Several companies in the Zacks Cosmetics industry are facing high inflationary pressures and supply-chain disruptions. Inflationary risks on consumer spending behavior are affecting demand for several companies’ products.
Nevertheless, efforts to boost digital operations and prudent product launches have been working for companies like e.l.f. Beauty, Inc. ELF, The Estee Lauder Companies Inc. EL, Inter Parfums, Inc. IPAR and Coty Inc. COTY.
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
Inflationary Headwinds: Companies in the cosmetics space are encountering inflationary pressure on operating costs like labor, supplies and travel, among others. 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. The impact of lower demand due to inflationary pressure and reduced discretionary expenses is also a major concern for the payers.
Pressure on Margins: The cosmetics industry is extremely competitive, with players contending in product launches, expansions, alliances and other brand-enhancement endeavors. These companies indulge in heavy research and development to develop new products and undertake increased advertising and promotions to stay relevant. This, in turn, puts pressure on margins. Apart from this, the availability of cheaper substitutes poses threats to players offering high-end luxury products.
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 been seeing 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
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. Companies in the space have made 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #137, which places it in the bottom 45% 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 bottom 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 June 2022, the industry’s consensus earnings estimate for the current financial year has fallen 3.1%.
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 40.5% over this period compared with the S&P 500’s decline of 20.2%. The broader sector has moved down 11.1% 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), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 24.18X compared with the S&P 500’s 15.48X and the sector’s 17.4X.
In the past five years, the industry has traded as high as 48.27X, as low as 20.58X, and at the median of 28.95X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Cosmetic Stocks to Keep a Close Eye on
e.l.f. Beauty: This provider of cosmetic and skincare products sports a Zacks Rank #1 (Strong Buy). e.l.f. Beauty appears well-placed to benefit from its commitment to solidify its brand portfolio through innovation. Focus on effective marketing strategies helps the company in reaching new audiences and penetrate into new platforms. Strength in the online business is a key driver for e.l.f. Beauty.
The Zacks Consensus Estimate for ELF’s fiscal 2023 earnings per share (EPS) has moved up by a penny over the last seven days to 90 cents. The company’s stock has surged 56.6% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: ELF
The Estee Lauder Companies: This 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 boasts a solid Skin Care portfolio, which is aiding growth.
EL’s shares have dropped 18.9% in the past six months. The Zacks Consensus Estimate for the company’s fiscal 2023 EPS moved down by a couple of cents in the last seven days to $7.50. The Estee Lauder Companies has an expected EPS growth rate of 10.8% for three-five years.
Price and Consensus: EL
Inter Parfums: The Zacks Rank #3 company is engaged in manufacturing, distributing and marketing a wide range of fragrances and related products. Inter Parfums is benefiting from solid growth across European and U.S. operations, courtesy of the impressive performance of its brands. The company is expanding its business through new licenses or acquisitions. Management’s focus on innovation and product launches is a key driver.
The Zacks Consensus Estimate for IPAR’s 2022 EPS has remained unchanged at $3.26 per share over the past 30 days. Shares of Inter Parfums have dropped 11.3% in the past six months. IPAR has an expected EPS growth rate of 15% for three-five years.
Price and Consensus: IPAR
Coty: This manufacturer, marketer and distributor of beauty products, presently carries a Zacks Rank #3. Coty is benefiting from its focus on six strategic pillars aimed at sustainable growth, including expanding makeup brands and mass fragrances as well as establishing a strong skincare portfolio. The company is strengthening its e-commerce and direct-to-consumer capabilities. The focus on optimizing the cost structure bodes well.
The Zacks Consensus Estimate for Coty’s fiscal 2023 EPS has moved up by a penny over the last seven days to 33 cents. COTY’s stock has declined 24.2% in the past six months. COTY has an expected EPS growth rate of 16.1% for three-five years.
Price and Consensus: COTY
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