Beauty: A Cutthroat Business
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Using the word “cutthroat’ in the same title as beauty may seem all too reminiscent of ‘Sweeney Todd, The Demon Barber of Fleet Street ‘ but with competition vying for an international market of both men’s and women’s fragrances, skin care and cosmetics in the mega billions it really isn’t an understatement. Every dermatologist who aspires to a more lucrative bottom line is creating an array of skin care products and seemingly every semi-famous starlet and athlete has a line of fragrance. Justin Bieber (?!) even has a line. To be honest, you can’t call yourself famous if you don’t have a line of perfumes. In this atmosphere of rampant world beautification, who has the best chances of making your portfolio a thing of beauty?
I’m So Pretty
Estee Lauder Companies, Inc. (NYSE: EL) could be called the matriarch of the publicly traded cosmetic companies. Founded in 1946 it was the one that really started the tradition of celebrity cosmetic endorsements with Joan Crawford touting its Youth-Dew line in 1947. Estee Lauder has performed very well over a 52 week period running from $40.76 to a high of $65.50. It is currently trading around $55.00 with has a P/E of 25.98 and a yield of 1%.
Not only does it carry its more traditional products available at department stores and pharmacies but it also owns popular and younger demographic-oriented lines like Smashbox! Cosmetics, Origins, M.A.C, Flirt!, and Clinique. Estee Lauder also licenses designer fragrances from Tommy Hilfiger, Michael Kors, Coach, etc. They even sell on cruise ships. To the uninitiated, Estee Lauder might sound like your granny’s cosmetic line but they are constantly innovating and acquiring edgy new products.
What is most interesting about Estee Lauder recently is that they have been retraining their lab coated Clinique salespeople in lower pressure sales techniques. Used to be walking to the department store cosmetics counter was scarily similar to walking into a used car showroom; glamorous commission hungry sales staff were ready to pounce and ‘upsell’ you into an entire facial regimen when all you wanted was a lipstick. Early feedback indicates the strategy is working and other cosmetic retailers have jumped on the bandwagon.
Estee Lauder reports on August 14. The last earnings release guided higher for the rest of the year and even with charges due to its cost-savings restructuring plan initiated in February 2009 and still claimed a rise of 7% on diluted net EPS of .38 cents year over year.
Oh So Pretty
Elizabeth Arden, Inc (NASDAQ: RDEN) founded in 1960, is definitely number two compared to Estee Lauder. Its market cap is only 1.16 billion and it has no dividend but it has a lower P/E of 20.33. It is trading close to its 52 week high of $40.19 and is up considerably from its low of $25.86. Wells Fargo on June 21 rated it at outperform with a high price target of $44.00.
Elizabeth Arden is also newsworthy as just last month it bought the fragrance licenses for pop performers Justin Bieber and Nicki Minaj. In general, Elizabeth Arden has been hanging its fortunes on more show biz personalities than Estee Lauder and now probably has the deepest bench of celebrity endorsers, especially those that attract the 18-24 year old golden demographic. It also has an impressive roster of aspirational youth oriented designer fragrances: Ed Hardy, Kate Spade, Juicy Couture, True Religion and Lucky Brand as well as its more traditional high end Halston, Geoffrey Beene and Giorgio Beverly Hills.
Elizabeth Arden is a direct competitor in the same product mixes and outlets as Estee Lauder. Its last earnings release showed a profit of 7 cents a share, a definite improvement over a loss of 12 cents a share a year ago. Their forward guidance is in line with analysts’ forecasts. They report on August 9.
A Pretty Exciting IPO
Coty Inc expects to list soon on the Nasdaq and may be one of the hotly anticipated IPO’s after the Facebook debacle, disaster, what have you. Coty, which just lately walked away from its takeover bid of Avon Products, is the oldest of these cosmetics giants founded in Paris in 1904 and recently reported over $3 billion in revenue for the year ending March 31.
Coty is no antique company, though, as it has recently purchased cosmetics companies Philosophy and OPI nail polishes. Coty is majority owned by Joh A Benckiser of Germany which also owns Reckitt-Benckiser, another consumer goods name. Berkshire Hathaway also owns 7.5% of Coty and at one point was willing to help with the Avon Products takeover.
The offering will be underwritten by Morgan Stanley, Bank of America Merrill Lynch and JPMorgan and is expected to raise up to $700 million. This IPO should do well as it’s a chance for Morgan Stanley and Nasdaq to redeem themselves after Facebook’s debut.
Who’s The Prettiest One of All
Coty will most likely have a very active debut after the recent IPO drought, but for stability I would probably go for Estee Lauder as I like the recent soft- sell initiative as well as their multi-year cost saving restructuring. In no time at all your portfolio could have a very attractive makeover.
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