Efforts to boost digital operations amid consumers’ rising inclination to purchase cosmetics online are favoring companies in the Zacks Cosmetics industry. Growing focus on marketing campaigns and prudent product launches are contributing to the growth of players in the space. These investments, inflationary pressures and supply-chain disruptions come at the cost of margins.
Nevertheless, rising consumer focus towards grooming and personal appearance along with the abovementioned upsides have been working for players like The Estee Lauder Companies Inc. EL, Coty Inc. COTY, Inter Parfums, Inc. IPAR and Helen of Troy Limited HELE.
About the Industry
The Zacks Cosmetics industry includes companies providing beauty and personal care products. Players in the industry manufacture, distribute, sell and market skincare, fragrance, makeup and hair care products. Many firms in the space market via sales representatives, whereas some sell products through retailers, independent and chain drug stores and pharmacies, upscale perfumeries, department stores and beauty salons. The companies also operate through retailer websites, third-party distributors and in-flight and duty-free shops. Some of the products offered by the industry participants include moisturizers, serums, toners and cleansers under skincare; perfume sprays, candles and soaps under fragrance; lipsticks, mascaras, powders, eye shadows, foundation and nail polishes under makeup; and shampoos, conditioner and hair color products under hair care.
Trends Shaping the Future of the Cosmetics Industry
Strong Demand for Skincare, Revival in Makeup: Burgeoning demand for skincare and other personal care products is working well for several cosmetic companies. Consumers’ increased focus on self-care and maintaining healthy skincare routines works well for this category. The makeup category is on track to full recovery for cosmetic players. This can be attributed to the rising demand for beauty products amid more socialization. Players in the space have seen strength in the fragrance and haircare category, with product newness being a solid driver. Such upsides are likely to continue supporting the top-line performance of cosmetics companies. In addition, increased consumer spending on cosmetic products during the holiday season is a tailwind for these companies.
Innovation & Digitization – Major Drivers: Talking of beauty and skincare, consumers keep expecting unique product offerings incorporating the latest technologies and expert scientific formulations. Focus on resonating with consumers’ evolving preferences has kept cosmetic players busy in terms of innovation and product launches. Increased consumer awareness has also stimulated demand for organic skincare and “clean beauty” products. Further, Cosmetic players’ foremost priority has been to broaden their market reach by boosting e-commerce capabilities. Thanks to the ease and convenience of online shopping, cosmetics sales via online channels are increasing consistently. Cosmetic companies are making significant progress on this front, evident from tools like virtual try, new digital payment solutions and digital marketing efforts. Other than this, players have been fueling brand portfolios through prudent buyouts and strategic alliances.
Inflationary Headwinds: Companies in the cosmetics space are encountering inflationary pressure on operating costs like labor, supplies and travel. Several players are battling supply-chain disruptions stemming from prolonged COVID-associated factors, congestion at ports and reduced airfreight capacity, resulting in increased freight costs. In addition, elevated marketing expenses and increased investments toward enhancing store and digital operations, especially during the holiday season, are likely to have pushed SG&A costs upward for cosmetic companies. These factors pose threats to companies’ margins. The impact of lower demand due to inflationary pressure and reduced discretionary expenses is also a major concern for the payers.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #33, which places it in the top 13% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries results in a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of December 2022, the industry’s consensus earnings estimate for the current financial year has increased 11.4%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Vs. Broader Market
The Zacks Cosmetics industry has underperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 33.7% over this period compared with the S&P 500’s decline of 18.9%. The broader sector has moved down 5.1% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month Price-to-earnings (P/E), commonly used for valuing consumer staples stocks, the industry is currently trading at 35.42X compared with the S&P 500’s 17.30X and the sector’s 17.4X.
In the past five years, the industry has traded as high as 45.92X, as low as 19.64X, and at the median of 27.82X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Cosmetic Stocks to Keep a Close Eye on
Inter Parfums: The company is engaged in manufacturing, distributing and marketing a wide range of fragrances and related products. The Zacks Rank #1 (Strong Buy) company is benefiting from solid growth across European and U.S. operations, courtesy of the impressive performance of its brands. IPAR is expanding its business through new licenses or acquisitions. Management’s focus on innovation and product launches keeps it well-positioned to cater to elevated demand in the fragrance space.
The Zacks Consensus Estimate for IPAR’s 2022 earnings per share (EPS) has remained unchanged at $3.40 per share over the past 30 days. Shares of Inter Parfums have gained 5.2% in the past year. IPAR has an expected EPS growth rate of 15% for three-five years.
Price and Consensus: IPAR
The Estee Lauder Companies: The New York-based company is engaged in manufacturing and marketing skincare, makeup, fragrance and hair care products. The Estee Lauder Companies’ online business has been performing well and is likely to remain a major growth engine. The company is implementing new technology and digital experiences to accelerate growth. The Zacks Rank #3 (Hold) company is on track to expand its consumer reach in productive distribution across high-growth channels while strategically expanding brands into new countries.
The Zacks Consensus Estimate for the company’s fiscal 2023 EPS has remained unchanged at $5.35 per share over the past 30 days. The Estee Lauder Companies has an expected EPS growth rate of 9.6% for three-five years. EL’s shares have dropped 26.4% in the past year.
Price and Consensus: EL
Coty: This manufacturer, marketer and distributor of beauty products, presently carries a Zacks Rank #3. Coty is keen on undertaking strategic partnerships to enhance its brand portfolio. The company’s focus on six strategic pillars aimed at sustainable growth, including expanding makeup brands and mass fragrances as well as establishing a strong skincare portfolio, bodes well. COTY is strengthening its e-commerce and direct-to-consumer capabilities. Management is committed to optimizing the overall cost structure.
The Zacks Consensus Estimate for Coty’s fiscal 2023 EPS has remained unchanged at 32 cents per share over the past 30 days. COTY’s stock has declined 10.5% in the past year. The company has an expected EPS growth rate of 14.3% for three-five years.
Price and Consensus: COTY
Helen of Troy: The provider of consumer products across Beauty, Housewares and Health & Home segments has been benefiting from its focus on strengthening its Leadership Brands portfolio. The Zacks Rank #3 is making investments in key areas like consumer-centric innovation, digital marketing, enhanced production, distribution capacity and direct-to-consumer channels. HELE is developing a global restructuring plan Project Pegasus, aimed at expanding operating margins
The Zacks Consensus Estimate for Helen of Troy’s fiscal 2023 EPS has remained unchanged at $9.23 per share over the past 30 days. The company’s stock has declined 52.2% in the past year. HELE has an expected EPS growth rate of 8% for three-five years.
Price and Consensus: HELE
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.