How the ‘Lipstick Index’ Found a Potential Long-Term Investment to Make

Nov 20, 2022

Even during this moment in history of high inflation, rate hikes, and fears of a recession, Americans are still buying beauty products.

So, why are people buying more face cream and perfume when the economy needs a serious makeover?

We gave members a look into this trend last month when we discussed the “Lipstick Index.”
Simply put, when the economy gets ugly, women tend to buy more lipstick because beauty products are perceived as an affordable luxury.

We think this sets up the beauty space for continued outperformance that should ultimately translate to better financial results and higher stock prices.

And we’re eyeing none other than Estée Lauder Companies Inc. (EL) as a beneficiary.

Prestige Beauty

EL benefits not just from more overall makeup sales, but because prestige beauty shoppers have higher average incomes and are less impacted by inflation.

They continue to stock up on their favorite products and are driving overall unit growth.

The LikeFolio Outlier Grid reveals that growth in EL Purchase Intent Mentions is significantly ahead of the competition on a long-term basis. Consumer sentiment readings are also favorable.

This tells us that Estée Lauder has a loyal and affluent customer base that is buying more skin care, makeup, fragrance, and hair products even as economic uncertainty rises.

Here are some of the company’s brands that are generating the most social media buzz:

The flagship Estée Lauder brand — Iconic skin care, makeup, and fragrances.

Clinique — Fragrance-free skin care for simple routines and remarkable results.

Bobbi Brown — Created by makeup artist Bobbi Brown to empower women to embrace individual beauty.

Too Faced — A line of cruelty-free makeup that’s about “unabashed girliness and the transformative power of cosmetics.”

Estée Lauder’s demand trends are healthy, but there is an issue that could be weighing on the stock price.

Estée Lauder Has a China Problem

Despite its presence in 150 countries, Estée Lauder is being slowed by China.

Since China accounted for 36% of Estée Lauder’s sales as of May, COVID-19 issues in the country have weighed on recent results.

As of this writing, the stock price is down almost 40% so far this year.

While this is a concern, what we do know is that EL won’t be weighed down by China forever.

Pandemic pressures are bound to subside eventually. And when they do, they will give way to the demographic trends backing Estée Lauder’s long-term growth narrative.

EL’s Secular Tailwinds Are Beautiful

In the intermediate term, the industry should continue to get a boost from pandemic tailwinds:

  • A return to normal — People are returning to the office and participating in social activities. Bare faces and ponytails are out. Natural cosmetics and shiny shampoos are in.
  • A shift from products to experiences — Consumers are spending more on trips and dinner parties. No, Estée Lauder doesn’t sell experiences, but it does sell the products that get people looking their best for these experiences.

For the longer-term outlook, sustained growth should be derived from:

  • Beauty’s emotional connection — If a recession hits and consumers feel down, EL products will satisfy an emotional need.
  • Mental well-being — Increased focus on mental health is altering consumer purchase behavior. Products like cosmetics that make us feel good about ourselves are important and enable beauty brands to further tap into an emotional bond.
  • Discretionary income — Since the prestige beauty space is skewed to higher-income shoppers, companies like EL have an inflation-resistant product.

Bottom line: On a 365-day moving average, mentions of purchasing skin care and makeup are each up more than 30% year-over-year (YoY).

This confirms that consumers are still spending on items that make them look and feel good as they prepare for holiday gatherings and travel.

With the economy on shaky footing, there aren’t many promising product categories in retail at this moment. But as the Lipstick Index reminds us, we shouldn’t be surprised that cosmetics is one of them.

Estée Lauder seems to have the winning combination of resilient demand and happy consumers.

We’ll keep monitoring consumer sentiment toward EL’s prestige beauty brands to see if this changes.