The beauty sector lowers its outlook

2023 is a challenging year for the markets due to rising rates, declining inflation and ongoing conflicts in Ukraine and Israel. The beauty industry is also experiencing volatility, with many stocks consistently dropping since the start of the year, including Estée Lauder which has seen a decline of about 43%. There are slightly more than a dozen publicly traded companies worldwide that are engaged in the beauty industry. This can be in direct involvement, as with industry giants L’Oréal (France), Estée Lauder (US) and Shiseido (Japan), or embedded within bigger entities typically associated with luxury such as Lvmh, Kering and investment holding firms such as Officina Santa Maria Novella in Italmobiliare.

To understand how the industry is performing during the current quarterly earnings season, let’s take a look at Lvmh’s financial statements from July-September, which were a letdown for the markets due to decreased customer purchases in Europe. Additionally, end consumers are struggling with rising costs of living and historically high interest rates. As a result, Lvmh’s stock dropped 6% during the week after the financial statements were released. Bernard Arnault’s group includes Sephora, a global chain of stores focused on beauty and retail sales, within the Selective retailing sector. Equita sim reported that this segment was the group’s top performer, with growth of 26%, slightly less than the analysts’ initial forecast of 30%. The Perfumes & cosmetics division contributed 6.02 billion in revenue (+8%) to the nine-month results, thanks to the strong performance of Christian Dior fragrances and make-up, Guerlain, and Parfums Givenchy.

Beauty is experiencing growth, but is also beginning to feel the effects of the economic slowdown. Specifically, Estée Lauder’s american-made cosmetics have been struggling since the beginning of the year due to overstocking pressure in the first half. Additionally, the acquisition of Tom Ford international announced in november is also a significant contributing factor. «The company requires a positive boon from asian travel retail to enhance its perspective, given that the guidance for organic sales growth in the first fiscal quarter dipped 10-12%», analysts at Bloomberg stated. «Reduced footfall and conversions may lead to a gross margin decline of 600 basis points, potentially leading to negative adjusted operating profit in the first quarter».

Experts are concerned about a further decrease in chinese spending, which could lead to a delay in new sales. Additionally, there is a possibility that the company may not be able to relocate excess inventory. «The Americas and Emea may not be dependable enough to offset this effect due to high interest rates, which are adversely affecting consumer demand. Inbound tourism is also at risk of declining during the non-holiday season», analysts continued. «2024 is expected to be a year of investments and rebuilding, with easier benchmarks set for October, following an 11% decline in the second quarter of last year». Goldman Sachs maintains its buy rating, but has lowered the target price from 216 to 185 dollars. Estée Lauder’s market value currently stands at just under 50 billion dollars.

L’Oréal’s momentum remains strong, as its luxury beauty and active-skincare divisions are already experiencing rapid growth that could continue to pick up this year. These segments account for over half of sales, with double-digit growth rates and a greater share of profits, as Bloomberg noted. This growth is largely due to a recovery in global travel and China’s reopening. «Cash flow can support expansion through acquisitions and an increase in dividend payouts», experts noted, adding that the french company capitalized at nearly 207 billion euros in Paris and boasting a 14% gain since the start of the year. As evidence, the company recently made a 2.5 billion dollar acquisition of the premium australian brand Aesop. «Although foreign exchange market challenges are emerging, they only will moderately impact 2023 sales by about 3-4% and remain manageable. Asia remains an untapped opportunity for expansion», they added. «The substantial profits in the mass market beauty sector can be attributed to a robust product range and a marketing strategy emphasizing both safeguarding market share and enhancing operating margin and cash flow. It is imperative to preserve the margin as raw material costs have already peaked».

2023 is significant year for Coty as well, as the company has recently dual listed in Paris to enhance its presence in Europe. Despite this move, Coty underperformed in terms of fundamentals, resulting in both Citi and Stifel lowering their price target for the New York-based group from 12 to 11 dollars. Their ratings remain neutral and hold, respectively. Experts predicted «an increase in gross margins», but caution that «the market will not respond positively unless there is a strong sales trend» due to the global economic downturn. Despite a decrease in the past six months, Coty’s stock has dropped almost 20% over the last six months, but has risen by 12 percentage points since the beginning of the year.

In Italy, Italmobiliare acquired the Santa Maria Novella perfume-pharmaceutical Officina a couple of years ago for approximately 200 million euros during the peak of Covid-19 when the Florence flagship saw a sales drop of -95%. Today, Officina, led by ceo Gian Luca Perris, who is also a skilled perfumer, is performing well with a double-digit ebitda margin projected to surpass 30% in 2024 by Exane analysts. First-half revenues were 23.7 million euros, an increase of 22%. Production is high-end, and the brand is well recognized in Southeast Asia and the Middle East.

On Interparfums, a company specializing in perfume distribution (with a 25% increase in performance on Wall street in 2023), Mediobanca noted that the company has achieved a compound annual growth rate of over 10% in revenues over the past two decades, surpassing its target market and «demonstrating exceptional resilience during challenging times». For the period 2023-2027, analysts predicted that there will be a «double-digit revenue growth, with 75% of it coming from organic development of brand portfolio, led by Jimmy Choo, Coach and Montblanc». Peter Gladel, the commercial country director of Italy at Interparfums Italia, stated to MFF that their «objective is to achieve worldwide revenues of 1.3 billion in 2023 as compared to 1.08 billion in 2022. We surpassed pre-pandemic revenues, and our cash flow remains strong even though we have not passed on all cost increases to end-users». From January 2024, Interparfums Italia will directly distribute the entire Group’s brand portfolio, which includes Montblanc, Jimmy Choo, Lacoste, Moncler, Coach, Van Cleef & Arpels, Lanvin, Karl Lagerfeld, Kate Spade, Rochas, and Boucheron.

While the Nikkei rose by 24% in 2023, Shiseido’s performance in the Far east is in negative territory, by 20%. The company’s performance has been impacted by its placement on China’s blacklist with other Japanese beauty companies due to contaminated water from the Fukushima nuclear power plant. While the Japanese government has cleaned up the waste and dumped it back into the ocean, this action has been met with firm opposition from Beijing. Bloomberg analysts suggested that the Japanese conglomerate must focus on boosting profit outside Asia to enhance margin efficiency. In order to counterbalance sluggish profit growth in Asia, the group should pursue greater market penetration in the US and Europe as these markets «may prove effective if severe market disruptions due to sluggish consumer sentiment in China persist».

Bain & company estimated that the luxury beauty industry generated global sales of 69 billion euros in 2022, which is 14-16% higher than 2021 and nearly double the growth rate before Covid-19. The makeup sector has been the primary driver of the industry’s growth, closely followed by fragrances, which have been boosted by niche products and duty-free sales. «Thanks to innovative launches, high-end brands are dominating, and luxury skincare products have become a crucial component of consumers’ beauty regimens», senior partners Claudia D’Arpizio and Federica Levato commented.

Luxury fragrances have experienced a steady increase in popularity over the years and are a crucial aspect of the beauty industry, now representing approximately 40% of the entire cosmetics market. «This trend has resulted in several high-end brands investing in this segment. Beauty is an essential part of consumers daily routines and significantly impacts their mood and overall well-being», as per the experts at the consulting firm. The french fashion company Hermès experienced an 8% revenue growth, reaching 249 million euros, in the first half of 2023 due to the release of its seventh fragrance and a limited edition of lipsticks in its Perfume & beauty division. However, analysts are directing their attention to the lower price points in this segment «as it becomes more challenging for consumers with lower spending abilities», as stated by Bloomberg.

Since last february, the Kering group established a specialized division, Kering beauté, with a focus on developing the Bottega Veneta, Balenciaga, Alexander McQueen, Pomellato and Qeelin brands in the beauty sector. The flagship Gucci brand’s beauty business is operated under license by Coty, and L’Oréal manages Yves Saint Laurent. June marked the first acquisition of niche perfume company Creed, a historic business with 250 million in revenue, acquired by the private equity fund Blackrock long-term private capital Europe. «The maisons are concentrating on original, authentic, and compelling storytelling, which increasingly centers on beauty for its ability to facilitate mental traveling and experiences. It is important to remember that these companies must both broaden their consumer base by diversifying their offerings and offer a higher value proposition to serve the ultra-rich clientele», D’Arpizio and Levato concluded. (All rights reserved)