What Beauty and Brains Can Buy You

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

According to a YWCA position paper, Beauty At Any Cost, women spend an average of $100 per month on beauty (including procedures and services) for a total of $7 billion per year in the US spent on cosmetics and a worldwide total of $250 billion annually.

It's not likely to decrease as women want to look good and economically need to look good. An infographic featured on trendhunter.com last fall showed women rated as more attractive than average earned 4% more than average looking women and least attractive women earn 3% less than average women. Over a lifetime, the more attractive women earn $230,000 more than the least attractive women.

Beauty stocks are a no-brainer

So, beauty stocks are a dime a dozen but it takes brains to figure which ones to buy. The major beauty pure plays are Revlon, Ulta Salon, Cosmetics & Fragrance,  (NASDAQ: ULTA), Coty, Avon, Elizabeth Arden, L'Oreal, NuSkin (NYSE: NUS), and Estee Lauder, now known as The Est (NYSE: EL). It should be noted  that cosmetics are high-margin items with constant demand.

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EL Gross Profit TTM data by YCharts

Ask yourself or a female loved one to count how many products are applied from bathing to night routine on say, a work day. The Environmental Working Group found the average total to be a dozen different products daily. A UK Daily Mail  survey found women carry roughly $400 US worth of products in their purse and at least a third will not leave the house unless fully made-up.

Not only that but cosmetics consumers buy twice as much make-up than they regularly end up using. The best performers change up their color palette or bring out new and improved products. The Est has been a master at this helping the stock soar 171% over the last five years.

Out of a lifetime average of $445,000 spent on beauty over 60% of that was spent on facial care so it's not surprising that within the last year two cosmeceutical skin care companies were bought out at premiums, Medicis Pharmaceutical  and Obagi Medical Products. The Est owns some of the premium skin care lines like Clinique, La Mer, and Aveda besides 23 other fragrance, skincare, and cosmetic brands.

The Est sells to the "prestige market", duty-free shops, department stores, etc. The prestige brands control 87% of the beauty market and The Est enjoys high gross margins (80% plus) despite the expenses of advertising and marketing. Prestige sales growth is at 7% is also more than double that of channels like drug stores and grocery stores for mainstream beauty products.

The Est offers a 1.10% yield at a forward P/E of 22.70. Total revenues and  total earnings per share have grown solidly year over year from $8.28 billion in 2010 to $9.98 billion in 2012 and $1.58 to $2.40 in 2012, respectively.

The most attractive stock based on recent performance would be NuSkin, the direct seller of anti-aging personal care products and nutritional supplements, up 80.4% in the last year. It rose 6% on July 18  news the Chinese government will allow its direct sales in five more mainland provinces adding to its current 53 global markets.

Emerging markets and Asia, in particular, have been strong beauty product consumers with Japan having the highest consumer cosmetic spending per capita and China trailing the US.

NuSkin guided higher for the rest of the year at its Q2 earnings pre-announcement expecting an additional $300 million plus in full year revenues for a 13% boost to previous guidance and the China news could add more upside. The company pays a 1.50% yield at a 24% payout ratio and its forward P/E is 14.47.

NuSkin, like The Est also enjoys 80% plus gross margins with its own direct sales force. Unfairly, it often gets lumped in with direct sellers Avon and battleground stock Herbalife making it volatile on news about direct sellers. One could take advantage of this and buy NuSkin on pullbacks from this latest 20% run knowing the company has a more solid foundation.

Ulta Salon, Cosmetics & Fragrance is the domestic story of this group as the one-stop shop for both prestige and mainstream beauty and grooming. The 576 stores in the US offer salon services as well and men's grooming is a growing profit driver for them. The company has over 10 million loyalty reward members and its online sales are booming, up 70%.

Online should increase gross margin from its mid-30's as bricks-and mortar expenses are higher than online sales. The bricks and mortar stores carry over 20,000 different products.

Ulta has been the best performer over the last five years but the search for and installation of a new CEO took the stock down so it's up only 4.99% over the last year. New CEO Mary Dillon showed confidence in the company buying 22,012 shares at the beginning of July.

Q1 results reported in June were  good with comparable store sales up 6.7%, a 20% increase of net income, and  planned openings of 125 stores in 2013.  Capital expenditures rose to $180 million in 2012 from $129 million the year before, mostly due to expansion and a new distribution center in the Northeast and capital expenditures should hit $225 million this year.

Benefiting both Ulta and The Est is the opening of 51 Clinique in-store boutiques. The company is also opening Lancome boutiques, another prestige brand, so by year end  most Ultas will have a prestige boutique.

Although The company has no yeild but is buying back  $150 million worth of shares. The short interest decreased by over 10% after Q1 results and insider conviction by new CEO Dillon.

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EL Total Return Price data by YCharts

The best beauty buy

These three leaders in the booming beauty biz are all buys on pullbacks. NuSkin has an intriguing story if you're not put off by a direct sales business model. The Est is a global beauty power with prestige brand domination. Ulta's future with a new CEO is more secure and planned expansion strategies well under way.

Which one you pick just depends on whether you want a play on China with high margins, a reliable global performer in The Est, or Ulta with its new face and store makeovers.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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