increase in our $8 fair value estimate, and we are placing the shares under review. While these goals strike us as aggressive, our confidence in Coty’s ability to execute its strategy successfully is buoyed by the firm’s new lineup of seasoned executives with impressive track records, and the remarkable progress CEO Sue Nabi has made since she joined the firm just over a year ago. Further, Coty’s current gross margins are subpar, suggesting inefficiencies, having averaged 60% the last three years, compared with 73% for L’Oréal and 76% for Estee Lauder (both wide-moat).