While financial details of Target's (TGT -0.38%) acquisition of online cosmetics retailer DermStore weren't revealed, analysts were speculating the beauty-products supplier could fetch anywhere from $100 million to $150 million a few months ago, when Wells Fargo was hired as a strategic advisor.
With the U.S. cosmetics business a $36 billion industry, Target was smart to invest in this strategic piece of the pie, even if it won't materially add to profits this year.
Department stores still reign supreme when it comes selling cosmetics, with Macy's (M -1.42%) pulling in almost $3.3 billion annually, and Sephora, which is owned by Louis Vuitton Moet Hennessy and sells its beauty supplies through Macy's, Nordstrom, and other department stores -- as well as through its own storefronts -- rakes in an estimated $2 billion a year. It also has a strong online presence as well.
The Internet could be where the future of beauty lays. DermStore generated around $50 million in revenues last year that's projected to rise to between $75 million and $80 million in 2013, a 60% surge that's well ahead of the total 7% increase NPD Group said the so-called prestige beauty market sold in department stores saw in 2012.
As the second biggest retailer behind Wal-Mart, Target began a big push in cosmetics last year by following the lead of its rivals and rolling out "beauty concierges" to harass customers in its stores. But by focusing on a relatively high-margin business like cosmetics -- which to my male mind ought to be priced like a commodity and not at a premium -- it has the potential to generate more than just incremental profits to Target's bottom line and push an investment in the retailer much higher.
Two of the biggest names in cosmetics, Revlon (REV) and Estee Lauder (EL -1.06%), both carry operating margins of around 15%, while L'Oreal turns more than $0.16 of each dollar of revenue into operating profits. Avon Products (AVP) generates about half that amount, about what Target itself puts up, but the troubled beauty queen is in the midst of a turnaround and still has bribery charges hanging over its head.
In short, this acquisition is more than just a cosmetic makeover for the retailer. With Revlon recently agreeing to buy the privately held Colomer Group (for $660 million, no less) and Sephora picking up its interactive Scentsa platform, the cosmetics market is heating up, consolidation may become more common, and DermStore just might turn an investment in Target into more than just another pretty face.
