The Zacks Cosmetics industry’s near-term prospects seem to have been eclipsed by coronavirus-related challenges, such as sluggish store and salon traffic, a disrupted travel retail network, supply-chain hiccups and reduced makeup usage due to decline in social outings. Also, increased spending on advertising and promotion, among other efforts to fend off mounting competition, poses threats to margins.
Nonetheless, demand for skincare and other personal care products has been rising owing to consumers’ growing consciousness toward wellness. To this end, companies’ constant innovation, new launches and other brand-enhancement endeavors are in sync with consumers’ evolving demand. Such initiatives bode well for players like Helen of Troy Limited (HELE - Free Report) , Nu Skin Enterprises, Inc. (NUS - Free Report) , Inter Parfums, Inc. (IPAR - Free Report) and e.l.f. Beauty, Inc. (ELF - Free Report) .
About the Industry
The Zacks Cosmetics industry includes providers of beauty and personal care products. Players in the industry mainly manufacture and market skin care, fragrance, makeup and hair care products. Many firms in the space market via sales representatives, whereas some sell their products through retailers, independent and chain drug stores and pharmacies, upscale perfumeries, department stores and beauty salons, among others.
What’s Shaping the Future of Cosmetics Industry?
Near-Term Concerns Related to COVID-19: A number of cosmetic industry players’ performances have been throttled by temporary closure of retail stores, clinics and salons, which serve as a major selling medium for companies in the space. Although stores have reopened in most parts of the world, traffic remains below prior levels. Also, significant job losses and economic disruptions have impacted consumer spending patterns, deterring them against spending on non-essentials items like makeup. Increased usage of masks and a major decline in social outings have again curbed the use of several cosmetic products. Other than this, the pandemic-led travel restrictions have hit the travel retail network hard, which plays a vital role in boosting the top line of most cosmetic players. Disturbances in supply-chain network have also been a barrier. The uncertainty surrounding the duration and severity of COVID-19 keeps the cosmetics space under pressure, though strength in online operations is likely to offer some respite.
Favorable Demand for Personal Care Products: Consumers’ rising consciousness toward wellness has been fueling demand for skincare, hair care and other personal care products. In fact, rising consumer awareness has stimulated demand for organic skincare products, and “clean beauty” products. Such trends have kept cosmetic players like Estee Lauder (EL - Free Report) and Coty (COTY - Free Report) on their toes in terms of coming up with the necessary innovation and product launches. Industry participants have also been bolstering the brand portfolio through prudent buyouts and alliances. Focus on resonating well with consumers’ evolving preferences bodes well for players in the cosmetics industry. Incidentally, per a GlobeNewswire report, the global Cosmetic Skin Care market is anticipated to see a CAGR of 4.5% over the 2021-2026 period. The market is expected to reach $134,570 million by 2026 from $128,380 million in 2020.
Margin Woes Persist: The cosmetics industry is extremely competitive. Players are competing 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 firm amid the competitive frenzy. This, in turn, comes at the cost of margins. Apart from this, availability of cheaper substitutes poses threats to players offering luxury products. People may refrain from buying high-priced products, given the difficult consumer environment.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% 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 drab 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 is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the end of March 2020, the industry’s consensus earnings estimate for the current year has slumped 27.1%.
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 Lags Stock Market Performance
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 20.7% over this period against the S&P 500’s growth of 15.6%. Meanwhile, the broader sector has lost 2.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 43.99X compared with the S&P 500’s 22.61X and the sector’s 20.28X.
Over the past five years, the industry has traded as high as 43.99X, as low as 19.65X, and at the median of 24.92X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Cosmetic Stocks to Keep a Close Eye on
We are suggesting one stock from the Zacks Cosmetics industry that currently carries a Zacks Rank #2 (Buy). We are also presenting three other stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s take a look.
Nu Skin Enterprises: The company develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. This Zacks Rank #2 company is focused on empowering its network of sales leaders. Also, focus on enhancing customer experience across various digital platforms bodes well. Apart from this, Nu Skin expects to benefit from its solid product pipe line, including ageLOC Boost device and Nutricentials Bioadaptive Skin Care. Importantly, Nu Skin has seen upward estimate revisions for its 2020 bottom line over the past 60 days by 26.5%. Moreover, the company has a trailing four-quarter earnings surprise of 18.7%, on average. Impressively, the stock, with an estimated long-term earnings growth rate of 5.6%, has rallied about 20% in the past year.
Price and Consensus: NUS
Helen of Troy: The provider of consumer products through Beauty, Housewares and Health & Home segments is poised to benefit 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 good results. Of late, the company has been gaining from strength in the Health and Home unit, thanks to higher demand amid the pandemic. Shares of the company have surged 30.1% in the past year. The consensus estimate for fiscal 2021 has remained stable in the past 30 days. Markedly, Helen of Troy has an estimated long-term earnings growth rate of 6.5%. The Zacks Rank #3 company has a trailing four-quarter earnings surprise of 28.3%, on average.
Price and Consensus: HELE
Inter Parfums: This manufacturer and distributor of fragrances and related products has seen the consensus mark for 2020 move north by 33.3% in the past 30 days. Well, Inter Parfums’ strong brand portfolio is one of its primary drivers. The company is set to gain from its continued focus on product launches under different brand banners alongside strategic partnerships and buyouts. Efforts to curtail advertising and promotion expenses are expected to aid margins. This Zacks Rank #3 company has a trailing four-quarter earnings surprise of 11.6%, on average. Inter Parfums’ shares have slid 37.4% in a year.
Price and Consensus: IPAR
e.l.f. Beauty: The bottom line of this provider of cosmetic and skincare products has outperformed the Zacks Consensus Estimate by a significant margin in the trailing four quarters, on average. Also, the consensus estimate for fiscal 2021 has moved up 28.6% over the past 60 days. The company has evolved from a single brand to a multi-brand beauty company. Certainly, it appears well placed to benefit from its commitment toward solidifying its brand portfolio through innovation as well as prudent acquisitions. Incidentally, the buyout of W3LL People brand in February 2020, and the planned new lifestyle brand (created with Alicia Keys) are expected to yield favorably. The company’s online presence should also act as a driver. Notably, this Zacks Rank #3 company’s shares have gained 15.6% in a year.
Price and Consensus: ELF