Market Spotlight: Cosmetic Companies

As consumers grow more skittish about the economy and clamp down on spending, the last thing they may be worried about is how they look.

But cosmetic companies are hoping new products and diversification efforts will keep customers interested and help them weather the current slowdown.

The sector, like many others, is facing many challenges lately as consumers tighten spending amid the continued housing downturn, eroding credit, escalating fuel costs and recession fears.

To that end, businesses such as Avon Products Inc. and Estee Lauder Inc. are hoping their new products will draw in customers. Avon has inked deals with clothing design company Marimekko for a new colors cosmetic collection; with fashion label Emanuel Ungaro Maison for two new fragrances; and actor Patrick Dempsey to create another fragrance.

Estee Lauder said last month it would launch a new beauty brand exclusively for IAC/InterActiveCorp's HSN home shopping network and HSN.com.

Wendy Nicholson of Citi Investment Research was encouraged by Estee Lauder's HSN deal. "With the absence of overhead costs associated with department stores, home shopping is one of the most profitable distribution channels for beauty brands," she wrote in a recent client note.

Estee Lauder's shift away from department stores comes at a crucial time. A Piper Jaffray survey shows customers are now more inclined to buy cosmetics and other related products at discount shops and drug and specialty stores rather than traditional department stores.

While the shift may relate partly to U.S. economic concerns, Morningstar Inc. equity analyst Michelle Chang says there is an industrywide trend to move to other distribution outlets.

"Shoppers are more willing to buy through different channels," she said in an interview, noting that Web-based and home shopping purchases are becoming more popular.

Revlon Inc., which is in the midst of a turnaround, and others like Elizabeth Arden Inc. and Estee Lauder have also received a boost from overseas, which represents an increasingly larger portion of some companies' sales.

While Chang acknowledges the sector is worried about domestic economic conditions, she notes that the industry is pretty resilient, and consumers are still likely to make a "tiny splurge" on cosmetics.

Latest earnings results have provided investors with some assurance. Revlon, which is controlled by financier Ron Perelman, said Friday it narrowed its first-quarter loss partly on cost control efforts, while Estee Lauder's second-quarter earnings climbed in February on international sales growth.

Even Avon, which unveiled a multiyear restructuring plan in November 2005 after global sales dropped, reported better-than-expected results. The company's fourth-quarter profit fell in February, but managed to top Wall Street's expectations.

The news hasn't gone unnoticed, as Estee Lauder's stock has climbed nearly 23 percent since hitting a 12-month low of $37.03 in January, while Avon's stock is up about 26 percent since its 52-week low of $31.95 in September.