Despite well-documented cost-of-living pressures, consumers continue to set aside cash for affordable luxuries such as cosmetics which make them feel good about their appearance and add a little glamour to their lives.

In contrast to the slowing growth being reported by the large luxury goods groups, companies which sell makeup, skincare and haircare products and other beauty and wellness wares are doing rather well.

One reason for this is the resilience cosmetics tend to exhibit through economic cycles, often referred to as ‘the lipstick effect’, based on the evidence that consumers are willing to treat themselves to little luxuries during tough times, although Covid-induced lockdowns did result in a sales decrease for key market players.

According to Statista Market Insights, the attractive global beauty and personal care market, of which personal care is the largest segment, is forecast to generate sales of $646.2 billion in 2024 and grow at a compound annual growth rate (CAGR) of 3.3% between 2024 and 2028. Meanwhile, research firm Euromonitor finds the total mass beauty market was worth $218 billion in 2022 and is expected to grow to $255 billion over the next three years.

WHAT ARE THE GROWTH DRIVERS?

Growth drivers for cosmetics include the widespread increase in the use of skincare and personal care products along with a burgeoning global ageing population: older consumers are increasingly using anti-ageing treatments and hair dye to change how they look, for example.

Rising financial independence among women and increasing beauty awareness among men are additional drivers, and there are head-turning long-run growth opportunities for cosmetics companies in emerging markets including China, where the beauty market’s recovery from the pandemic has been slower than expected thus far.

Other market drivers include social media, where influencers on Instagram and TikTok can boost demand for new cosmetics products, not to mention consumers’ growing preference for organic products over those with chemical bases. It is also worth noting the global cosmetics market is increasingly seeing customers switch to more value-orientated brands.

WHAT ARE THE IMPORTANT METRICS TO FOCUS ON?

Key metrics to monitor with beauty and cosmetics companies include revenue growth, an indicator of rising or falling demand for their products, and gross margin, as high gross margins demonstrate a company has pricing power and provide more of a buffer to absorb rising raw material costs.

Other indicators worth watching include free cash flow, a measure favoured by legendary investor Warren Buffett, as well as return on invested capital (ROIC), which gives a sense of how well a company is using its capital to generate profits.

And don’t forget to scrutinise the accounts of beauty businesses for the amount they spend on product research and development and advertising, since cosmetics is a fiercely competitive industry in which market leaders must sustain heavy investment in innovation and marketing to keep rivals at bay.

WHICH COMPANIES ARE LISTED ON THE STOCK MARKET?

Arguably the two most iconic companies in the space are French personal care powerhouse L’Oreal (OR:EPA) and its US counterpart Estee Lauder (EL:NYSE). The former’s stunning share price rise recently enabled the reclusive Francoise Bettencourt Meyers, heir to the L’Oreal empire, to become the world’s first woman to be worth over $100 billion according to the Bloomberg Billionaires Index.

As highlighted in his annual letter to Fundsmith Equity (B41YBW7) shareholders, in 2023 Terry Smith sold the fund’s stake in Estee Lauder, ‘whose mishandling of the demand/supply situation in China following reopening post Covid and in the travel retail market revealed serious inadequacies in its supply chain’, although Smith insisted L’Oreal remains ‘a long-term favourite whose handling of the China market contrasts sharply with that of Estee Lauder’.

Other prominent overseas-listed players include Olay-to-SK-11-owner Procter & Gamble (PG:NYSE) and Coty (COTY:NYSE), the beauty products maker behind the CoverGirl, Rimmel and Max Factor brands in the midst of a turnaround under chief executive Sue Nabi. Meanwhile, Ulta Beauty (ULTA:NASDAQ) is America’s biggest beauty retailer, while the fast-growing mass market cosmetics brand e.l.f. Beauty (ELF:NYSE) continues to take market share.

A relatively recent issue across the pond is the rapidly-growing Oddity Tech (ODD:NASDAQ), a holding in investment trust Smithson (SSON). The Israeli company behind the Spoiled Child and Il Makiage brands made its Wall Street debut last year (19 July 2023) at $35 and the shares are trading 23% above that level at $43 at the time of writing.

Oddity has bold plans to shake up the legacy beauty industry and replace the in-store experience by using data and artificial intelligence to develop brands and generate tailored product recommendations. Continental selections include Nivea-owner Beiersdorf (BEI:ETR), and don’t forget that one of the world’s oldest cosmetics concerns emanates from the Far East, namely Japan’s Shiseido (4911:TYO).

UK-listed options include Unilever (ULVR) and PZ Cussons (PZC), the former brands including Dove, Sunsilk and Clear as well as luxury colour cosmetics brand Hourglass and the Dermalogica skincare brand, the latter the owner of beauty brands including premium tanning line St.Tropez.

Yet another firm with exposure to the beauty and cosmetics space is THG (THG), the e-commerce company behind the Lookfantastic, Cult Beauty and Dermstore websites as well as the Perricone, ESPA and Biossance beauty brands, whose Ingenuity platform has recently won work for industry big beast L’Oreal.

VALUE-ORIENTED PLAYERS LOOK WELL-PLACED

Lower down the market cap scale, the stunning earnings upgrade cycle continues at affordable colour cosmetics supplier Warpaint London (W7L:AIM), owner of the W7 and Technic colour cosmetics brands.

Another small-cap name is Revolution Beauty (REVB:AIM), the self-styled ‘multi-channel mass beauty innovator’ whose Revolution brand you’ll find in Boots and Superdrug. Revolution Beauty has been a disaster since joining the stock market in 2021, although a new management team is turning the business round and share price weakness has created an opportunity for online fashion group Boohoo (BOO:AIM), which wants to be a bigger beauty market player, to build a 27.13% stake, so watch this space.

TWO STOCKS TO BUY

L’Oreal (OR:EPA). Share price: €425.40

Paris-based personal care powerhouse L’Oreal’s shares are testing all-time highs in a testament to the attractions of the beauty giant, which include its successful innovation pipeline, strong brands, pricing power, high returns on equity and a record of outperforming global beauty market peers.

While a prospective price to earnings ratio of 35.1 may appear punchy, it is actually a discount relative to the world’s largest cosmetics company’s peak PE levels. Led by chief executive Nicolas Hieronimus, the skincare, haircare, makeup and fragrance firm’s flotilla of brands span L’Oreal Paris and Yves Saint Laurent as well as Maybelline New York, Garnier and luxury beauty brand Aesop, the latter with significant growth potential in China and travel retail.

In the third quarter to September 2023, L’Oreal shrugged off macroeconomic uncertainties to deliver another period of double-digit growth with like-for-like sales up an eye-catching 11.1% driven by strong performances from its consumer products and dermatological beauty divisions. The dermatological beauty market opportunity excites, since consumers eager to slow the ageing effects on their skin are spending on L’Oreal products such as La Roche-Posay.

Warpaint London (W7L:AIM). Share price: 390p

An affordable-cosmetics seller with strong earnings and share-price momentum, Warpaint London supplies its wares to retailers including 

Tesco (TSCO), Boots, New Look and Superdrug as well as Five Below (FIVE:NASDAQ), and sells online via its own website, and through Amazon and Tmall, China’s most-visited B2C (business-to-consumer) online retail platform. 

Asset-light, since manufacturing is outsourced to allow for competitive pricing and rapid production, cash-generative and dividend-paying, Warpaint delivered its fourth upgrade to year-to-December 2023 guidance after a bumper fourth quarter including Christmas. The colour cosmetics star turn upgraded its 2023 sales forecast to £89.5 million, and with gross margins remaining robust, said pre-tax profit will be ‘not less than £18 million’, up from previous guidance of ‘in excess of £16 million’.

With a net cash balance sheet and no debt, Warpaint has the financial strength to support its growth ambitions and the forward earnings multiple of 21.3 is undemanding despite the stunning share price appreciation over the past five years and with further upgrades looking likely. House broker Shore Capital describes Warpaint’s growth as ‘in the foothills of its medium to long-term potential’.

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