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Cosmetics Industry Outlook: Can Innovation Help Fight Odds?

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The Zacks Cosmetics industry comprises companies providing beauty and personal care products, under several luxury brands. Players in the industry primarily manufacture and market skin care, fragrance, makeup and hair care products. While some companies in this space market through sales representatives, some offer their products through retailers, including hypermarkets, supermarkets, independent and chain drug stores and pharmacies, upscale perfumeries, department stores, beauty salons and specialty retailers, among others.

Let’s take a look at the industry’s three major themes:

  • Rising demand for skincare products, which account for a significant chunk of sales, is a major growth driver for the industry participants. Players are also poised to gain from strength in the haircare category, along with improved trends in makeup and fragrance businesses. To make the most of such favorable trends, cosmetic players are committed toward constant innovation, product launches, buyouts and strengthening of digital operations. These, however, entail high costs.
  • A strong travel retail network acts as a major positive for the cosmetics industry. Markedly, beauty and fragrance account for a considerable portion of travel retail sales, which have been rising on increased travel particularly around Asia Pacific and China. Notably, the travel retail platform helps enhance brand awareness and acceptance among customers globally.
  • Rising health concerns and inputs in the preparation of cosmetic products have drawn the attention of the Food and Drug Administration on cosmetic players, which were otherwise self-regulated for quite some time. This apart, availability of cheaper alternatives gives rise to stiff competition in the premium segment.

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 #157, which places it in the bottom 39% 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 an unimpressive 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 April, the industry’s consensus earnings estimate for the current year has slipped close to 11%.

Despite the bleak prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags on Stock Market Performance

The Zacks Cosmetics industry has lagged the Zacks S&P 500 composite over the past year, though it has performed better than the broader Zacks Consumer Staples sector.

The industry has gained 2.1% over this period, compared with the S&P 500’s rise of 6.5%. Meanwhile, the broader sector has fallen roughly 10%.

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 24.95X compared with the S&P 500’s 16.57X and the sector’s 17.99X.

Over the past five years, the industry has traded as high as 34.05X, as low as 19.39X, and at the median of 23.94X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Burgeoning demand for skincare products along with robust travel retail and digital operations paint a radiant picture for the cosmetic space. Further, efforts to empower sales leaders through improved training and technological enhancements will likely work in favor for most companies in the Zacks cosmetics universe. However, stiff competition and escalated costs associated with new products, innovation and other sales-driving initiatives cannot be ignored.

None of the stocks in the Cosmetics space currently hold a Zacks Rank #1 (Strong Buy). However, we are presenting two stocks with a Zacks Rank #2 (Buy) and one with a Zacks Rank #3 (Hold) that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Estee Lauder Companies Inc. (EL - Free Report) : For this cosmetics giant, the consensus EPS estimate for the current fiscal year has increased over the last 60 days. This Zacks Rank #2 stock has gained 15.1% in the past year. The company has an estimated long-term earnings growth rate of 11.9%. It has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by an average of 9.9% in the trailing four quarters.

Price and Consensus: EL

Helen of Troy Ltd. (HELE - Free Report) : The consensus EPS estimate for this Zacks Rank #2 company has gone up over the last 30 days. The consumer products player has an estimated long-term earnings growth rate of 6.1%. The company has an average positive earnings surprise of 21.2% for the last four quarters, including a beat in every quarter. Markedly, Helen of Troy has seen its shares rally close to 60% in a year.

Price and Consensus: HELE

Avon Products, Inc. (AVP - Free Report) : This provider of cosmetics, fragrances, toiletries and accessories has an estimated long-term earnings growth rate of 15%. The Zacks Rank #3 company has gained 30.1% in the past six months.

Price and Consensus: AVP

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