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Cosmetics Industry Outlook Glows on Travel Retail, High Demand

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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.

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

  • Strength in travel retail channel is a major tailwind for players in the cosmetic industry as beauty and fragrance account for a sizeable part of travel retail sales. Markedly, sales of these products have been rising on increased travel, especially around Asia Pacific and China. We note that the travel retail platform helps enhance brand awareness and acceptance among customers globally.
  • Rising demand for skincare products (which constitute a considerable proportion of cosmetic sales) is a major driver. Additionally, the industry players are set to benefit from favorable haircare product sales and improving trends in makeup and fragrance businesses. Cosmetic players are focused on making the most of these trends through constant innovation, launches, buyouts and strengthening of digital operations. However, these entail high costs.
  • Rising health concerns and inputs in the preparation of cosmetic products have drawn the attention of the FDA on cosmetic players, which were otherwise self-regulated for quite some time. Additionally, availability of cheaper alternatives gives rise to stiff competition in the luxury segment.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #88, which places it in the top 35% 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.

Given the bright 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 Outpaces Stock Market Performance

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 gained 57.8% over this period, compared with the S&P 500’s growth of 33.6%. Meanwhile, the broader sector has risen 24.3%.

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 32.61X compared with the S&P 500’s 19.07X and the sector’s 20.22X.

Over the past five years, the industry has traded as high as 32.61X, as low as 18.69X, and at the median of 23.95X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Prospects in the cosmetics space appear bright, given the strength in travel retail and digital operations along with burgeoning skincare products demand. Apart from this, efforts to empower sales leaders through improved training and technological enhancements will likely work in favor of most cosmetics companies. However, stiff competition and escalating costs related to product introduction, innovation and other sales-driving initiatives remain concerns.

That said, we are presenting four stocks from the Cosmetics universe, which are well positioned to capitalize on opportunities.

Helen of Troy Ltd. (HELE - Free Report) : The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company has been stable in the last 30 days. The consumer products player has an estimated long-term earnings growth rate of 9.1%. The company has a trailing four-quarter positive earnings surprise of 12.9%, on average. Markedly, Helen of Troy has seen its shares rally 36.8% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: HELE

e.l.f. Beauty, Inc. ELF: This provider of various makeup products and cosmetics sets/kits has an estimated long-term earnings growth rate of 3.8%. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-year earnings has remained stable in the last 30 days. Further, the company, whose shares have soared 68.1% in a year, has a positive earnings surprise of 60.7% for the last four quarters, on average.

Price and Consensus: ELF

The Estee Lauder Companies Inc. EL: For this cosmetics giant, the Zacks Consensus Estimate for the current fiscal-year earnings has moved up by a penny over the past 30 days. This Zacks Rank #3 stock has gained 60.3% in the past year. The company has an estimated long-term earnings growth rate of 12.8%. It has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by 14.3% in the trailing four quarters, on average.

Price and Consensus: EL

Coty Inc. COTY: This beauty products biggie has an estimated long-term earnings growth rate of 6.7%. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year earnings has increased by a penny in the last 30 days. Coty has a trailing four-quarter positive earnings surprise of 8.5%, on average. To top it, its shares have rallied 61.2% over the past year.

Price and Consensus: COTY

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