The holidays are coming, but can there be winners in the beauty industry at a time of sky-high inflation and mounting fears that a deep recession is on the horizon?
According to beauty industry executives, many of whom delivered their latest quarterly earnings over the past few weeks, the answer is broadly yes.
For one, Sue Nabi, chief executive officer at Coty Inc., whose brands include Cover Girl and Kylie Cosmetics, is betting on a “big holiday season,” powered by the fragrance index, which she believes has overtaken the lipstick index, Leonard A. Lauder’s theory that beauty sales increase during tough economic times.
“A much larger number of people are getting into this category and the fragrance business is doing half of its business in the U.S. and elsewhere between November and December,” she said after the release of the company’s first-quarter fiscal 2023 earnings. “I think [it] can be a good holiday season.”
Tarang Amin, E.l.f.’s chairman and CEO, shared these sentiments, noting he is “highly confident” about the forthcoming holiday season, helped by the company’s decision to move away from its holiday kits business last year.
“We wanted to prioritize our core items and that strategy really paid off for us. We saw increased gross margins in the quarter. We have some very strong sales,” Amin said. “I think the fundamental insight is E.l.f., given its affordability, is a terrific brand to gift whether we put it in a box or the consumer puts it in the box. So we’re staying with that same strategy this year.”
Wall Street agrees. Thus far this year, the company is the top-performing cosmetics stock of 2022, with a share price of $51.75 at press time, up from $33.17 on Monday, Jan. 3 of this year.
Even the Estée Lauder Cos., which slashed its full-year forecast earlier this month due to COVID-19 restrictions in China and a number of macroeconomic headwinds, appeared relatively upbeat on holiday.
Tracey Travis, executive vice president and chief financial officer of the Estée Lauder Cos., which is acquiring Tom Ford in a deal valuing the brand at $2.8 billion, expects dynamic growth despite a plethora of headwinds.
“We expect strong sell-through of our holiday gift items. We do expect potentially some moderated traffic here in North America, in line with our retailers particularly in the U.S. and we still expect a moderation of traffic in Hainan, but generally we’re enthusiastic about holiday. I think we expect strong growth and as you know, 11/11 has started in China and we’re seeing good results from many of our brands as it relates to 11/11.”
And perhaps most unsurprisingly, the ever optimistic Ulta Beauty CEO Dave Kimbell, is also “optimistic about holiday.”
“There’s been such a good momentum in the total category this year and our businesses has certainly been strong and healthy. So I believe the beauty category will have a very strong holiday,” he said during an October interview.
“We think of holiday every year as different than the rest of the year through the lens of gifting and glamming. There’s probably pent-up demand for those things. We’re anticipating plenty of glamming opportunities, but also gifting again because of this elevation of the importance of beauty played into their lives,” he said.
The optimism comes as beauty companies, like most other industries, have been implementing price increases in the face of the soaring cost of raw materials and transportation.
E.l.f., for example, which also owns Keys Soulcare in partnership with Alicia Keys, raised prices in March in response to higher transportation costs and inflationary pressures on about two-thirds of items and left the other third untouched and that has not affected demand, according to Amin. For now, he doesn’t see the need for further price hikes.
Coty and Lauder have implemented increases, too, with the latter likely to do another round in February, although Travis did not offer details on which markets would be impacted. Both companies also reported not seeing these increases weigh on demand.
There are other negative economic factors at play too. A wave of tech companies including Twitter, Meta and Amazon, have laid off thousands of workers across the U.S.. The cost of heating a home and filling up a gas tank is surging and speculation that a recession is on its way is getting stronger as the weeks go by.
But so far this hasn’t, on average, appeared to dampen overall beauty spending in the U.S.
According to data from The NPD Group, prestige beauty sales in the U.S. increased by $6 billion in the third quarter of the year, marking a 15 percent rise when compared to the same period a year earlier.
Makeup sales also surpassed pre-pandemic 2019 levels during the third quarter, posting $2.1 billion in total sales, with lip makeup taking its crown as the fastest-growing segment, increasing 32 percent. Skin care sales were up 14 percent to $1.7 billion, largely driven by clinical brands, followed by natural brands.
“Unit sales and revenue are both growing by double digits for beauty products sold in the prestige market, indicating that consumers are indulging in beauty products this year,” said Larissa Jensen, beauty industry adviser, The NPD Group, in a statement.
Fragrance sales, meanwhile, jumped 13 percent to $1.3 billion, with average prices growing faster than other beauty categories, fueled by consumers opting for higher concentration products and luxury brands that command a higher price point.
Hair product sales also continued to grow despite the category becoming less promotional, up 23 percent to $853.8 million. Over the year-to-date through September 2022 period, the category experienced a two-point decrease in the share of units sold on promotion.
Part of the reason that beauty is holding up so well is that a recessionary environment is building up after two years of COVID-19 restrictions, meaning there is much pent-up demand.
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“The playbook of the past of recessions happening after overconsumption period isn’t valid anymore,” Nabi said. “The new playbook is around people willing to travel together to meet their families again, to meet the friends again. Of course, part of this is the beauty business, specifically the fragrance business, has become almost an essential part of consumption in consumer’s lives because it has to do with well-being, mood boosting.”
Olivia Tong, an analyst at Raymond James, added: “This year it’s back to normal. I haven’t heard anybody talk about potential changes that they might make because of COVID-19 to their holiday plans. If anything they’re making up for two years of disrupting holiday plans.”
She believes holiday will be a little mixed although mostly good, but that it will feel much more normal than recent holidays that have been plagued by COVID-19. “I think people still want to have some nice little treat for themselves.”
Ashley Helgans, an analyst at Jefferies, said: “On the prestige side we continue to see growth across all categories. Fragrance continues to be the standout. Makeup finally surpassed 2019 levels in units and sales and units and sales are both up for the year on a year-to-day basis, which indicates to us that there’s going to be continued growth into the holiday season. It doesn’t seem like there’s any slowdown and demand for beauty at this point.”
While she thinks there could be more promotional activity, mainly driven by department stores, she said this could result in some margin pressure but the top line should be OK.
Tong also noted that there could be a bit more promotional activity this year, especially as the likes of Walmart, Target and Amazon appear to be stepping up their promotional levels as they try and clear some of their inventory. “A lot of them have various promotions going on. It’s a full force right now. No categories are waiting until Black Friday. A lot of a lot of different brands are even doing Singles’ Day, 11/11.”
Outside of just beauty, holiday spending is also expected to be healthy even with recent inflationary challenges, with the National Retail Federation forecasting that retail sales during November and December will grow between 6 percent and 8 percent over 2021 to between $942.6 billion and $960.4 billion. Last year’s holiday sales grew 13.5 percent over 2020 and totaled $889.3 billion, shattering previous records.
“While consumers are feeling the pressure of inflation and higher prices, and while there is continued stratification with consumer spending and behavior among households at different income levels, consumers remain resilient and continue to engage in commerce,” said NRF president and CEO Matthew Shay. “In the face of these challenges, many households will supplement spending with savings and credit to provide a cushion and result in a positive holiday season.”
NRF chief economist Jack Kleinhenz added: “The holiday shopping season kicked off earlier this year — a growing trend in recent years — as shoppers are concerned about inflation and availability of products. Retailers are responding to that demand, as we saw several major scheduled buying events in October. While this may result in some sales being pulled forward, we expect to see continued deals and promotions throughout the remaining months.”
Target, though, is not as bullish on the season overall. The company lowered its fourth-quarter outlook after revealing that third-quarter profits were nearly cut in half as the firm continues to work through excess inventory issues and battles inflationary pressures.
That being said, CEO Brian Cornell said that beauty, along with food and beverage and household essentials, continues to be a growth driver.
Overall, Target is anticipating low-single-digit declines in comparable sales fur the holiday shopping season, with an operating margin rate centered around 3 percent.
As for what next year may hold in store for beauty, a new report from investment bank Harris Williams has some insight.
In its second consecutive annual survey of beauty enthusiasts, 93 percent expect to increase or maintain their spending on beauty in the next year, while 66 percent said they would maintain or increase spending in an economic downturn.
Kelly McPhilliamy, managing director of Harris Williams, said, “Despite the macro headlines we’re seeing beauty consumers remain highly engaged in the category. We see that as a very encouraging sign for strategics, as well as private equity investors in the space.”
Higher prices were the main reason for elevated spending in 2022, but other top reasons included increased usage sustaining wellness routines and preference for premium.
In terms of the categories where consumers expect to spend more than they have in the past year, sun care products containing SPF topped the list, followed by beauty and wellness supplements and then daily skin care treatments, hair treatments and fragrance.
As for those who indicated that what they would decrease or maintain spending in an economic downturn, 44 percent said they would use all products they had before buying new ones, 33 percent stated that would buy fewer products outside of the core routine and 31 percent said reduce spending on services. Trade down was fifth on the list.
“That’s encouraging that they will do those other things before they’ll trade down,” McPhilliamy concluded. “I think [beauty spending] will hold up. This is a category where consumers make choices within the category and across categories so our view is that they’re not abandoning what is important to their routines even in a period of economic weakness. But we do think they can make choices within the category if they’re forced to do so.”