4 Cosmetics Stocks Worth Watching Amid Industry Headwinds
Players in the Zacks Cosmetics industry are operating amid an inflationary environment and supply-chain challenges. Reduced discretionary spending owing to the overall inflationary landscape has been affecting demand for several companies’ products.
That being said, efforts to boost digital operations and innovations have been working for companies like Coty Inc. COTY, Inter Parfums, Inc. IPAR, e.l.f. Beauty, Inc. ELF and European Wax Center, Inc. EWCZ.
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. These 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: Cosmetic companies have been battling inflationary pressure thanks to operating costs like labor, supplies and travel, among others. Several players are witnessing supply-chain bottlenecks from wide-scale shortages of materials, higher freight prices and port congestions. Rising cost of living, hiked interest rates and rising household debt are compelling consumers to cut down on discretionary purchases, thus impacting demand for products offered by cosmetic players. A highly competitive cosmetic market compels companies to indulge in heavy research and development, thus putting pressure on margins.
Volatile Currency Movements: Several industry players remain vulnerable to unfavorable foreign currency movements due to their exposure to international markets. This is because a strengthening U.S. dollar will shrink margins in every case where the company is unable to raise prices and pass the impact on to customers. Adverse currency fluctuations are likely to have affected several industry players’ performance during 2023.
Innovation & Digitization – Major Drivers: Consumers keep looking for unique product offerings that incorporate 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 engaged in innovation and product launches. Increased consumer awareness has also stimulated demand for organic skincare and “clean beauty” products. These firms’ foremost priority has been to broaden their market reach by boosting e-commerce capabilities. They have made significant progress, evident from tools like virtual try, new digital payment solutions and digital marketing efforts. Players have 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 #190, 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 leads to a negative aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of September 2023, the industry’s consensus estimate for current financial year earnings has plunged 37.5%.
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 moved down 29.1% over this period, against the S&P 500’s increase of 16.8%. The broader sector has dropped 9.7% in the said time frame.
One-Year Price Performance
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 31.57X compared with the S&P 500’s 19.30X and the sector’s 16.99X.
In the past five years, the industry has traded as high as 45.92X, as low as 19.64X, and at the median of 30.77X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Cosmetic Stocks Worth Watching
e.l.f. Beauty: This provider of cosmetic and skincare products sports a Zacks Rank #1 (Strong Buy). The company 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. It is undertaking significant investments in its digital business, which are yielding. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for ELF’s current fiscal year earnings per share (EPS) has increased 3.1% in the past 30 days to $2.68. e.l.f. Beauty’s stock has declined 5.4% in the past three months.
Price and Consensus: ELF
Inter Parfums: The Zacks Rank #2 (Buy) company manufactures, distributes and markets a wide range of fragrances and related products. Inter Parfums has been reaping the benefits of the favorable trends and the momentum in the fragrance market. The company is growing its market share with innovative programs. Management is expanding its business through new licenses or acquisitions.
The Zacks Consensus Estimate for IPAR’s current fiscal year EPS has moved up 4.2% to $4.75 in the past 30 days. Shares of Inter Parfums have dropped 1.1% in the past three months.
Price and Consensus: IPAR
Coty: The manufacturer, marketer and distributor of beauty products presently carries a Zacks Rank #3 (Hold). 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. Management has made several strategic partnerships to enhance its brand portfolio. COTY is committed to optimizing the overall cost structure.
The Zacks Consensus Estimate for Coty’s current fiscal year EPS has moved down 15.2% in the past 30 days to 39 cents. COTY’s stock has gained 6.3% in the past three months.
Price and Consensus: COTY
European Wax Center: The largest and fastest-growing franchisor and operator of out-of-home waxing services in the United States carries a Zacks Rank #3. EWCZ is gaining on solid business momentum from franchisees and in-center partners. Solid brand loyalty and recurring revenue stream have been upsides for European Wax Center. Focus on undertaking increased digital promotions has been aiding growth.
The Zacks Consensus Estimate for European Wax’s current fiscal year EPS has moved down a couple of cents in the past 30 days to 34 cents. EWCZ’s stock has declined 9.9% in the past three months.
Price and Consensus: EWCZ
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Coty (COTY) : Free Stock Analysis Report
Inter Parfums, Inc. (IPAR) : Free Stock Analysis Report
e.l.f. Beauty (ELF) : Free Stock Analysis Report
European Wax Center, Inc. (EWCZ) : Free Stock Analysis Report
