Famous face: Kate Moss in a Charlotte Tilbury advert
There is an observation – known as the lipstick index – that when times get tough, women splash out on a lipstick.
But does the recent fall in sales of lipsticks and other cosmetics and creams disprove this once reliable theory?
That’s the question investors are asking as the downturn hits the shares of the likes of beauty industry power players such as Estee Lauder and Shiseido.
But the best known money manager on the globe is not among the sceptics.
Warren Buffett, boss of the £775billion Berkshire Hathaway fund, just snapped up a stake in Ulta Beauty, one of the largest US names in hair and make-up.
Buffett is evidently convinced that Ulta shares are a bargain.
Because beauty has not gone out of fashion, it is just going through change.
There are signs of a step away from woke. Brands have been reluctant to use the phrase ‘anti-ageing’ – preferring terms like ‘renewal’. But the 20-something among Gen Z do not like such euphemisms.
They prefer to be open about seeking solutions for incipient wrinkles – just in case they live as long as Buffett, who celebrated his 94th birthday last month.
In skincare, for example, there is a new emphasis on dermatology, in which moisturisers and serums are marketed more as pharmaceutical products rather than mere lotions.
Also, consumers are wearing a lot more perfume and the smell of success surrounds the upmarket scents.
Meanwhile, sales are not weak everywhere. In Britain, the clamour for lipstick and the rest is unabated. The UK market, the fifth largest in the world, is worth £27.2billion, according to global forecaster Oxford Economics.
If Buffett’s intervention has made you consider a makeover of your portfolio, here are some of the names that could add polish.
Estee Lauder
The woes of the £33.2billion US beauty empire Estee Lauder stem from an over-reliance on the lipstick index, which was coined in 2001 by Leonard Lauder. He was then chairman of the group set up by his mother in 1946.
The company seems to have assumed that Chinese customers, who account for one third of sales, would be undeterred by such factors as high youth unemployment and the crisis in their country’s property sector.
Estee Lauder was also slow to promote its brands – such as Bobbi Brown, Clinique, Le Labo, Mac and Tom Ford – on Tik Tok and other social media platforms.
And it was somewhat dilatory in making the shift from failing department stores to outlets like Sephora, the swish retailing arm of luxury titan LVMH.
As a result,the shares have tumbled by 73 per cent to $92 over the past year, posing a sizeable problem for chief executive Fabrizio Freda and whoever succeeds him when he steps down next year.
Such are the challenges that most analysts rate the shares a ‘hold’. David Coombs of wealth manager Rathbones is more confident, however, arguing that ‘any recovery in China should result in a decent bounce’.
He adds that Estee Lauder is now selling more through Amazon which is increasingly a force in the beauty market.
L’Oreal
The £180billion French leviathan L’Oreal is the world’s number one in beauty.
Under chief executive Nicolas Hieronimus, the group seems to have not only navigated the China slowdown better than Estee Lauder, but also expanded into the dermatological sector with its Cerave and SkinCeuticals brands. In this lucrative area, it has recently taken a stake in Galderma which supplies ‘injectables’ (Botox).
Hitting the right note: YSL have produced scents like Libre, advertised by Dua Lipa
L’Oreal owns Garnier and Maybelline. It is also big in ‘prestige’ beauty through such brands as Aesop, Lancome and Kiehl’s.
Spending on these more expensive offerings has dipped amid wider weakness in the luxury sector which has affected shares in Burberry and others.
This dip in sales may be a return to normality following the frantic revenge purchasing of the post-pandemic years.
But some analysts consider that the ‘narrative is now too negative’, especially as L’Oreal is one of the so-called ‘Granolas’, the European shares favoured by US banks looking for bargains and long-term quality. L’Oreal shares stand at €383, but the analysts at brokers Bernstein have set a target price of €490.
Some of this confidence may be based on L’Oreal’s focus on perfume. Long-term deals with couture houses such as YSL have produced scents like Libre, advertised by singer Dua Lipa. ‘Fragrance’ is at the centre of a boom. Barclays calculates that global sales have increased to £49billion, about 40 per cent above their pre-pandemic level.
Moreover, perfume lovers are no longer faithful to just one scent, but have lots of bottles.
This is proving to be good news also for Puig, the Spanish beauty group whose array of scents includes Paco Rabanne and Jean Paul Gaultier. As results out yesterday show, the appeal of perfumes and skincare is compensating for lower Asian sales.
Shares in Puig, which has a majority stake in beauty business Charlotte Tilbury, floated in May and are rated a ‘buy’ by the majority of analysts.
Ulta
This £12.8billion chain, which has 1,385 stores across America, is facing more competition from Sephora but also from Amazon.
This development, revealed in the company’s second quarter results, has come as a surprise to investors following Ulta’s rapid growth of recent years.
The shares are down by 27 per cent to $358 since the start of the year, but up 10 per cent over the past month which suggests that the slowdown is perceived more as a stumble than a long-term trend.
Buffett’s share purchase is also regarded as a sign of faith in recovery, especially since he has made it clear Berkshire Hathaway’s £144billion cash pile will only be committed to something that has ‘very little risk and can make us a lot of money’.
Analysts’ average target price for the shares is $405.
Shiseido
The elegant wares of Shiseido, a Japanese group, used to be much sought-after in China.
But the Chinese are now less keen. As a consequence, the shares have declined by 27 per cent to 3,094 yen this year.
Yet the majority of analysts still rate the shares a ‘buy’ because Shiseido has some of the hip brands like Drunk Elephant that so delight the burgeoning ‘tween’ clientele. These are the consumers between ten and 12 who crowd the aisles of Sephora, armed with knowledge about their favourite blushers, potions and mascaras and with the cash to acquire them. These consumers have helped turn singer Selena Gomez into a billionaire with her make-up brand Rare Beauty. Analysts have downgraded their price targets for Shiseido, but still rate the shares a ‘buy’.
Elf
Elf, which stands for eyes, lips, face, is famous for its low-cost products and the trajectory of its share price which has leapt by 708 per cent over the past five years.
But the shares have been adversely affected by Donald Trump’s threat, if elected president, to impose tariffs on US goods imported from China.
This is the chief source of Elf’s lipsticks, eye pencils and other essentials which have the feel and look of more costly products.
Most analysts rate the shares a ‘buy’, viewing the dip as an opportunity to benefit from Elf’s innovation – and its appeal to budget-minded beauty lovers.
Warpaint London
This AIM-listed company is the British equivalent of Elf, supplying the look for a lot less. A great deal less, as fans of its W7 line will attest. Investors are also fans – the shares have advanced by 959 per cent over five years to 546p.
But analysts believe that they have further to go, setting an average target price of 590p.
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