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When times are tough, penny-pinching shoppers may cut back on a new car or washing machine, but they are still happy to splurge on small luxuries, such as a good quality $20 lipstick. That, at least, is the idea behind the “Lipstick Index”, a term coined by former Estée Lauder CEO Leonard Lauder during the 2001 recession.
Limited and infrequent historical data on lipstick sales mean the theory is hard to prove or disprove. Regardless, investors should not count on it to plump up the sagging share prices of major cosmetic makers.
While lip make-up was a bright spot for the US beauty sector last year, with sales up 18 per cent according to consumer analytics firm Circana, that has not been enough to cover up the blemishes that have popped up elsewhere. China’s economy remains stuck in a slowdown and fears of a sharp US downturn have surfaced.
Estée Lauder, home of Clinique and MAC, last month said sales in the current quarter were expected to slide by as much as 12 per cent year on year. The company, which reaps about a quarter of its sales from China, has struggled over the past two years as consumers there cut back on pricey face creams and its duty free business has been slow to recover. While the weak travel retail market is no surprise, it now faces the added pressure of falling sales in North America. Estée Lauder shares are down 80 per cent from their 2021 peaks.
Others, including Coty, e.l.f. Beauty and specialist retailer Ulta Beauty have flagged softer growth in the US. At Coty, sales momentum is slowing for both mass-market make-up brands including CoverGirl and higher-end offerings such as perfumes. This suggests that even those with money to spare are turning more cautious. Shares in Coty are down more than 50 per cent over the past 12 months.
Short term, beauty groups can try to ride out the slowdown by cutting costs. Both Estée Lauder and Coty have launched restructuring programmes. In the past, the sector has also turned to acquisitions of up-and-coming brands to juice sales. However, Estée Lauder is a cautionary tale on the risks of overpaying. The company fell into a net loss of $590mn after it took a $861mn writedown on its Tom Ford acquisition and other assets in the latest quarter.
Among beauty groups, large diversified conglomerates such as France’s L’Oréal remain the safest bet. True, even after its recent share price fall, the behemoth still trades at a pricey 27 times forward earnings, on S&P Capital IQ estimates, compared with Coty on 11 times. But, as with lipstick, paying more for quality is worth it.
pan.yuk@ft.com
