Spring is in the air, the weather is getting warmer, you can see your driveway again and the walk from your house to the car is actually bearable. No longer must we load up with our parkas and snow gear to brave the weather. With weather warming up, most of us will probably be spending more time outside socializing with our friends and family. We want to look good for them don’t we? In this article I’ll examine the cosmetic industry and some luxury beauty and personal care brands that could be an attractive opportunity for your portfolio.
Industry Backdrop
Increasing E-commerce Sales
The increasing presence of Gen X and Gen Z ’s preference towards social media for discovering new products should continue to propel online sales. Instagram (Tii:FB) announcing in-app purchases (instead of redirecting to company sites) is projected to increase the industry’s Instagram sales with the process becoming increasingly seamless. Kylie cosmetics (Ulta Beauty Brand) is one of the first to have immediate access to this new checkout feature. The online beauty category reached $5 billion in web sales in 2017, growing 23.6% over the prior year among Internet Retailer’s Top 1000 retailers, according to Internet Retailer data. Also, more than 70% of Chinese Gen Z consumers prefer buying products directly via social media compared with the global average of 44% according to Accenture.
Mergers and Acquisitions
The acquisition of This is L. by Procter & Gamble (Tii:PG), Church & Dwight’s (Tii:CHD) acquisition of Flawless and Finishing Touch, and Nestle’s Skin Health unit (Tii:NSRGY) put up for sale are recent examples of such activity. The sector’s increasing valuation multiples relative to earnings solidify the shift toward more premium product sales, and attractive acquisition and consolidation opportunities.
China’s Growing Middle Class
China’s middle class is the largest in the world with an estimated 420 million consumers growing over 31% in a decade. The retail sales growth of the cosmetics industry has increased 9.6% in 2018 and 13.8% in 2017 over the prior year. As more Chinese citizens migrate to cities, their spending on beauty and cosmetics should also increase.
Companies That Might be Worth a Closer Look
Estee Lauder (Tii:EL)
Estee Lauder owns a diversified portfolio of beauty brands such as: Aveda, Clinique and MAC. They also sell various perfumes for several notable brands, including: Michael Kors, Tommy Hilfiger, Tom Ford and Tory Burch. Their strong global presence and stable history of returning a dividend to investors for the last 23 years could make them an attractive investment opportunity for investors. Their exposure and growth opportunity in the Chinese retail beauty market has also set the company up for continued growth. In 2018, their Chinese sales grew 40% YoY lapping 2017’s YoY growth of 50%. Demand is expected to remain strong, supported by a growing middle class and a trend of consumers preferring more prestige beauty brands.
Coty Inc. (Tii:COTY)
Coty Inc. also owns several notable brands in the beauty products category such as: Covergirl, OPI and Bourjois Paris. Much like Estee Lauder, they also manufacture fragrances for apparel companies such as Adidas, Gucci and Calvin Klein. The company is a great fixed income play for those looking for exposure to the beauty segment, with a current dividend yield of 4.45%. A true global company, Coty generates ~70% of its revenue from outside of North America. The company has mainly grown through acquisition and most notably acquired Procter & Gamble’s Beauty Business in 2018.
Ulta Beauty (Tii:ULTA)
Ulta Beauty is not quite as large with respect to brands or revenues as either Estee Lauder or Coty, but has grown substantially since 2008 through retail exclusivity and celebrity partnerships. For instance, Kylie Cosmetics (Kylie Jenner “Kylie”) is only sold in their retail outlets and not online. Ulta is seeking to expand through millennials and teens to drive further sales growth and take market share. The Company has also experienced great success with their loyalty rewards program, Ultamate, of which’s members account for 90% of sales and spend on average 25% more than the average customer higher transactions. Instead of paying a dividend, Ulta reinvests this capital to continue to grow their business, which has helped boost sales more than 200% since 2008 and more than quadrupled the share price over the past five years.