Cosmetics Industry Outlook Looks Radiant on Solid Sales Channels

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.

Let’s take a look at the industry’s three major themes:

  • Cosmetic industry players are likely to gain on a strong travel retail channel, given the fact that beauty and fragrance account for a sizeable part of travel retail sales. Markedly, sales of these products have been rising on increased travel, especially around Asia Pacific and China. We note that the travel retail platform helps enhance brand awareness and acceptance among customers globally.
  • Burgeoning demand for skincare products (which constitute a considerable proportion of cosmetic sales) is a major driver. Additionally, players in the universe are set to benefit from solid haircare product sales and improving trends in makeup and fragrance businesses. Cosmetic players are focused on making the most of these trends through constant innovation, launches, buyouts and strengthening of digital operations. These, however, entail high costs.
  • Rising health concerns and inputs in the preparation of cosmetic products have drawn the attention of the Food and Drug Administration on cosmetic players, which were otherwise self-regulated for quite some time. Additionally, availability of cheaper alternatives gives rise to stiff competition in the luxury segment.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #40, which places it in the top 16% 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 bright 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 top 50% of the Zacks-ranked industries is a result of an impressive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the end of January, the industry’s consensus earnings estimate for the current year has risen close to 4%.

Given the favorable prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Outpaces Stock Market Performance

The Zacks Cosmetics industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.

The industry has gained 25.7% over this period, against the S&P 500’s decline of 0.9%. Meanwhile, the broader sector has risen 5.2%.

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 28.15X compared with the S&P 500’s 16.36X and the sector’s 19.25X.

Over the past five years, the industry has traded as high as 34.05X, as low as 19.39X, and at the median of 26.26X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Prospects of the cosmetic space appear radiant, given the strength in travel retail and digital operations along with rising demand for skincare products. This apart, efforts to empower sales leaders through improved training and technological enhancements will likely work in favor of most companies in the Zacks cosmetics industry. However, stiff competition and escalating costs associated with product introductions, innovation and other sales-driving initiatives remain concerns.

We present one stock from the Cosmetics space that currently holds a Zacks Rank #1 (Strong Buy), and two stocks with a Zacks Rank #2 (Buy), which are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Helen of Troy Ltd. (HELE): The Zacks Consensus Estimate for this Zacks Rank #1 company has remained stable in the last 30 days. The consumer products player has an estimated long-term earnings growth rate of 6.7%. The company has an average positive earnings surprise of 14.1% for the last four quarters. Markedly, Helen of Troy has seen its shares rally close to 25% in a year.

Price and Consensus: HELE

The Estee Lauder Companies Inc. (EL): For this cosmetics giant, the Zacks Consensus Estimate for the current fiscal year earnings has moved up over the past seven days. This Zacks Rank #2 stock has gained more than 44% in the past year. The company has an estimated long-term earnings growth rate of 13%. It has a splendid earnings surprise record and has outperformed the Zacks Consensus Estimate by average of 17.1% in the trailing four quarters.

Price and Consensus: EL

Inter Parfums, Inc. (IPAR): This provider of cosmetics, fragrances, toiletries and accessories has an estimated long-term earnings growth rate of 12.5%. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-year earnings has remained stable in in the last 30 days.

Price and Consensus: IPAR

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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