Beauty Is in the Eye of the Shareholder
Out of China and Into Other Parts of the World
The smallest of these is Revlon, with a $1.33 billion market cap. Its gross margin for the last year is 69.1 percent. Revlon has prettied up its balance sheets most recently by exiting China, saving the company $11 million in costs.
A more important catalyst for the stock is the acquisition of The Colomer Group for $660 million, which gives Revlon access to salon distribution, a desirable venue for beauty companies, as well as more international reach. Half of TCG's $500 million in sales come from Europe, Middle East and Africa. It also provided Revlon with a new CEO -- Lorenzo Paldani, the former CEO of TCG -- and a lineup of professional hair and nail products.
On the third quarter earnings release, interim CEO David Kennedy said The Colomer Group will begin pulling its weight the very first year. Had this new segment's numbers been included in the fourth quarter earnings result, net sales would have been $1.9 billion instead of $1.49 billion for Revlon consumer.
Consistent Browsing on Any Platform
Ulta was the belle of the Wall Street ball in 2011 and 2012, but it was flat for 2013. For the first time in years, it missed third quarter earnings estimates (by 2 cents). This led to a dramatic 20 percent share price swoon on four-times-average volume, taking it to a 52-week low in low $80s.
To be fair, its e-commerce arm reported 74 percent growth in that quarter and is one of the main growth drivers. On this front, Ulta is up against Amazon.com (AMZN) and -- believe it or not -- Target (TGT), which in 2013 bought beauty and skin care wesite DermStore.com with 26,000 products.
%VIRTUAL-article-sponsoredlinks%Painfully aware of the importance of its online arm, Ulta revamped its website. As CEO Mary Dillon explained, "Ulta is one of the first retailers to feature Responsive web design, a new technology that enables a consistent browsing experience regardless of the device the customer is using."
Thanks to this revamp, the company recently reported fourth quarter results that pleasantly surprised analysts. More importantly, e-commerce rose 82 percent, prompting Goldman Sachs to upgrade to buy. However, Ulta's trailing 12-month margin isn't as lush as these other two, at only 39.4 percent.
Ulta is competing with mass market, department stores, beauty supply stores and most directly with Sephora, owned by Louis Vuitton Moet Hennessey. Sephora was named by Internet Retailer as one of the top ten retailers using mobile for its pioneering usage of tablets in-store. Sephora has 800,000 rewards members who have connected their account to the Apple Passbook wallet. It is also engaging in a loyalty war with Ulta, which has 12.5 million active loyalty rewards members. (Active means the customer has purchased in the last 12 months).
However, no one competitor has the variety of products nor full-service grooming salons it offers in 664 stores in 46 states. Ulta is aiming for 1,200 US stores and opening 100 in 2014.
Prestige Means Profits
Since 2012, Ulta has been opened 100 Clinique boutiques in Ulta stores. Clinique is one of 30 Estee Lauder brands, which includes Smashbox, La Mer and M-A-C. It also acts as a fragrance licensee for Michael Kors, Coach, DKNY and more high-end well known designers.
On the 2014 second quarter earnings call, CEO Fabrizio Freda called online one of its highest-margin channels and performing well in a high-margin industry. Estee Lauder's trailing 12-month gross margin is already a stunning 83.8 percent.
Estee Lauder operates in 150 countries. It also sells in airport duty-free shops and cruise ship stores in which sales have risen 70 percent over the last three years. Estee Lauder plans for more high-growth freestanding retail stores like the one at the Champs Élysées in Paris.
Estee Lauder has been performing well with $10 billion in 2013 sales, cash flow of $1.5 billion plus, and net earnings of $1 billion.
China is a big part of the bullish thesis. While Revlon and L'Oreal's Garnier exited China, premium prestige brands of all kinds still do well. Estee Lauder is expanding in smaller Chinese cities. It's also a shareholder-friendly company, raising the dividend by 37 percent in 2013 alone and buying back shares worth $388 million. The yield is now 1.20 percent, and the forward price to earnings ratio is 20.66 compared to 22.45 at Ulta and 12.68 at Revlon.
Who's the Prettiest of Them All?
Ulta has Goldman's seal of approval but also now has a higher e-commerce bar to vault. Revlon could perform well with its two divisions, consumer and the promising professional lines. Despite the lowest forward price to earnings ratio, it is still the most speculative. Of these, the prettiest one would have to be classic beauty Estee Lauder with its rising yield and beautiful prestige channel growth globally.