Analysis: EL ELF COTY

Wednesday night Estee Lauder (EL) reported better-than-expected December-ending quarter results that topped both top- and bottom-line expectations. But EL shares are down only modestly in response following the downside guidance issued for the current quarter: earnings per share of $0.37-$0.47 vs. the $1.78 consensus. And revenue in the range of $3.65 billion -$3.72 billion is well below the $4.17 billion consensus. The reason for that is the company's full-year 2023 guidance that ends with its June-ending quarter, implies a sharp rebound during its final quarter of its June-ending fiscal year.

Estee Lauder's management spoke to this on its earnings call earlier, saying that the current quarter "is set to be more variable, because of the high level of covid cases, we now anticipate even stronger organic sales growth as of the fourth quarter as the recovery evolves."

That quarter-over-quarter pick-up not only reflects a greater impact of China's reopening and dollar headwinds dissipating, but also more progress on inflation pressures.

We also heard from e.l.f. Beauty Inc. (ELF) on Wednesday, which delivered better-than-expected quarterly results and lifted its outlook for the year, thanks to continued strength in cosmetics and skincare, especially its premium ones. ELF has a far smaller non-U.S. footprint than EL and Coty (COTY) , which accounted for just 13% of ELF's sales in the quarter. While that minimized the impact of dollar headwinds in the quarter, it also means that, at least for now, ELF isn't as well positioned to capture incremental spending associated with China's reopening.

As Action Alerts PLUS members know, we've been cautiously waiting with the shares of Coty, looking for clarity on the how China's reopening would affect the company. While the full benefit won't be in Coty's December-ending quarter results, similar to Estee Lauder, we should see it reflected in the company's guidance that should also reflect waning dollar headwinds and improving input costs. It may take some parsing like what we did above with that for Estee Lauder and we may be a bit early, but we would rather be early than miss out completely on the longer-term opportunity with COTY shares. 

After you receive this Alert, we will call the shares of Coty up from the AAP Bullpen, as we buy 3,500 COTY shares at or near $10.30. Following the trade, COTY shares will account for roughly 1.0% of the Action Alerts PLUS investment club portfolio.

COTY shares have moved since we first added them to the Bullpen on Jan. 11, despite the technical resistance ahead for the market at that time.

We'll start with a $12 price target and a "Two" rating ahead of the company reporting its quarterly results next week on Feb. 8. We could look to scoop up more shares between $9-$10, but we would look to revise that range should Coty's outlook for the coming year be meaningfully stronger than expected.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)

At the time of publication,  Action Alerts PLUS had no positions in any securities mentioned.