Beauty Companies’ Initiatives to Expand Margins for Calendar 4Q15
What to Expect from Beauty Companies after a Mixed Calendar 3Q15
Pressure on margins
Beauty companies have been investing heavily in store expansions, new product launches, brand enhancements, media formats, and other growth initiatives, which are impacting their margins.
Profitability comparisons
Estée Lauder’s (EL) calendar 3Q15 gross margin fell flat at 79.6% with the prior year quarter. The slight decrease was primarily due to higher store operations cost from the increase in freestanding retail store openings over the past year. However, adjusted constant currency operating income increased 8%, resulting in an operating margin of ~16% for calendar 3Q15.
For Coty (COTY), adjusted gross margin increased to 60.3% in calendar 3Q15 compared to 59.6% in calendar 3Q14, driven by supply chain efficiencies. Adjusted operating income also increased 4% to $0.17 billion in calendar 3Q15. The increase was primarily due to improvements in each of the segments, including an increase of 280 basis points in Color Cosmetics. Operating income decreased to $81.7 million due to acquisition-related costs and higher restructuring costs.
Adjusted gross margin for Avon (AVP) declined to 61.2% in calendar 3Q15. The decrease was due to the Brazil VAT (value added tax) credits in 2014 and IPI in 2015, which negatively impacted the adjusted gross margin by ~100 basis points. Adjusted operating margin also declined to 1.4% in calendar 3Q15. The decrease was primarily driven by foreign currency translation and transaction costs, which negatively impacted our results by approximately 410 basis points.
Companies’ initiatives
With changing consumer behavior and rising disposable incomes, there has been an increased demand for beauty and personal care products. Like peers L’Oréal (LRLCY) and Shiseido (SSDOY), EL and COTY aim to strengthen their product categories through various channels across geographies in order to increase brand penetration with lower operational costs. This will result in increased revenue and thus higher margins.
Coty has exposure in the First Trust US IPO ETF (FPX), with 0.8% of the total weight of the portfolio.
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