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There is an observation, known as the lipstick index, which says that when times get tough, women overuse lipstick.
But does the recent drop in sales of lipsticks and other types of cosmetics and creams refute this once-trusted theory?
That is the question investors are now asking themselves as the crisis hits the stakes of powerful players in the £490bn global beauty business, such as Estee Lauder and Shiseido.
But the world’s best-known fund manager is not among the sceptics. Warren Buffett, the head of the £775bn Berkshire Hathaway fund, has just bought a stake in Ulta Beauty, one of the biggest US hair and make-up companies.
Brands have been reluctant to use the phrase “anti-aging,” preferring terms like “renewal.” But Gen Z 20-somethings aren’t fond of such euphemisms.
Buffett is evidently convinced that Ulta stock is a bargain, as beauty hasn’t gone out of style, it’s just changing.
There are signs that the concept of “social consciousness” is taking a step back. Brands have been reluctant to use the phrase “anti-aging,” preferring terms like “renewal.” But Gen Z 20-somethings don’t like such euphemisms. They prefer to be open about seeking solutions for incipient wrinkles — just in case they live as long as Buffett, who celebrated his 94th birthday last month.
In skin care, for example, there is a new emphasis in dermatology, where moisturizers and serums are marketed more as pharmaceutical products than mere lotions.
Also, people are wearing a lot more perfume and the smell of success surrounds luxury perfumes.
Meanwhile, sales are not weak everywhere. In Britain, the clamour for lipstick and other products has not abated. The British market, the fifth largest in the world, is worth 27.2 billion pounds, according to Oxford Economics.
If Buffett’s intervention has you considering a portfolio facelift, here are some of the names that could bring some shine to your portfolio.
Estée Lauder
The problems of the £33.2bn US beauty empire Estée Lauder are due to an over-reliance on the lipstick index, coined in 2001 by Leonard Lauder, then chairman of the group created by his mother in 1946.
Leonard Lauder took over his mother’s (and company namesake) cosmetics empire, Estee (pictured together).
The company appears to have assumed that Chinese customers, who account for a third of sales, would not be deterred by factors such as high youth unemployment and the crisis in the property sector in their country.
Estée Lauder was also slow to promote its brands, including Bobbi Brown, Clinique, Le Labo, Mac and Tom Ford, on TikTok and other social media platforms. And it was slow to move from ailing department stores to outlets like Sephora, the posh retail arm of luxury giant LVMH.
As a result, shares have fallen 73% to $92 over the past year, posing a significant problem for current Chief Executive Fabrizio Freda, who is stepping down next year, and whoever succeeds him.
Such are the challenges that most analysts rate the stock as “hold.” However, Rathbones’ David Coombs is more confident, arguing that “any recovery in China should result in a decent rebound.”
She adds that Estee Lauder now sells more through Amazon, which is increasingly a force in the beauty market.
L’Oréal
L’Oréal, the £180bn French giant, is the world’s number one in beauty. Under Nicolas Hieronimus, the group not only appears to have weathered the Chinese slowdown better than Estée Lauder, but has also expanded into the dermatology sector with its Cerave and SkinCeuticals brands. In this lucrative sector, it recently acquired a stake in Galderma, which supplies “injectables” – i.e. Botox.
L’Oréal shares are currently trading at 390 euros
L’Oréal owns Garnier and Maybelline. It is also a major player in the “prestige” beauty sector through brands such as Aesop, Lancome and Kiehls.
Spending on these more expensive offerings has declined amid a broader weakness in the luxury sector that has hit shares of Burberry and others. This drop in sales may be a return to normality after the frenzied revenge buying of the post-pandemic years.
But some analysts say the “narrative is now too negative”, especially as L’Oreal is one of the so-called “Granolas” – the European stocks currently favoured by US banks seeking bargains and long-term quality.
L’Oréal shares are currently trading at 390 euros, but analysts at the Bernstein brokerage have set a target price of 490 euros.
Part of this confidence may be down to L’Oréal’s push into perfumes. Long-term deals with couture houses such as YSL have led to fragrances such as Libre, endorsed by singer Dua Lipa. “Fragrances” are at the centre of a boom. Barclays estimates that global sales have risen to £49bn, about 40% above their pre-pandemic level.
Analysts are confident about L’Oreal’s future, thanks in part to its focus on perfumes
Moreover, perfume lovers are no longer loyal to a single scent, but own numerous bottles.
It’s also good news for Puig, the Spanish beauty group whose fragrance range includes brands such as Adolfo Dominguez, Paco Rabanne and Jean Paul Gautier. The company, which has a majority stake in successful British beauty brand Charlotte Tilbury, was listed earlier this year and is rated “buy” by most analysts.
Ulta
The £12.8bn chain, which has 1,385 stores across the US, is facing increased competition from Sephora but also from Amazon. This development, revealed in the company’s second quarter results, has surprised investors following Ulta’s rapid growth in recent years.
Beauty chain Ulta shares fall, but analysts predict a turnaround
Shares are down 27% to $358 since the beginning of the year but are up 10% over the past month, suggesting the downturn is seen more as a stumble than a long-term trend.
Buffett’s share purchase is also seen as a sign of faith in the recovery, especially as he has made clear that Berkshire Hathaway’s £144bn cash hoard will only be put into something that is “very low risk and can make us a lot of money”. The average analyst target price for the stock is $405.
Shiseido
Japanese group Shiseido’s stylish products used to be in high demand in China, but now the Chinese are less interested. As a result, the shares have fallen 27% this year to 3,094 yen.
Analysts prefer Shiseido because its fashion brands, such as Drunk Elephant, are popular with young shoppers.
Most analysts, however, still rate the stock “buy” because Shiseido has some of the same trendy brands like Drunk Elephant that delight the growing “tween” clientele. These are consumers ages 10 to 12 who crowd the aisles of Sephora, armed with information about their favorite blushes, potions and mascaras and the cash to buy them. Analysts have lowered their price targets for Shiseido, but still rate the stock “buy.”
Elf
Elf, which stands for eyes, lips and face, is famous for its low-cost products and its stock price trajectory, which has increased by 708% in the past five years. But the shares of this American company have been negatively affected by Donald Trump’s threat to impose tariffs on imported goods from China if he is elected president.
Elfo, meaning eyes, lips and face, is famous for its low-cost products that look high-end.
This is the main source of Elf’s lipsticks, eyeliners and other staples that have the feel and look of more expensive products. Most analysts rate the stock a buy, seeing the dip as an opportunity to profit from Elf’s innovation and appeal to budget-conscious beauty lovers.
London war paint
This London-listed British company is the British equivalent of Elf, offering this look for much less. A lot less, as fans of its W7 line will attest. Investors are fans too: the stock has gained 928% in five years to 454p. But analysts think it still has a long way to go and have set an average target price of 590p.
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