The Beauty Secrets To Success

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Why does Broadway keep reviving”How to Succeed in Business Without Really Trying?” Besides having a plot that anyone who has worked in a corporate setting can relate to and some great songs, it’s because it exposes some interesting truths. Especially the opening when corporate climber Finch sings to himself in the mirror,  “There’s that face that somehow I trust. ..You have the cool, clear eyes of a seeker of wisdom and truth yet there’s that upturned chin and the grin of impetuous youth. I believe in you!”

A  fresh face, cool eyes and grin of youth...yes, part of what enables him to vault the corporate hurdles.

Why are Ulta Salon, Cosmetics and Fragrance (NASDAQ: ULTA)Elizabeth Arden (NASDAQ: RDEN) and The Estee Lauder Companies (NYSE: EL) doing so well these last few years? There are two dirty little secrets about beauty that you have to know. One, beautiful people find it easier to get hired, get raises and make more than $230,000 than an average looking person over their lifetime. The other is that the markup on beauty products is in the top ten list of highest markups on a list that includes movie popcorn, brand name jeans and bottled water. Beauty products are mostly made from the same basic materials if you compare labels and average 10 times markup from manufacture to end sale (and much more for “high end’” or “dermatologist approved” names).

While Ulta is a retailer of beauty and grooming products and Elizabeth Arden and Estee Lauder both manufacture and sell beauty products, the truth is even in the worst economies job seekers need to look their best.

Sure, all the career sites say you need to use certain buzzwords and get social media savvy, but if a job seeker can finally get that face to face interview then they have got to be all they can be, looks-wise. Professor Daniel Hamermesh, University of Texas at Austin economics professor wrote an entire book on the subject: “Beauty Pays: Why Attractive People Are More Successful.” 

People feel they have to buy in to this, and sales of men’s grooming products, in particular, are on the rise at all three of these companies. Estee Lauder has grown margins from the low 70’s to 79.5% since 2009. Its P/E is 29.63 and has a .80% yield. Estee Lauder makes and markets globally some of the best known high end cosmetic, grooming, and fragrance lines like La Mer, Clinique, Aramis, Prescriptives, Aveda, M.A.C, and a new line developed specifically for Asian skin called Osiao. This new product line is very promising, as revenue growth has been strong in China, and this should draw even more customers to Estee Lauder’s counters.

Competitor Elizabeth Arden also has cosmetics, skin care and an extensive line of celebrity and designer fragrances. Its debt to cash ratio at 2.24 is not as favorable as Estee Lauder’s at 1.81 and in general does not have the hot new cosmetic lines like Smashbox that Estee Lauder has. Elizabeth Arden’s return on equity is not nearly as good either at 12.77%, compared to Estee Lauder’s at 31.9%. Even with a slightly lower P/E at 24.28 it has had a big run over the last year (better than 40%) and may be fairly valued right here.  Elizabeth Arden reports on October 31.

Ulta has been basking in the light of the makeup mirror lately with its low sales pressure stores that carry over twenty thousand products and offer full service beauty salons. Even though they're low pressure, there are usually estheticians on duty to help customers. Ulta’s main competition is Sephora, which offers similar brands and makeup consultants but not full service haircuts, styling, etc.  Ulta’s loyalty program boasts nine million customers, and it carries both Elizabeth Arden and Estee Lauder as well as the highest end beauty products you can buy at CVS. It also carries shelves and shelves of a dizzying variety of hair dryers, straighteners, irons and other hair devices and, not to leave out our male friends, has an entire section of the stores devoted solely to male grooming.

The P/E is a hair-raising 44.58 compared to Elizabeth Arden's and Estee Lauder's multiples. Like Elizabeth Arden it has risen just over 40% in the last year. Its return on equity is a 25.58%. It is the largest beauty retailer with 489 stores across 45 states, e-commerce, and catalogs; it also has plans to expand to 1,200 stores in the US. Each freestanding store averages 10,000 square feet with one tenth of that usually devoted to its salons. Their e-commerce site and catalogs are all very alluring and well designed, and management has stated that expanding e-commerce is a primary goal.

One thing I have not seen mentioned in other stories about Ulta is that they have spent years developing relationships with prestige, mass and salon vendors and that they consider it a significant barrier to entry for possible competitors with strong and profitable relationships in place (They mention it quite specifically on their investor relations page).

In the past I’ve thought Ulta can’t possibly go much higher, and I’ve been wrong. I do like Estee Lauder as a reliably run and innovative cosmetics company with some of the hottest brands. Ulta, however, as a retailer carries many more brands than any department or drug store could. One thing I know for sure is that the beauty biz is good in almost any economic weather because, as Billy Crystal used to say on Saturday Night Live, '"When you look good, you feel good."

leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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