In the past few months, our lives have mostly centered around our homes. Many consumers have initially limited shopping to basic consumer essentials, such as food and hygiene products. As economies begin to open up around the world, consumer discretionary products, such as cosmetics, are likely to go back on shopping lists. Therefore, today I’ll discuss three cosmetics stocks to freshen up your holdings.
The Federal Food, Drug, and Cosmetic Act defines cosmetics by as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body … for cleansing, beautifying, promoting attractiveness, or altering the appearance.” Different countries have similar legal definitions that also highlight intended use. Most consumers may regard cosmetics as a substance that is applied to the human body, including the face, to enhance its appearance or odor.
Main products within the cosmetics industry include makeup, perfume, hair care, skincare, oral cosmetics and toiletries. Skin care is the leading category, accounting for about 39% of the global market. It is followed by hair care products (21% and make-up (19%). Luxury skin care is regarded as one of the most profitable parts of the industry.
Therefore, as the “new normal” life begins globally, it may be safe to assume that consumers will not hesitate to spend more to care for their faces and bodies. The global cosmetics market is expected to reach “$429.8 billion by 2022, registering a CAGR of 4.3% during the forecast period 2016-2022.”
It is a highly concentrated industry, dominated mostly by several multinationals. At present, there is no single benchmark for the cosmetics industry. Therefore if you are interested in the general industry, you may also want to keep an eye on the the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY).
Beauty may be in the eye of the beholder. And with timely research and due diligence, investors may find that robust cosmetics companies can put beauty in their portfolio. Therefore today, we look at three cosmetics stocks to freshen up your holdings. They are:
Cosmetics stocks: e.l.f. Beauty (ELF)
California-based e.l.f. Beauty specializes in manufacturing and selling “100% vegan and cruelty-free” skin care and makeup products. The product range includes eyeliners, lipstick, lip glosses, blushes, brushes, bronzers and mascara. The name e.l.f. stands for eyes, lips and face. The business was established in 2004, making it a relatively newcomer in the industry. It went public late 2016 at an opening price of $24. Products are sold both online and in retail channels, such as Target (NYSE:TGT), Walmart (NYSE:WMT), and Ulta Beauty (NASDAQ:ULTA).
Its sales steadily increased, in part due to prices that seem to be affordable for a wide range of consumers. In late March, the group released its fourth-quarter and FY 2020 results. Over the fiscal year, it recorded “four quarters of net sales growth, culminating in a 16% increase in the fourth quarter versus prior year.”
For the full year, net sales increased 6% to $282.9 million, as compared to $267.7 million in fiscal 2019. Gross margin also increased to 64% from 61%. And for Q4, net sales increased 13% to $74.7 million as compared to $66.1 million in the three months ended March 31, 2019. It had $46.2 million in cash and cash equivalents.
Due to the novel coronavirus, the company saw a marked decline in retail sales. However, that loss was partially offset by increased online sales. So far in 2020, ELF stock is up over 20%, which means the shares are in a bull market. In fact, they hit a 52-week high on July 9.
If you’re looking for robust cosmetics stocks to freshen up your portfolio, e.l.f. shares deserve to be among the top names.
Estee Lauder (EL)
New York City-based Estée Lauder is a multinational manufacturer of skin care, makeup, and hair care products as well as fragrances. The group started operations in 1946 under the leadership of Mrs. Estee Lauder, who developed her own line of beauty products. Now its portfolio includes Aramis, Aveda, Bobby Brown, Clinique, Darphin, Ermenegildo Zegna, Estee Lauder, Jo Malone, La Mer, Mac, Michael Kors, Origins and Tommy Hilfiger. These brand names provide a large economic moat.
In terms of geographic distribution of products, Europe, Middle East and Africa bring in over 43% of revenue. The Americas contribute over 31%. And the Asia-Pacific region brings in around 25% of total revenue.
On May 1, the group released released FY 2020 third quarter results. Net sales were $3.35 billion, a decrease of 11% from $3.74 billion in the prior-year period. And the company reported a net loss of $6 million, compared with net earnings of $555 million last year.
The company attributed these losses to the closure of stores due to Covid-19. Yet CEO Fabrizio Freda optimistically highlighted, “The surge in our online business worldwide, coupled with the recovery we are seeing emerge in China, confirm consumers’ passion for our prestige beauty portfolio.”
Management also said demand for skin care and hair care products has been more resilient than makeup and fragrance products. Year-to-date, EL stock is down close to 10%. Long-term investors may consider researching the the stock further. It will deserve to be on your radar as a cosmetic stock to own, especially if there is a decline toward $175.
L’Oreal SA (LRLCY)
L’Oréal is a French conglomerate specializing in personal care products, including hair dyes, skin care products, makeup tools and items, and fragrances. It is the world’s largest cosmetics company.
It operates under four main divisions:
- Professional Products (including L’Oreal, Redken, and Kerastese);
- Consumer Products (including L’Oreal, Garnier, Maybelline and Niely);
- L’Oréal Luxe (including Lancome, YvesSaintLaurent, Biotherm, Ralph Lauren, Diesel and Valentino);
- Active Cosmetics. (including Vichy, Decleor and SkinCeuticals).
In recent weeks, it has agreed to buy Thayers Natural Remedies, a Connecticut-based natural skin care company whose history goes back 170 years. It will be added to the consumer products division. The company also regularly partners with other cosmetics and fashion firms to create exclusive product lines.
L’Oréal released sales results for Q1 2020 in mid-April. Quarterly sales hit 7.22 billion euros, registering a 4.8% decline YoY on a like-for-like basis. Management said the global cosmetics market experienced a sales decline of 8% in the first quarter of 2020.
Despite the global decline, L’Oreal sales in China were up 6.4%. The adverse effect of Covid-19 was different for each segment.
“The L’Oréal Luxe and Professional Products Divisions are the most impacted due to the closure of perfumeries, department stores and hair salons in many countries,” CEO Jean-Paul Agon said. “The Consumer Products Division however has seen a more moderate decline, largely because the activity in mass-market retail has been maintained. Lastly, the Active Cosmetics Division is still posting double-digit growth, with the pharmacy channel still open, and a portfolio of brands that is adapted to the strong demand for health-related products.”
Year to date, LRLCY stock is up more than 9%. I would look to buy the dips in this global leader of cosmetics stocks, especially if the price goes toward $60.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.