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5 Cosmetics Stocks Looking Good Amid Industry Challenges

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·9 min read
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The prospects of the Zacks Cosmetics industry seem to be shadowed by pandemic-related hurdles, such as reduced store and salon traffic, a disrupted travel retail network, supply-chain bottlenecks and lesser makeup usage due to fewer social outings. Moreover, increased spending on advertising and promotion, among other efforts, to fend off competition, poses threats to margins.

On the brighter side, demand for skincare and other personal care products has been rising owing to consumers’ growing consciousness toward wellness. To this end, companies’ constant innovation, new launches and other brand-enhancement endeavors are in sync with consumers’ evolving demand. Such upsides bode well for players like The Estee Lauder Companies Inc. (EL), Helen of Troy Limited (HELE), Coty Inc. (COTY), Nu Skin Enterprises, Inc. (NUS) and e.l.f. Beauty, Inc. (ELF).

About the Industry

The Zacks Cosmetics industry includes providers of beauty and personal care products. Players in the industry mainly manufacture and market skin care, fragrance, makeup and hair care products. Many firms in the space market via sales representatives, whereas some sell their products through retailers, independent and chain drug stores and pharmacies, upscale perfumeries, department stores and beauty salons, among others.

3 Trends Shaping the Future of the Cosmetics Industry

Pandemic-Related Woes Likely to Linger: Cosmetic companies have taken quite a hit from the novel coronavirus, which resulted in temporary closure of retail stores, clinics and salons, which serve as a major selling medium for companies in the space. Although stores have reopened with curbs being lifted, traffic has been below pre-pandemic levels as fears related to the virus are keeping a number of people confined indoors. Also, economic disruptions have impacted consumer spending patterns, deterring them from spending on non-essentials items like makeup. Increased usage of masks and reduced social outings have again curbed the use of several cosmetic products. Other than this, the pandemic-led limitations on traveling have hit the travel retail network hard, which plays an important role in boosting the top line of a number of cosmetic players. Disturbances in supply-chain network have also been a barrier. The uncertainty surrounding the impacts of COVID-19 keeps the cosmetics space under pressure. On the brighter side, strength in online sales, especially amid the pandemic-led social distancing, has been offering respite to many cosmetic players who have been focused on bolstering their online operations.

Favorable Demand for Personal Care Products: Companies have been seeing increased demand for skincare, hair care and other personal care products, given consumers’ growing consciousness toward wellness. In fact, elevated consumer awareness has stimulated demand for organic skincare and “clean beauty” products. Such trends have kept cosmetic players on wheels in terms of coming up with the necessary innovation and product launches. Industry participants have also been fueling brand portfolio through prudent buyouts and alliances. Focus on resonating well with consumers’ evolving preferences bodes well for players in the cosmetics industry. Incidentally, per a statista report, the global skin care market is anticipated to grow to more than $180 billion by 2024 from $134.5 billion in 2018.

Pressure on Margins: The cosmetics industry is extremely competitive, with players contending in terms of product launches, expansions, alliances and other brand-enhancement endeavors. Also, these companies indulge in heavy research and development to come up with new products alongside undertaking increased levels of advertising and promotions to stay relevant. This, in turn, comes at the cost of margins. Apart from this, availability of cheaper substitutes poses threats to players offering luxury products. People may refrain from buying high-priced products, given the difficult consumer environment.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #180, which places it in the bottom 29% 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 drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming less confident about this group’s earnings growth potential. Since the beginning of November 2020, the industry’s consensus earnings estimate for 2021 has slumped 29%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Zacks Cosmetics industry has underperformed the Zacks S&P 500 composite though it has outpaced the broader Zacks Consumer Staples sector over the past year.

The industry has gained 10.9% over this period, compared with the S&P 500’s growth of 19.8%. Meanwhile, the broader sector declined 1.3%.

One-Year Price Performance



Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 42.62X compared with the S&P 500’s 23.19X and the sector’s 19.36X.

Over the past five years, the industry has traded as high as 45.64X, as low as 19.65X, and at the median of 26.27X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)



5 Cosmetic Stocks to Keep a Close Eye on

Helen of Troy: Shares of this Zacks Rank #2 (Buy) company have surged 31.1% in the past six months. The provider of consumer products through Beauty, Housewares and Health & Home segments has been benefiting from its focus on strengthening its Leadership Brands portfolio. These brands account for a significant chunk of the company’s sales, and generate solid margins and volumes. Additionally, the company’s robust online operations have been yielding solid results. Of late, the company has been gaining from strength in the Health and Home unit, thanks to higher demand amid the pandemic. The consensus estimate for its current fiscal-year earnings has jumped 5.4% in the past 30 days. Markedly, Helen of Troy has an estimated long-term earnings growth rate of 9.7%. Further, the El Paso, Texas-based company has a trailing four-quarter earnings surprise of 38.4%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: HELE

Nu Skin Enterprises (NUS): This Zacks Rank #2 company is focused on empowering its network of sales leaders. Also, focus on enhancing customer experience across various digital platforms bodes well. Apart from this, Nu Skin is optimistic about its launch of ageLOC Boost device system and Nutricentials Bioadaptive Skin Care System. Well, the company develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. Importantly, the consensus mark for Nu Skin’s current fiscal-year bottom line has risen by a cent over the past 60 days. Moreover, the company has a trailing four-quarter earnings surprise of 20%, on average. Impressively, the stock, with an estimated long-term earnings growth rate of 8.1%, has rallied 33.8% in the past six months.

Price and Consensus: NUS

e.l.f. Beauty: The bottom line of this provider of cosmetic and skincare products has outperformed the Zacks Consensus Estimate by a significant margin in the trailing four quarters, on average. The consensus estimate for its current fiscal-year earnings has remained unchanged over the past 30 days. The company has evolved from a single brand to a multi-brand beauty company. Certainly, it appears well placed to benefit from its commitment toward solidifying its brand portfolio through innovation as well as prudent acquisitions. The company’s online presence is also a key driver. Notably, this Zacks Rank #2 company’s shares have gained 27.7% in the past six months.

Price and Consensus: ELF

Estee Lauder: This manufacturer and marketer of skin care, makeup, fragrance and hair care products has seen the consensus mark for current fiscal earnings move north by a cent in the past 30 days. Estee Lauder has been gaining on strength in the skin care category. Further, the company’s online business has been performing well and is likely to remain a major growth engine. In fact, Estee Lauder’s brand teams have been fully committed to enhancing consumer experiences online – especially amid the pandemic. Apart from this, strong cost-saving measures have been aiding margins. This Zacks Rank #3 (Hold) company has an estimated long-term earnings growth rate of 13%. Markedly, shares of this New York-based company have rallied 27.4% in the past six months.

Price and Consensus: EL

Coty: This manufacturer, marketer and distributor of beauty products has surged 66.6% in the past six months. The Zacks Consensus Estimate for Coty’s current fiscal earnings has remained unchanged in the past 30 days. The company has been benefiting from focus on core priorities, which include innovation and performance in its prestige and mass channels, solidified position in its key markets, robust e-commerce momentum along with strengthened foothold in the skincare category and the China region. Further, this Zacks Rank #3 company has been bolstering its portfolio through meaningful buyouts. Also, focus on optimizing cost structure bodes well.

Price and Consensus: COTY

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Nu Skin Enterprises, Inc. (NUS) : Free Stock Analysis Report

Helen of Troy Limited (HELE) : Free Stock Analysis Report

e.l.f. Beauty Inc. (ELF) : Free Stock Analysis Report

The Estee Lauder Companies Inc. (EL) : Free Stock Analysis Report

Coty Inc. (COTY) : Free Stock Analysis Report

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