The Zacks Cosmetics industry is gaining from improved demand for makeup products amid consumers’ increased outdoor movement and socialization. Companies are also seeing higher demand for skin care and personal care products as consumers incline toward self-care. Such upsides along with prudent product launches and digitization have been favoring companies such as The Estee Lauder Companies Inc. (EL – Free Report) , Coty Inc. (COTY – Free Report) . Helen of Troy Limited (HELE – Free Report) and Inter Parfums, Inc. (IPAR – Free Report) .
However, pandemic-related issues such as a disrupted travel retail network and supply-chain constraints are headwinds. Increased spending on advertising and promotion to battle industry competition has been a threat to margins.
About the Industry
The Zacks Cosmetics industry includes companies providing beauty and personal care products. Players in the industry mainly manufacture, distribute, sell and market skin care, fragrance, makeup and hair care items. Some 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, among others. They also operate through retailer websites, third-party distributors, 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, colognes, 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: Rising demand for skin care and other personal care products has been working in favor of a number of cosmetic companies. Increased at-home grooming practices amid the pandemic have stimulated the demand for such products. Apart from these, companies are seeing a revival in makeup trends. This can be attributed to increased socialization, thanks to the relaxation of pandemic-led curbs and mass vaccinations. Fragrance and haircare categories are also performing well, with the latter gaining on DIY trends including hair color and hair styling tools. Such upsides are likely to keep supporting the top-line performance of companies in the cosmetics space.
Innovation & Digitization Leads the Way: When it comes to beauty and skincare, consumers keep expecting new and improved products developed with expert scientific formulations. Focus on resonating with consumers’ evolving preferences has kept cosmetic players busy in terms of innovation and product launches. Elevated consumer awareness has stimulated demand for organic skincare and “clean beauty” products. Industry participants have also been fueling brand portfolios through prudent buyouts and strategic alliances. Cosmetic players are striving to broaden their market reach by boosting e-commerce capabilities. Companies are focusing on boosting features on websites as well as digital market capabilities. Expansion of brand presence across various third-party sites and the rollout of new digital payment solutions bodes well.
Pandemic-Related Woes: Companies in the cosmetics space have been facing soft store traffic, especially in travel retail channels due to limited international travel amid the pandemic. Disturbances in the supply-chain network have also been a barrier. The uncertainty surrounding the impacts of COVID-19 keeps the cosmetics space under pressure. Temporary store closures in certain international markets have affected the revenues of companies.
Pressure on Margins: The cosmetics industry is extremely competitive, with players contending in terms of product launches, expansions, alliances and other brand-enhancement endeavors. Also, these companies indulge in heavy research and development to come up with new products alongside undertaking increased levels of 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.
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 #58, which places it in the top 23% 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 bright 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 is a result of 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 February 2021, the industry’s earnings estimate for 2021 has improved 1.4%.
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 outperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has surged 28.6% over this period, compared with the S&P 500’s growth of 27.7%. Meanwhile, the broader sector moved up 6.4% 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 41.63X compared with the S&P 500’s 20.6X and the sector’s 18.98X.
Over the past five years, the industry has traded as high as 48.27X, as low as 19.65X, and at the median of 27.06X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Cosmetic Stocks to Keep a Close Eye on
Helen of Troy: This provider of consumer products across Beauty, Housewares and Health & Home segments has been benefiting from its focus on strengthening its Leadership Brands portfolio. These brands account for a significant chunk of the company’s sales, and generate solid margins and volumes. Additionally, the company’s robust online operations have been yielding solid results. Amid the easing of pandemic-led norms, the company’s Beauty and Houseware segments have been doing well. Shares of this Zacks Rank #2 (Buy) company have moved up 7.2% in a year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained stable over the past 30 days.
Price and Consensus: HELE
Estee Lauder: This New York-based company is engaged in manufacturing and marketing of skin care, makeup, fragrance and hair care products. Estee Lauder has been gaining on strength in its skin care category, thanks to consumers’ rising at-home grooming trends. Further, the company’s online business has been performing well and is likely to remain a major growth engine. In fact, Estee Lauder’s brand teams have been fully committed to enhancing consumer experiences online. Apart from this, strong cost-saving measures have been aiding margins. This Zacks Rank #3 (Hold) company’s shares have surged 41.4% in a year. The Zacks Consensus Estimate for its current fiscal-year sales and earnings indicate growth of 16% and 16.4%, respectively. The consensus estimate for the current fiscal-year earnings has been stable over the past 30 days.
Price and Consensus:EL
Coty: This manufacturer, marketer and distributor of beauty products has been benefiting from expanding its brand lines through innovations and partnerships. Some of the best performing brands in the company’s portfolio include CoverGirl, Gucci, Marc Jacobs, Burberry, Calvin Klein and Chloe. Its key growth priorities include expanding make-up brands and mass fragrances as well as establishing a strong skincare portfolio. The company is strengthening its e-commerce and direct-to-consumer capabilities with a focus on the digital-first omni-channel. Also, the focus on optimizing the cost structure bodes well. Shares of this Zacks Rank #3 company have surged 144% in a year. The Zacks Consensus Estimate for its current fiscal-year sales indicates growth of 1.64%. The consensus estimate for the current fiscal-year earnings has improved by a penny over the past 30 days.
Price and Consensus: COTY
Inter Parfums: The company is engaged in manufacturing, distribution and marketing of a wide range of fragrance and related products. It has been benefiting from its focus on innovation and product launches. The company has been exploring potential license deals with different brands. It has been striving to expand offerings under well-known banners such as Donna Karan, DKNY, Oscar de la Renta, Jimmy Choo and Kate Spade among others. Shares of this Zacks Rank #3 company have surged 95.4% in a year. The Zacks Consensus Estimate for its current fiscal-year sales and earnings indicate growth of 42% and 61.2%, respectively. The consensus estimate for current fiscal-year earnings has been stable over the past 30 days.