Several companies in the Zacks Cosmetics industry are battling inflationary pressures and supply-chain bottlenecks. Reduced discretionary spending due to an overall inflationary landscape affects demand for several companies’ products.
About the Industry
The Zacks Cosmetics industry includes companies providing beauty and personal care products. Players in the industry 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. The companies also operate through retailer websites, third-party distributors and 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
Inflationary Headwinds: Companies in the cosmetics space are encountering inflationary pressure on operating costs, including labor, supplies and travel, among others. Several players continue to battle supply-chain disruptions stemming from port congestions, increasing freight prices and wide-scale shortages of materials. Rising costs, higher interest rates and increasing household debt are compelling consumers to cut down on discretionary purchases, thus impacting demand for the players.
Volatile Currency Movements: Several industry players remain vulnerable to unfavorable currency movements due to their exposure to international markets. This is because a strengthening U.S. dollar may require a company to either raise prices or contract profit margins in locations outside the United States. Some industry players expect adverse currency fluctuations to affect their performances in 2023.
Innovation & Digitization – Major Drivers: Consumers keep looking for unique product offerings incorporating the latest technologies and expert scientific formulations in the beauty and skincare space. Focus on resonating with consumers’ ever-changing preferences has kept cosmetic players occupied in terms of innovation and product launches. Increased consumer awareness has also stimulated demand for organic skincare and “clean beauty” products. Further, Cosmetic players’ foremost priority has been to broaden their market reach by boosting e-commerce capabilities. Companies in the space have made significant progress, evident from tools like virtual try, new digital payment solutions and digital marketing efforts. Players have also been fueling brand portfolios through prudent buyouts and strategic alliances. Such upsides are likely to continue supporting the top-line performance of cosmetics companies.
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 #189, which places it in the bottom 24% 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 outperform 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 results in a positive aggregate earnings outlook for the constituent companies. 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 May 2023, the industry’s consensus earnings estimate for the current financial year has fallen 16.1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s 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 and the broader Zacks Consumer Staples sector over the past year.
The industry has declined 25.9% over this period compared with the S&P 500’s growth of 12.4%. The broader sector has moved down 3.2% in the said time frame.
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 29.18X compared with the S&P 500’s 19.36X and the sector’s 17.33X.
In the past five years, the industry has traded as high as 45.92X, as low as 19.64X, and at the median of 30.55X.
4 Cosmetic Stocks Worth Watching
Inter Parfums: The Zacks Rank #1 (Strong Buy) company manufactures, distributes and markets a wide range of fragrances and related products. Inter Parfums is benefiting from solid growth across European and U.S. operations, courtesy of the impressive performance of its brands. IPAR is reaping benefits from the booming fragrance market globally. The company is expanding its business through new licenses or acquisitions. Management’s focus on innovation and product launches is a key driver.
The Zacks Consensus Estimate for IPAR’s current fiscal year earnings per share (EPS) has moved up 4.1% to $4.55 in the past 30 days. Shares of Inter Parfums have dropped 0.3% in the past three months.
Helen of Troy: The provider of consumer products across Beauty, Housewares and Health & Home segments, currently carries a Zacks Rank #2 (Buy). HELE is making significant investments in critical areas to continue driving growth. To this end, it invests in consumer-centric innovation, digital marketing and media, and enhanced production and distribution capacity, among others.
Helen of Troy is progressing well with Project Pegasus, which aims to expand operating margins via improved efficiency and lower costs. The company’s solid investments in its Leadership Brands, which is a portfolio of market-leading brands, are yielding.
The Zacks Consensus Estimate for Helen of Troy’s current fiscal year EPS has remained unchanged in the past 30 days at $8.86. The company’s stock has increased 15.6% in the past three months. HELE has an expected EPS growth rate of 8% for three-five years.
e.l.f. Beauty: The provider of cosmetic and skincare products carries a Zacks Rank #2. e.l.f. Beauty appears well-placed to benefit from its commitment to solidifying its brand portfolio through innovation. Focus on effective marketing strategies helps the company reach new audiences and penetrate new platforms. e.l.f. Beauty is undertaking significant investments in its digital business, which is yielding.
The Zacks Consensus Estimate for ELF’s current fiscal year EPS has increased by a penny in the past 30 days to $2.37. The company’s stock has gained 26% in the past three months. ELF has an expected EPS growth rate of 21.7% for three-five years.
Coty: The manufacturer, marketer and distributor of beauty products presently carries a Zacks Rank #3. Coty is benefiting from its focus on six strategic pillars aimed at sustainable growth, including expanding makeup brands and mass fragrances and establishing a strong skincare portfolio. The company is strengthening its e-commerce and direct-to-consumer capabilities. COTY is committed to optimizing the overall cost structure.
The Zacks Consensus Estimate for Coty’s current fiscal year EPS has moved down 6.3% in the past 30 days to 45 cents. COTY’s stock has declined 5.4% in the past three months. COTY has an expected EPS growth rate of 2.8% for three-five years.
Coty (COTY): Free Stock Analysis Report
This article originally appeared on Zacks
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