Beauty & Wellness Briefing: Beauty consumers are not convinced that the economy is doing well

In this week’s briefing, I take a snapshot of some of the recent gains in the beauty industry and its sectors. Suffice it to say, although the economy is technically sound, consumers are unconvinced. Scroll down to use Glossy+ comments to allow the Glossy+ community to participate in industry topic discussions.

After a wave of earnings calls last week, there is a clearer picture of where the beauty industry stands amid consumer disbelief in the strong economy. As consumers forego their money, earnings reports show how the beauty industry is being impacted and how it is responding.

Bulk cosmetics company Elf Beauty, powerhouse Estée Lauder Companies and retailer Sally Beauty Holdings released quarterly earnings last week. Given the marked differences between the companies, there was little agreement between them. But each managed to paint a picture of the state of their respective markets. The first report was Elf Beauty, showing the resilience of mass brands. Meanwhile, ELC sales declined mainly due to China, but sales in the US also suffered from retail sales of skin care products. And from the retailer’s perspective, Sally Beauty emphasized the sales environment that shoppers expect from promotions.

“The numbers definitely tell a story. Mass color cosmetics were very resistant and [the category] has never been healthier,” said Tarang Amin, CEO of Elf Beauty, in an interview with Glossy. “It was driven by a lot of the themes. … Consumers are interested in getting out and expressing themselves, and this is a great category to do that.”

Elf Beauty’s third quarter of fiscal 2023 was its 16th consecutive quarter of revenue growth, and the company again raised its full-year outlook in line with the earnings release. Net sales increased 49% year over year to $146.5 million. As a result, the company updated its fiscal 2023 outlook to reflect an expected 38% to 39% increase in net sales from the 22% to 24% range announced in November.

Amin pointed to the three pillars of Elf Beauty’s strength: its value proposition, its makeup and skincare launch pipeline, its strong marketing ROI, and its ability to engage consumers. He went on to say that the company’s values ​​resonate with customers given its clean, vegan, cruelty-free and fair trade certified products.

It’s important to remember that several factors contribute to the US economy in addition to the stock market. These include unemployment and hiring rates, inflation and GDP growth, among others. But the earnings of consumer-focused companies are helpful in informing us about consumer sentiment, trends, and confidence.

According to the latest jobs report from the Bureau of Labor Statistics, US employers added 517,000 jobs in January — almost double the previous month. The unemployment rate also unexpectedly fell to 3.4%, its lowest level since 1969, despite near-constant layoff announcements from tech titans like Meta, Google, Twitter and Amazon, and Wall Street giants like Goldman Sachs, Black Rock and BNY Mellon .

Annual consumer spending totals more than $13 trillion, accounting for about 70% of America’s GDP. GDP grew by 2.9% in the fourth quarter of 2022, more than expected. And inflation has slowed for six straight months. Consumer prices rose 6.5% yoy in December, up from 7.1% in November, according to a CPI report released in January. The slowdown came from falling energy costs as gasoline became cheaper. However, housing costs continued to rise.

But recession fears are surfacing because everything still feels bad. And consumer confidence is fickle. The January monthly consumer confidence survey shows a decline of about 2% from December 2022, but that’s still above the level of July 2022, the lowest month in 2022. Consumer confidence fell the most among households with incomes below $15,000 and back for those under 35-years old.

This consumer confidence seems to be gnawing at more prestigious players while giving a boost to mass players. On Feb. 2, the Estée Lauder Companies reported net sales of $4.62 billion for the second quarter of fiscal 2023, down 17% from $5.54 billion year over year. This was due to sales slumps in China due to Covid-19 restrictions and a drop in travel retail. Across the portfolio, skincare and makeup sales fell while haircare and fragrances rose. But the Americas region also saw revenue decline 3% to $1.2 billion in the second quarter. The company cited the negative impact of lower replenishment orders from retailers in the United States, primarily affecting skin care. Conversely, US net sales increased in both the fragrance and makeup categories.

Retailers are likely to decrease their order frequency in response to tightening of consumers’ own wallets. Due to the bad economic mojo, customers are more thoughtful, buy after more discounts and promo codes, and choose cheaper private labels. Target executives noted this trend on their third-quarter conference call in November 2022.

“In North America, we continue to lose market share in the quarter. And overall, we want to accelerate our stock recovery plan,” said Fabrizio Freda, CEO of The Estée Lauder Companies, in announcing the company’s results last week. “But the good news is that there has been very strong progress [the second quarter]. Each month—October, November, and then December—there was revenue acceleration progress.”

The company said it plans to accelerate new product launches in the U.S. over the next six months, including for portfolio brands Estée Lauder, Clinique, La Mer and Tom Ford Beauty. ELC will also increase premium fragrance distribution at Macy’s and Dillard’s and launch The Ordinary at Nordstrom.

On the same day as ELC’s earnings, a beauty retailer shared its take on current retail dynamics. Sally Beauty Holdings reported its first-quarter 2023 results showing its retail arm of its business, Sally Beauty Supply, saw net sales decline 2.1% year over year to $549.5 million for the quarter. However, e-commerce sales rose 14% to $91 million, or 9.5% of net sales.

Specifically, the company stated that promotional activity at Sally Beauty Supply had “modestly” increased. The increased promotional activities were funded by brand partners, allowing the retailer to maintain strong gross margins of around 50%. Since the last announcement of results in November 2022, Sally Beauty Holdings executives have spoken about the company’s vision for the future, which includes improving “customer centricity”, expanding high-margin private labels at Sally Beauty, strengthening innovation and upscaling the efficiency of operations and the optimization of technical capabilities.

“We are focused on our loyal customers as well as attracting new customers through our marketing program, differentiated professional color and grooming product offerings, and strategic initiatives,” said Denise Paulonis, CEO of Sally Beauty Holdings for the first time. Quarterly earnings 2023 call Thursday. Sally Beauty has 17 million active loyalty members in the US and Canada, representing 77% of its sales in the first quarter.

Across the board, mass retailers, including Sally Beauty Supply, Whole Foods and Target, have tried to lean on their suppliers to lower prices and take advantage of a slowdown in inflation. Instead of fighting cost increases, retailers are pushing for price cuts from brand partners. Otherwise, partners risk delayed orders or unfavorable placement on the shelves. Essentially, brands are absorbing the lost sales while retailers are able to maintain or increase their margins.

After experiencing inflation-related price increases, many consumers bought less and waited longer between purchases. For December 2022, federal data showed that consumer spending fell 0.2% over the month – a weak end to the holiday shopping season – while retail sales fell 1.1%.

“Maybe we overtook each other last year [April 2022] as we delved into the “recovery” of Estée Lauder’s US business,” wrote Lauren Lieberman, an equities analyst at Barclays, in her Feb. 3 research note. At the time, analysts suggested that a return to growth for prestige beauty would help shield the company from volatility in China and travel retail.

“As of the date of our communication, the company’s organic sales have been in the [Americas] Region underperformed our expectations for three consecutive quarters,” Lieberman wrote. “While of course Estée Lauder’s [less diversified] channel mix versus peers is partly to blame (with department stores accounting for just over a third of the region’s sales), we can’t help but wonder if some of the other aspects of the region’s previously formulated turnaround plan aren’t enough. ”

In our coverage:

Unilever launched Michiru scalp brand in Target.

Dragun Beauty is on an inexplicable hiatus.

Sally Beauty is celebrating Black History Month.

What we read:

Is CBD in Trouble?

America’s CEOs have remained silent on national tragedies.

The domino effects of the weight loss industry.