The Zacks Cosmetics industry is benefiting from increased demand for makeup products, with consumers getting back to outdoor movement and socialization. Companies have also been witnessing burgeoning demand for skincare and personal care products, given consumers’ growing inclination toward self-care. Such upsides along with prudent product launches and digitization have been working well for companies like 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) .
That said, pandemic-related issues such as a disrupted travel retail network and supply-chain constraints are headwinds.
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 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, among others. The companies 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, 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 has been working well for 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. 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 continue supporting the top-line performance of cosmetics companies.
Innovation & Digitization – Major Drivers: Talking of 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. Increased consumer awareness has also stimulated demand for organic skincare and “clean beauty” products. Other than this, players have been fueling brand portfolios through prudent buyouts and strategic alliances. Cosmetic companies are striving to broaden their market reach by boosting e-commerce capabilities. Industry participants 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 bode well.
Pandemic-Related Woes: Companies in the cosmetics space have been seeing limited 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 the pandemic keeps the cosmetics space under pressure. Temporary store closures in certain international markets have also affected the companies’ revenues.
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 #78, which places it in the top 31% 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 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 January 2022, the industry’s earnings estimate for 2021 and 2022 has improved 2.2% and 5%, respectively.
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 22.8% over this period, compared with the S&P 500’s growth of 12.2%. Meanwhile, the broader sector has moved up 4.6% 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 36.52X compared with the S&P 500’s 19.78X and the sector’s 20.08X.
Over the past five years, the industry has traded as high as 48.27X, as low as 20.58X, and at the median of 27.9X, 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 Helen of Troy’s sales, and generate solid margins and volumes. Additionally, this Zacks Rank #1 (Strong Buy) company’s robust online operations have been yielding results.
Shares of Helen of Troy have moved down 7% in a year. The Zacks Consensus Estimate for HELE’s current fiscal-year earnings has remained stable over the past 30 days.
Price and Consensus: HELE
Inter Parfums: The company is engaged in manufacturing, distributing and marketing a wide range of fragrance and related products. Inter Parfums has been benefiting from its focus on innovation and product launches. The company has been exploring potential license deals with different brands. Inter Parfums 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 #1 company have surged 41.5% in a year. The Zacks Consensus Estimate for IPAR’s current fiscal-year earnings has moved up 8.7% over the past 30 days.
Price and Consensus: IPAR
Estee Lauder: This New York-based company is engaged in manufacturing and marketing skincare, makeup, fragrance and hair care products. Estee Lauder has been gaining on strength in its skincare 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.
This Zacks Rank #3 (Hold) company’s shares have risen 2.7% in a year. The Zacks Consensus Estimate for EL’s current fiscal-year earnings has jumped 2.2% 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 innovation and partnerships. Some of the best performing brands in Coty’s portfolio include CoverGirl, Gucci, Marc Jacobs, Burberry, Calvin Klein and Chloe. Its key growth priorities include expanding makeup brands and mass fragrances as well as establishing a strong skincare portfolio. Coty 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 28.1% in a year. The Zacks Consensus Estimate for COTY’s current fiscal-year earnings has climbed 8.3% over the past 30 days.