Cosmetics Companies Face New Consumer Reality

By Eugene Bukoveczky | October 29, 2008 AAA

For some time now, the cosmetics sector has consistently managed to earn the accolades of analysts who've essentially seen the group as recession proof. This view has been based on the notion that women regard toiletries and cosmetics as necessities and that they would be unlikely to skip or skimp on them even as we head into tough times.

In a recent BusinessWeek piece, Kenneth Nugent, a cosmetics industry watcher with independent research outfit Value Line (Nasdaq:VALU) rated the group's projected performance "to best a majority of industries under our review". And no less than 9 of the 12 Wall Street analysts covering cosmetics giant Avon Products (NYSE:AVP) rate the stock a 'buy' or 'strong buy' rating.

Profit Warnings Put New Face on Industry Outlook
However, a slew of disappointing recent earnings results and profit warnings from some of the larger operators in the beauty products industry is now casting doubt on these validity of all this positive sentiment as it now looks like the industry is unlikely to sail through the current recession unscathed. (Don't miss Can Earnings Guidance Accurately Predict The Future?)

Last week, shares of industry giant Avon tumbled more than 15% in one day to hit a new 52-week low as the company reported third quarter earnings numbers that came of short of analysts expectations. Excluding the tax benefit of 9 cents a share, Avon reporting a profit of only 43 cents per share. On average analysts had expected Avon to report 52 cents per share in earnings for the quarter. The company also offered up disappointing guidance disclosing that it now expects its full year operating margin to dip to around 13% from its earlier target of 14%.

Bearish on BARE
Shareholders in skin care manufacturer Bare Essentuals (Nasdaq:BARE) were even less forgiving when Bare lowered its full-year earnings forecast in the face of a tougher consumer environment. The stock tumbled nearly 40% following the announcement that the company now expects sales and earnings growth to decelerate to roughly a 10% gain in 2008 compared with earlier forecasts of sales growth in 15% to 20% range.

Soaring Dollar Puts Wrinkle Into Estee Lauder's Outlook
More evidence of troubled times ahead for the industry came from Estee Lauder (NYSE:EL), which lowering its full-year earnings per share forecast to $2.20-2.50 per share, compared to an earlier forecast of $2.57-2.72 per share. A resurgent U.S. dollar is now expected to dampen profits by 33 cents alone as the company's European sales now translate into fewer greenbacks.

And those European sales are also expected to suffer a slump as well. French cosmetics giant L'Oreal saw its shares take a 12% haircut in Paris trading last Friday when it declared that 2009 would be a difficult year. The company's third-quarter sales growth of just 2.7% was the slowest in a decade and analysts now expect the company to report its first decline in operating margin since the 1990s.

The Bottom Line
The severity of the current downturn in consumption has obviously caught many forecasters off guard, including those that follow the cosmetics group. Traditional notions of what constitutes normal consumer behavior in a recession are now clearly out the window. More negative surprises can now be expected from other so-called defensive groups.

To learn more, check out Four Tips For Buying Stocks In A Recession.

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