- Experts anticipate cosmetics industry revenue will increase at an annualized rate of 0.8% and e-commerce sales will outpace brick and mortar through 2026.
- Standalone retailers Ulta Beauty and Sephora continue to dominate the retail cosmetics market, though competition remains steep from online and drug store retailers.
- Major partnerships between Ulta Beauty and Target and Sephora and Kohl’s could expand the shop-in-shop convenience concept.
- In the short term, the retail sector may be under pressure as economic uncertainty weighs on domestic and international markets.
Beauty, Cosmetics & Fragrance Stores Revenue and Store Count Trends
Strong Year for Cosmetics in 2021: Sephora, Ulta Beauty, Bath & Body Works and Sally Beauty Supply, continue to dominate the U.S. retail cosmetics market representing almost 60% of retail cosmetics and fragrance sales as of 2021, although the retail cosmetics market has expanded to include a larger share of drug and dollar store retailers.
Ulta Beauty, a one-stop shopping destination that offers a range of value-priced and luxury branded products across every category, continues to outpace Sephora, Bath & Body Works and Sally Beauty Supply in sales volume. The company’s comparable sales increased 47.1% through September 2021 compared to a decrease of 23.8% for the same period in 2020, driven by a 40.7% increase in transactions and a 4.6% increase in average ticket, according to the company’s third-quarter report.
Ulta Beauty’s gross profit increased to 39.7% in the first nine months of 2021 compared to 29.8% in the same period in 2020, driven by leveraged fixed costs and improved merchandise margins. The company opened 42 new full-line stores and closed four stores as of September 2021.
French luxury goods conglomerate LVMH’s perfumes and cosmetics group, which includes Sephora, DFS and Le Bon Marche, reported a year-over-year revenue increase of 27% in 2021, a 1% drop from 2019. The perfumes and cosmetics group saw no change in profit growth from recurring operations in 2021 over 2019, but Sephora’s online sales performed well, and in-store revenues rebounded in 2021, according to LVMH’s annual report. Additionally, Sephora’s European digital roll out accelerated through its partnership with multi-national e-commerce company Zalando.
The cosmetics industry’s try-before-you-buy norm evolved in the COVID-19 pandemic with new apps, artificial intelligence, virtual influencers and three-dimensional avatars that gave consumers the confidence to shop for cosmetics online. Additionally, brands have begun customizing product recommendations for consumers based on lifestyle questionnaires.
Shop-in-Shops and the Future of Cosmetics Retail: Ulta Beauty and Target’s industry-changing partnership launched over 100 shop-in-shop concepts across the U.S. and online at Target.com in 2021. The partner companies plan to expand to 800 total locations in the coming years. Located alongside Target’s existing beauty section, the shop-in-shop concepts feature specialized displays, discovery zones for new products and season-specific products.
“Ulta Beauty at Target is unmatched in the industry, bringing guests the opportunity to discover new prestige brands while they shop Target’s incredible beauty assortment,” said Christina Hennington, executive vice president and chief growth officer at Target, in a July 21, 2021 company press release.
Ulta Beauty customers can access Target’s in-store, curbside and same-day delivery services, its RedCard 5% discount, and Ultamate® and Target Circle™ rewards, which combined have more than 100 million users. Target plans to open more than 250 Ulta shop-in-shops by the end of 2022, more than doubling its current count, according to a February 2022 USA Today report.
Sephora launched its original shop-in-shop concept in 2006 through a partnership with JCPenney that ended in 2020. Sephora continues to wind down the last of these concept stores and expects to complete the process by 2023.
The company entered a new long-term strategic partnership with Kohl’s and opened 200 shop-in-shops in fall 2021, with plans to expand to at least 850 locations and an omnichannel partnership on Kohls.com by 2023. The 200 existing Sephora shop-in-shops generated a mid-single digit lift to comparable store sales compared to non-Sephora stores, according to Kohl’s year-end report. The company noted 25% of the Sephora customer based is brand new to Kohl’s, increasing the potential for additional sales across other departments.
This partnership allows Sephora to reach a new, aspirational customer base for its prestige brands and address the strong mass merchant competition for its standalone stores. It’s important to note that on March 21, 2022, Kohl’s Corp. confirmed it had received preliminary acquisition interest from multiple prospects. It remains to be seen how an acquisition may influence the company’s sales performance or operating strategy going forward.
Industry Outlook: Experts anticipate industry revenue will increase at an annualized rate of 0.8% through 2026, driven by continued consumer interest in cosmetics and fragrances, according to industry research firm IBISWorld. Additionally, the firm expects e-commerce sales will outpace brick-and-mortar stores in the same period, though retailers will continue to rebound from pandemic-related declines.
In the near term, cosmetics and fragrances will compete for consumers’ disposable income with travel, dining and social events as travel and other pandemic-related restrictions roll back with declining infection rates across the U.S. and Europe.
Valuation Outlook: Gordon Brothers believes appraisal values should remain stable for the cosmetics sector given retail’s ongoing recovery from the pandemic and strong sales performance. However, it is important to note consumer sentiment remained at its lowest level in 10 years as of February 2022, which the University of Michigan’s Survey of Consumers attributes to a decline in sentiment among households with incomes of $100,000 or more.
As travel restrictions and other pandemic-related protocols are rescinded with increasing vaccination and declining infection rates across the U.S. and Europe, consumers will likely return to spending on travel, dining and social events, which will compete for disposable income spent on cosmetics and skin care. While the cosmetics industry offers a range of products and price points, rising fuel and food prices resulting from inflation will affect consumers across demographics. In the short term, the retail sector may be under pressure as economic uncertainty weighs on domestic and international markets, especially for consumers with lower levels of disposable income.
Assets appraised in 2021 should be reappraised in 2022 as sales and four-wall expenses normalize. Lenders should remain cognizant of retailers’ control and leverage over variable and fixed expenses amid ongoing challenges like inflation, labor shortages and employee retention.
Special Consideration for Cosmetics and Fragrance Inventory Dispositions: Asset-based lenders considering cosmetics and fragrance inventory as collateral need to understand how these products would recover in a liquidation event and what additional considerations may be required.
Fragrance inventory can achieve strong gross recoveries in a liquidation depending on brand name and customer demand; however, this inventory may be consigned and therefore potentially ineligible on the borrowing base. Similarly, branded, high-end cosmetics are typically a high gross recovery category in a liquidation as there is generally not significant normal-course discounting on these products.
Gordon Brothers typically considers cosmetics inventory from major brands like Estée Lauder, Lancôme, Clinique and others in its appraisal net recovery analysis. In a going-out-of-business (GOB) event, select vendors may elect to repurchase their inventory from the retailer at 70% to 100% of cost to protect their products from being heavily discounted, which could potentially erode brand perception in the marketplace. In some cases, branded cosmetics have been retained and sold in liquidation sales at discount-protected rates.
For the purposes of an appraisal analysis, Gordon Brothers typically assumes all cosmetics would be included in a GOB event, so gross and net recovery rates include the proceeds and related expenses to liquidate the total inventory. Lenders should partner with appraisers to understand the implications and net outcomes of situations in which a retailer, agent or liquidator negotiates an agreement allowing the vendors repurchase inventory or limit discounts on premium products.
Note: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2022 GORDON BROTHERS, LLC.
Reference sources: LVMH MOËT HENNESSY LOUIS VUITTON, ULTA BEAUTY, INC., SEPHORA.COM, IBISWORLD, TARGET, INC., USA TODAY, THE UNIVERSITY OF MICHIGAN, BIORIUS, THE DALLAS MORNING NEWS