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Evaluating Beauty’s Financial Performance Mid-pandemic

"It helped leapfrog the industry to a better place."

By the numbers, 2020 was a murky year. 

Analysts who normally look at figures and craft corporate predictions found that in the midst of the global coronavirus pandemic, numbers weren’t telling the whole story.

Sales at many beauty companies, including major players like L’Oréal and the Estée Lauder Cos. Inc., slid downward. Shutdowns negatively impacted consumer spending in beauty, and the lifestyle changes demanded by COVID-19 meant that for many, buying makeup remained low on the priority list. For some businesses that posted gains, including L Brands and P&G Beauty, those upticks were driven by nontraditional categories — hand sanitizer and soap, respectively — as people prioritized cleanliness over all else. 

For the Wall Street community, the pandemic meant assessing things a little differently. In addition to looking through beauty’s numbers, which in mid-2020 were universally bad, analysts paid attention to how quickly companies pivoted and how successfully businesses were able to drive e-commerce sales. As the world hopefully emerges from the pandemic, they said those factors will continue to play important roles in their analyses — and that most beauty corporations navigated COVID-19 well enough to come out the other end in strong positions. 

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“It’s viewed as a temporary setback in general, but in some ways, it’s accelerated the transformation for many beauty companies that may have previously relied on department stores or more traditional brick-and-mortar channels,” said Faiza Alwy, analyst at Deutsche Bank, talking about the pandemic. “It helped leapfrog the industry to a better place.”

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Part of that jump was the acceleration of online sales, which analysts paid close attention to during a year with temporary store closures and dismal foot traffic.

“I want to see digital — major digital change. It’s never going to go back to what it was before traffic wise,” said Jane Hali, chief executive officer at investment research firm Jane Hali & Associates. “I want to make sure that everyone is digitally proficient.”

“Where does percent of online sales or total digital e-commerce sales come out?” asked Stifel analyst Mark Astrachan, who noted that globally beauty has gone from 10 to 15 percent e-commerce to almost 30 percent. Ulta Beauty, for example, went from online sales of about 12 or 13 percent to e-commerce sales between 30 to 33 percent, Astrachan said.

For beauty companies, keeping up with those rates is crucial.

“We’re trying to strip out, are you gaining share, or are you not? Are you keeping up with the industry pace on e-commerce? That has implications for profitability,” Alwy said, noting that it’s more profitable for companies to sell online than to sell in traditional retail channels.

For some analysts, pandemic-era analysis goes beyond the numbers into the services and offerings that beauty companies shifted to provide.

Neil Saunders, managing director of GlobalData Retail, said he was looking to evaluate: “how businesses had adapted to the new realities of trading, how quickly they’d done that, how effectively they’d done it and how they served customers through different channels,” he said.

He also looked at companies leadership teams to see if they were making calculated changes, or having “knee-jerk” reactions, he said.

Steph Wissink, an analyst with Jefferies, agreed that leadership has been a key factor during the pandemic. “How did companies respond, how did they communicate with their consumers and employees, did they deepen trust or erode it, did they make business decisions to protest the business, conserve cash and redefine their short-term strategy for an elongated period of time?” she said. 

Successful companies operated with the customer at the center, and constantly innovated to keep up with the evolution of their needs, Saunders added.

“We have conveniences now that we never had before,” Hali said. Beauty businesses needed to pivot to curbside pickup, buy online pick up in store and convenient delivery offerings. “We’re going to expect that to continue. We’ve gotten used to it, and we want it,” she said.

As far as the numbers, go, analysts focused on market share gains and losses and evaluating companies in comparison to their peers.

“It’s best to look at market share and relative performance,” Astrachan said.

Comparing company gains or losses to the overall category, or to corporate peers, was also a key tactic. “If overall beauty sales are down by 10 percent, if a retailer is down by 5 percent, really, it’s performing better than average,” Saunders said. 

Going forward, analysts will continue those types of comparisons, and as 2021 numbers come out, will compare them to 2019 figures, they said.

“Will we return to 2019 levels or has there been permanent change to consumer use case [with] work from home, etc., attitudes, and therefore demand?” Wissink asked.

“The next few months are going to be really critical. It’s at the point where potentially red flags may emerge [if] you’re not growing in line with everyone else,” Alwy said.

“What gave me confidence about companies was how they were performing before the pandemic,” said Saunders, who noted that the pandemic has been disruptive, but hasn’t pushed strong companies “over the edge.” 

“What it’s done is pushed those weaker companies over the edge,” said Saunders, giving the example of L’Occitane in the U.S., which filed for bankruptcy in January in order to close stores. 

“Everyone is saying apparel is going to be through the roof. No, I’m sorry — It was a struggling category before the pandemic,” Hali said. “Will cosmetics go through the roof? No. It will be better, but it’s still going to have difficulty.”

 

For more from WWD.com, see: 

Updated: All the M&A Deals of 2021

Beauty Spending Will Look Different in 2021

The Evolution of Beauty Retail: Who’s Gaining Share, and Who’s Losing It