December 18, 2015
TOILETRIES/COSMETICS INDUSTRY
The Toiletries and Cosmetics Industry’s prospects have certainly improved of late. The group
seems poised for a solid performance in 2015, and
its Timeliness rank has improved since our September review and is now near the top third of the
97 industries under our review.
The Year Ahead
Over the last couple of years, the Timeliness rank of
this group slipped from the top 10% to the bottom 10%
among industries under our review. This came as no big
surprise, as we would not expect this traditionally ‘‘defensive’’ industry to do well during times when investors
are looking ahead to a recovering economy. Indeed,
economic growth typically prompts a shift in investor
interest to other areas that are growing more rapidly.
These companies tend to turn in relatively stable earnings performances in both good times and bad, due to the
general population’s routine use of their product lines.
When the economy is in recession mode, the lure of
steady and predictable earnings trends is somewhat
more compelling. Even with the recent volatility in the
overall market, the values of many of the issues under
our review have bounced back considerably from the
lows seen earlier in the year.
Current Trends
Although many of the more exclusive cosmetic brands
are only available in upscale department stores, distribution patterns may be changing. Notably, highergrowth distribution channels, such as the Internet,
infomercials, television home shopping, and independent retailers and spas, are making their mark, and we
would not be surprised to see more traditional brands
taking advantage of these avenues to boost top-line
growth.
Separately, the fastest-growing sectors of the Toiletries and Cosmetics Industry now include dermatological
skin care, men’s personal care, and products specifically
designed for ethnic groups. As such, it comes as no
surprise that many companies focus their R&D, as well
as advertising dollars, in specific market niches that
offer impressive growth potential.
Recent Developments
Coty, one of the world’s largest manufacturers, marketers, and distributors of women’s and men’s fragrances, cosmetics, and skin/body care products, is
poised to double in size. In early July, the company
announced that it had inked a definitive agreement to
merge The Procter & Gamble Company’s fine fragrance,
color cosmetics, and hair color businesses into Coty
through a tax-free Reverse Morris Trust transaction.
Post closing, P&G stockholders would own 52% of all
outstanding shares, with Coty’s existing shareholders
owning the balance of the combined company. We look
for the transaction to be finalized in the second half of
calendar 2016.
Revlon, which manufactures a variety of beauty products, including such brands as Revlon, Almay, SinfulColors, Pure Ice, Mitchum, Charlie, and Jean Nate,
certainly looks different than it did this time last year. In
October of last year, the company completed the acquisition of The Colomer Group, a beauty care company
that markets and sells nail and hair care products
primarily in salons and other professional channels, for
$665 million. Subsequently, early in the June quarter,
the company acquired CBBeauty, a U.K.-based global
1006
INDUSTRY TIMELINESS:
34 (of 97)
fragrance management company that distributes and
markets perfumes and beauty products.
Overseas Opportunities
The crucial factor here is the opportunity to build
businesses in emerging markets, where per capita incomes are on the rise, local goods are typically of lesser
quality, and usage of personal care items taken for
granted in the Western world is still sporadic at best. A
number of multinationals in this group have tapped into
huge countries, such as China, India, and Russia, where
they can also benefit from a gradual trading up among
the population to ever more sophisticated (and highermargined) offerings. There are hurdles and risks to
overcome, though, including volatile currency markets
(i.e. the recent rate fluctuations in Venezuela) and cultural differences. But these seem insignificant in comparison to the opportunities available to Avon, Elizabeth
Arden, and Estee Lauder.
New Product Development Is Key
A lackluster retail sector, an increasing reliance on
just-in-time inventory, a continued fight for shelf space
that requires significant marketing support, a more
value-oriented consumer, and the possibility of inroads
by private labels are some of the constraints under
which this industry is operating in the domestic marketplace, demonstrating that consumers are willing to pay a
premium for the quality associated with well-known
brand names. Therefore, they must continually improve
existing products and communicate the advantages to
consumers so that buyers will trade up. And they seem
to be doing just that, despite hefty price differentials.
New product activity is at an impressive level, boosting
volume and margins, thanks to a richer product mix.
Conclusion
This industry is a worthwhile choice for the next six to
12 months. However, many of the issues in this industry
have experienced a run up in value recently, and therefore only a couple still offer alluring appreciation potential through 2018-2020.
Kenneth A. Nugent
Toiletries/Cosmetics
RELATIVE STRENGTH (Ratio of Industry to Value Line Comp.)
1200
1000
800
600
400
200
2 009
2 010
2 0 11
2 012
2 01 3
2 014
2 015
Index: June, 1967 = 100
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