When the doors of beauty empire Sephora opened at noon last Sunday, shoppers poured in to sample and pick up products from Armani, Prada, and Jo Malone—as well as pioneering brands like Augustine Bader and Fenty.
I was one of them, visiting the store in Westfield London shopping centre, looking for new make-up ideas, but also to spruce up my stock portfolio.
The rush for expensive lipsticks, powders and paints was so great that I understood within minutes why the $571 billion beauty and personal care market – worth $571 billion – is expected to grow at 3.8 percent per year through 2027.
I also got another insight into the reign of Sephora’s owner Louis Vuitton Moet Hennessy, better known as LVMH. This week, the conglomerate, which also includes “houses” like Tiffany and Tag Heuer, became the first European company worth more than $500 billion.
LVMH’s first-quarter revenue was up 30 percent, helped by Sephora’s performance. The retailer’s 2,700 outlets worldwide – the Westfield store marks its return to the UK – showcase LVMH brands such as Fenty, as well as those from L’Oréal and other competitors.
Shares of L’Oréal are up 27 percent over the past year, thanks to CeraVe, Garner, Maybelline and premium lines like Lancome and Aesop, the maker of £31-a-bottle liquid soap, which was recently acquired for $2.5 billion . I have money in Fundsmith, which owns LVMH, L’Oréal and Estee Lauder. But I’m keen to expand my exposure to the sector because of its appeal to the wealthy and the relatively well off.
Julian Bishop, co-manager at the Brunner Trust, owner of LVMH, says: ‘Wealthy consumers have not been affected by the cost of living crisis and continue to spend lavishly.’
David Coombs, of Rathbone, holds onto Estee Lauder, L’Oréal and LVMH, because it’s not just the loaded that splash out. He says, “Many women—and more men—in middle-income groups won’t compromise on skin care.”
Zehrid Osmani, manager of the FTF Martin Currie European Unconstrained fund, which invests in L’Oréal, and the FTF Martin Currie US Unconstrained fund, in which Estee Lauder is a holding company, is also betting on the sector’s resilience. Coombs also says that when the Chinese go on holiday abroad again, they will spend Covid savings on creams, concealers and the rest.
Marcel Stotzel, manager of the Fidelity European trust and Fidelity European fund, which has interests in LVMH and L’Oreal, says 150 million Chinese traveled in 2019 and an equal number could do the same this year, with many visiting Europe.
While shares of LVMH are up 44 percent over the past 12 months, some analysts believe there is even more upside potential.
Barclays rates the stock as a buy with a target of $948, down from the current $877. But I’ll look for share price weakness before buying into this and the other premium names, while I look for others in the field research.
Coombs invests in Ulta Beauty, America’s largest cosmetics retailer, selling everything from Maybelline to Tom Ford (a division of Estee Lauder).
Shares are up a third over the past year, but analysts expect another rise.
Another option is Shiseido, the Japanese titan whose brands include Drunk Elephant and Nars (both in stock at Sephora). Darius McDermott, of FundCalibre, calls Baillie Gifford Japan a particular fan of this stock, whose price is 13 percent higher than a year ago. Holders of the Lindsell Train Global Equity fund will be pleased to know that this is part of the portfolio.
Such is the appeal of the sector that the woes of the listed Revolution Beauty raise more eyebrows. Shares have been suspended due to an investigation into accounting issues.
By contrast, shares of Warpaint London, another Aim name that also provides “high-quality cosmetics at an affordable price,” are up 60 percent since last April.
Revolution Beauty shareholders will be as saddened as those of the THG, the beauty group whose shares have fallen 88 percent since its inception in 2020.
Private equity giant Apollo looks set to bid, but for much less, reflecting the view that THG doesn’t exude enough sparkle to entice the cost-conscious.
I left Sephora and headed to Boots, where queues had formed for its new skincare, Future Renew. Could this prompt US group Walgreens Boots Alliance to try again to sell the British drugstore chain? Analysts rate the shares – down 23 percent year-on-year – as a hold. But I’m encouraged by the makeover of some of its tired stores to hope for good results for my portfolio.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.