Beauty & Wellness Briefing: Beauty consumers are not convinced the economy is good

Mass beauty company E.l.f. Beauty, prestige conglomerate Estée Lauder Companies and retailer Sally Beauty Holdings posted quarterly earnings last week. Given the distinct differences between the companies, there were few consistencies between them. But each managed to paint a picture of the state of their respective market. The first to report was E.l.f. Beauty, which showed the resiliency of mass brands. Meanwhile, ELC’s sales declined primarily due to China, but the U.S. sales also suffered because of retail skin-care sales. And from the retailer perspective, Sally Beauty spotlighted the promotional sales environment shoppers have come to expect.

“The numbers definitely tell a story. Mass color cosmetics have been highly resilient, and [the category] has never been healthier,” said Tarang Amin, CEO of E.l.f. Beauty in an interview with Glossy. “It’s been driven by many of the themes. … Consumers are interested in getting out and expressing themselves, and this is a terrific category to do that.”

E.l.f. Beauty’s third quarter of fiscal year 2023 was its 16th consecutive quarter of sales growth, and the company again raised its full-year outlook in step with the earnings release. Its net sales gained 49% year-over-year to hit $146.5 million, and as a result, the company updated its outlook for fiscal 2023 to reflect an expected 38-39% year-over-year increase in net sales, up from the 22-24% range announced in November.

Amin pointed to E.l.f. Beauty’s three pillars of strength: its value proposition, its makeup and skin-care product launch pipeline, its strong marketing ROI and ability to engage consumers. He further said 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 U.S. economy aside from the stock market. That includes unemployment and hiring rates, inflation and GDP growth, among others. But consumer-facing companies’ earnings are helpful in informing us on consumer sentiments, trends and confidence.

According to the latest jobs report from the Bureau of Labor Statistics, U.S. employers added 517,000 jobs in January — nearly double the prior month’s advance. The unemployment rate also unexpectedly retreated to 3.4%, the lowest level since 1969. This is despite the near-constant layoff announcements from tech industry titans like Meta, Google, Twitter and Amazon, as well as Wall Street behemoths like Goldman Sachs, Black Rock and BNY Mellon.

Annual consumer spending, on the whole, is more than $13 trillion, making up around 70% of the American GDP. GDP grew 2.9% in the fourth quarter of 2022, more than expected. And inflation has slowed for six straight months. In December, consumer prices rose 6.5% from a year earlier, down from 7.1% in November, according to a Consumer Price Index report released in January. The slowdown came from declining energy costs as gasoline became less expensive. Housing costs, however, continued to increase.

Yet recession fears loom because, well, everything still feels bad. And consumer confidence is fickle. The monthly Consumer Confidence Survey from January shows a roughly 2% decline from Dec. 2022, but that’s still above levels in July 2022, which was the lowest month in 2022. Consumer confidence fell the most for households earning less than $15,000 and those under 35-years-old.

This consumer confidence appears to be eating away at more prestige players while buoying mass players. On Feb. 2, the Estée Lauder Companies reported net sales of $4.62 billion for its second quarter of fiscal year 2023, a decline of 17% from $5.54 billion year-over-year. That was driven by slumping sales in China due to Covid-19 restrictions and a decline in travel retail. Across its portfolio, skin-care and makeup sales declined while hair care and fragrance grew. But the Americas region also saw a sales decline of 3%, to $1.2 billion for the second quarter. The company cited the negative impact of lower replenishment orders from retailers in the United States primarily impacting skin care. Conversely, U.S. net sales grew in both the fragrance and makeup categories.

Retailers are likely tightening their order frequency in response to consumers tightening their own wallets. Due to the bad economic mojo, customers are more thoughtful, shopping for more discounts and promo codes and opting for less expensive in-house brands. Target executives noted this trend on its third-quarter earnings call in Nov. 2022.

“In North America, we continue to lose share in the quarter. And overall, we would like to accelerate our plan of share recovery,” said Fabrizio Freda, CEO of The Estée Lauder Companies, on the company’s earnings call last week. “But the good news is there’s been very strong progress in [the second quarter]. In every month — October, November and then December — there was progress in top-line sales acceleration.”

The company said that, over the next six months, it has a plan to accelerate new product launches in the U.S., including for portfolio brands Estée Lauder, Clinique, La Mer and Tom Ford Beauty. ELC will also deploy more distribution of high-end fragrances in 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 the current retail dynamic. Sally Beauty Holdings reported its first quarter of 2023 earnings showing the retail store division of its business, Sally Beauty Supply, experienced a net sales decline of 2.1% year-over-year, to $549.5 million in the quarter. However, e-commerce sales increased 14% to $91 million, representing 9.5% of net sales.

Notably, the company stated that promotional activity was up “modestly” at Sally Beauty Supply. The increased promotional activity was funded by brand partners, enabling the retailer to maintain strong gross margins of around 50%. Since its previous earnings call in Nov. 2022, Sally Beauty Holdings executives have spoken about the vision for the company moving forward, which includes enhancing “customer centricity,” growing high-margin owned private-label brands at Sally Beauty, amplifying innovation, increasing the efficiency of operations, and optimizing tech capabilities.

“We’re focused on our loyal customers, as well as acquiring new customers through our marketing program, differentiated product offerings in professional color and care, and strategic initiatives,” said Denise Paulonis, CEO of Sally Beauty Holdings, on the company’s first-quarter 2023 earnings call Thursday. Sally Beauty maintains 17 million active loyalty members across the U.S. and Canada, representing 77% of its first-quarter sales.

Across the board, mass retailers, including Sally Beauty Supply, Whole Foods, and Target have sought to lean on their suppliers to cut prices and capitalize on cooling inflation. Rather than fighting cost increases, retailers are pushing for brand partner decreases. Otherwise, partners risk delayed orders or unfavorable placement on shelves. In essence, brands absorb the loss in sales while retailers can maintain or boost margins.

Having experienced inflation-related price increases, many consumers have been buying less and taking longer in between purchases. In Dec. 2022, federal data shows consumer spending slid 0.2% over the month — a weak finish for the holiday shopping season — while retail sales fell 1.1%.

“Perhaps we’d gotten ahead of ourselves last year [April 2022] when we zoomed in on the ‘rebound’ in Estée Lauder’s U.S. business,” wrote Lauren Lieberman, equity analyst for Barclays in her Feb. 3 research report. At the time, analysts suggested that a return to growth for prestige beauty would help insulate the company from volatility in China and travel retail.

“Since the time of our note, the company’s organic sales in the [Americas] region fell short of our expectations three quarters in a row,” wrote Lieberman. “While of course, Estée Lauder’s [less diversified] channel mix relative to peers is, in part, to blame (with department stores just over a third of the region’s sales), we can’t help but question if some of the other aspects of the region’s previously articulated turnaround plan are falling short.”

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