Coty (COTY) shares have come under some pressure over the past few days, alongside other luxury goods companies, including LVMH Moet Hennessy Louis Vuitton (LVMHF) , Compagnie Financière Richemont SA (CFRUY) , Kering (PPRUY) , Burberry (BURBY) , and Hermes (HESAY) .
Debt ceiling talks in Washington may be partly to blame, but so too may be reports of a resurgence of Covid in China. Some are suspecting a new round of restrictions there. This new wave is expected to peak in June and infect as many as 65 million people a week, but the reported symptoms are milder than those in past waves. So far restrictions appear to be off the table, but this is an evolving situation.
The concern, however, is China's reopening may lose some momentum in the coming weeks, and the shares of most luxury goods companies have moved higher as that reopening has driven demand for their products and services.
We would make two points. First, not all luxury goods businesses are the same, and by that we mean their array of products. For example, LVMH's portfolio consists of wines and spirits, fashion and leather, perfumes and cosmetics, and watches and jewelry. Some, like those in the company's wines and spirits and perfumes and cosmetics, are categorized as consumables while others are far less so. In the case of Coty, its business is cosmetics, fragrances, skin, and body care -- all of which are consumables- - and suggests some aspect of repeat purchases, especially when compared to watches and jewelry. Recently Target (TGT) said its beauty business was a draw for frequent shoppers, something that speaks to our point about those being consumable products.
Second, as we've discussed recently, China is the medium- to longer-term opportunity for Action Alerts PLUS holding Coty as it grows its exposure to that market. Exiting its latest quarter, all of Asia-Pacific accounted for just 12% of Coty's sales compared to 36% for LVMH or 32% for Estee Lauder (EL) . In that market Coty is leveraging its Prestige segment and looking to make inroads in skincare, a play into the China's demographics.
After tonight's market close, e.l.f Beauty (ELF) will report its quarterly results, and Ulta Beauty (ULTA) will do the same after tomorrow night's close. Taking a nod from Target's comments and Inter Parfums (IPAR) reiterating its guidance last week, given continued strength in the fragrance market e.l.f and Ulta are likely to deliver solid quarters. And remembering the cost cutting efforts underway at Coty, we will use the move lower, which puts the shares very close to our average cost basis of $10.56 to pick up some additional shares. Should the shares move lower toward the support level near $9.50, we would look to further build out the portfolio's position.
After you receive this Alert, we will buy 1,320 shares of COTY at or near $10.70. Following the trade, COTY shares will account for roughly 2.75% of the portfolio's assets.
(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.)