4 Cosmetics Stocks Worth Watching Amid Industry Challenges

In the Zacks Cosmetics industry, companies are facing challenges from inflationary pressures, which have been compounded by a general decline in discretionary spending stemming from higher cost of living and elevated interest rates. These factors have impacted consumer demand across the sector.

Nevertheless, initiatives aimed at enhancing digital capabilities and fostering innovation have proven beneficial for firms such as Coty Inc. COTY, Inter Parfums, Inc. IPAR, Waldencast plc WALD and Olaplex Holdings, Inc. OLPX.

About the Industry

The Zacks Cosmetics industry includes companies that provide beauty and personal care products. Players in the industry manufacture, distribute, sell and market skincare, fragrance, makeup and hair care products. Many firms in the space market sell products via sales representatives, whereas some do the same through retailers, independent and chain drug stores and pharmacies, upscale perfumeries, department stores and beauty salons. These companies also operate through retailer websites, third-party distributors and in-flight and duty-free shops. Some products offered by industry participants include moisturizers, serums, toners and cleansers under skincare; perfume sprays, candles and soaps under fragrance; lipsticks, mascaras, powders, eye shadows, foundation and nail polishes under makeup; and shampoos, conditioner and hair color products under hair care.

Trends Shaping the Future of the Cosmetics Industry

Inflationary Headwinds: Cosmetic companies are grappling with inflationary pressures, which are escalating expenses across various areas such as raw materials, energy, labor and packaging, among others. Many firms are vulnerable to shipping disruptions, which can result in delays and higher freight expenses, squeezing overall profit margins. The elevated cost of living and interest rates are prompting consumers to reduce discretionary spending, affecting the demand for cosmetic products.

International Risk Factors: Several industry players face potential risks due to their global footprint, including exposure to adverse foreign currency fluctuations. Political unrest, like turmoil related to geopolitical events, might disrupt market access and operational continuity. Trade conflicts, tariffs, sanctions and other restrictions may also affect their performance.

Innovation & Digitization – Major Drivers: Innovation and digitization are pivotal to the beauty and skincare industry. Consumers increasingly seek unique products that combine advanced technologies with expert scientific formulations. To address ever-evolving preferences, cosmetic companies are continuously innovating and introducing new products. Growing awareness of organic and 'clean beauty' products has further fueled demand. Enhancing e-commerce capabilities is a top focus, leading to advancements like virtual try-on tools, digital payment solutions and improved digital marketing strategies. Additionally, companies are expanding their brand portfolios through strategic acquisitions and partnerships.

Strong Demand for Skincare & Makeup: The robust demand for skincare and makeup is a boon for numerous cosmetics companies. Consumers' heightened emphasis on self-care and adhering to healthy skincare regimens propelled the skincare segment. Similarly, the makeup category remains popular, contributing to the overall expansion of cosmetics companies. Players in this sector are registering strength in fragrance and haircare products, driven by innovations and new product launches. These positive trends are likely to keep supporting the top-line performance of cosmetics companies moving forward.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Cosmetics industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #211, which places it in the bottom 16% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry's position in the top 50% of the Zacks-ranked industries leads to a negative aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Since the beginning of Jun 2024, the industry's consensus estimate for current financial year earnings has decreased 4%.

Before we present a few stocks that you may want to consider for your portfolio, let's look at the industry's recent stock-market performance and valuation picture.

Industry Vs. Broader Market

The Zacks Cosmetics industry has underperformed the Zacks S&P 500 composite and the broader Zacks Consumer Staples sector over the past year.

The industry has moved down 40.5% over this period, against the S&P 500's growth of 19.1%. The broader sector has dropped 1.4% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 20.49X compared with the S&P 500's 20.71X and the sector's 17.55X.

In the past five years, the industry has traded as high as 43.55X, as low as 20.49X, and at the median of 31.71X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Cosmetic Stocks Worth Watching

Coty: The manufacturer, marketer and distributor of beauty products carries a Zacks Rank #3 (Hold). Coty continues to benefit from robust growth in the global beauty market, driven by a strong brand presence and consumer demand. With a focus on six growth pillars, including growing Consumer Beauty and fragrances, COTY demonstrates a proactive approach to sustainable growth. By investing in core categories like skincare and expanding its e-commerce capabilities, the company aligns with evolving consumer preferences. Management's commitment to innovation and strategic partnerships enhances its competitive position across the beauty market. These fundamental factors underscore Coty's resilience and potential for long-term success, irrespective of short-term headwinds.

The Zacks Consensus Estimate for COTY's current fiscal year earnings per share has remained unchanged in the past 30 days at 44 cents. Coty's shares have dropped 21.3% in the past six months.

Price and Consensus: COTY

Inter Parfums: The Zacks Rank #3 company manufactures, distributes and markets a wide range of fragrances and related products. Inter Parfums has been capitalizing on the strong momentum in the fragrance market, supporting the booming fragrance market and strength in its legacy and new brands. IPAR has been witnessing increased market share propelled by new product launches and brand extensions. Inter Parfums has been on track to expand its business through new licenses or acquisitions.

The Zacks Consensus Estimate for IPAR's current fiscal year earnings has remained unchanged at $5.15 in the past 30 days. Shares of Inter Parfums have dropped 13.1% in the past six months.

Price and Consensus: IPAR

Olaplex: This innovative, science-enabled and technology-driven beauty company carries a Zacks Rank #3. The company is positioned for continued growth and success, driven by its strong brand equity, innovative product offerings and strategic investments. Olaplex's commitment to enhancing its marketing strategies and engaging deeply with the professional stylist community yielded positive early results, evidenced by increased social media engagement and brand visibility. The forthcoming product innovations underscore the company's leadership in hair care innovation.

The Zacks Consensus Estimate for OLPX's current fiscal year earnings has remained unchanged at 14 cents in the past 30 days. Shares of Olaplex have dropped 13.1% in the past six months.

Price and Consensus: OLPX

Waldencast: This global multi-brand beauty and wellness platform, currently carries a Zacks Rank of 3. The company's agile and expert-driven platform, combined with a clear focus on innovation and community engagement, positions Waldencast to capitalize on emerging trends, enhance profitability and drive long-term value creation. WALD benefits from a robust online presence. Additionally, its focus on clean, high-performance beauty products aligns with the increasing consumer demand for sustainability. The company's strategic acquisitions and investments in cutting-edge innovation further enhance its market positioning, offering ample opportunities for global expansion.

The Zacks Consensus Estimate for WALD's current fiscal year bottom line has remained unchanged at a loss of 9 cents in the past 30 days. Shares of Waldencast have dropped 62.9% in the past six months.

Price and Consensus: WALD

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