While the coronavirus pandemic has been a major headwind for most companies, it represents a particular challenge for sellers and makers of makeup and beauty products. Coty (NYSE:COTY), the owner of Cover Girl and Rimmel brands, has posted a 52% share decline so far this year, while Ulta Beauty (NASDAQ:ULTA), seller of cosmetics and skincare products, has fallen 29%. At the same time, the S&P 500 Index slipped 19%.
The COVID-19 outbreak, which started in China in January and spread throughout the world over the past two months, has created supply-chain disruptions for a wide variety of companies. It also has hurt demand from tourists as travel has been halted and forced stores to temporarily shut their doors.
Less need for makeup
Stores that sell beauty products have followed this general lockdown movement. For example, Ulta announced it would shut stores until at least March 31 but urged customers to continue to shop through its app or e-commerce site.
While the switch to online shopping has been strong in essential areas like grocery, it won't necessarily be as beneficial for companies like Ulta. Sure, shoppers are stuck at home in front of their computers, but their focus is more on stocking their pantries with essentials in case of extended lockdowns. At the same time, many people are telecommuting, and outside meetings and events have been canceled. That means less of an immediate need for makeup, perfume, and other beauty products.
Economic figures this week offered consumers even less of a reason to shop. U.S. unemployment hit a record high, with initial jobless claims reaching more than 3 million in the week ending March 21, according to the Labor Department. The department cited the impact of the coronavirus pandemic as the reason for the massive number of filings.
That's bad news for discretionary spending. As people lose their jobs, makeup, apparel, and entertainment may lose out to purchases of food, beverages, and other staples.
Companies have already been feeling the shock. Ulta said it drew down $800 million under a revolving credit facility as a precautionary measure in consideration of the health crisis. It also said it's re-evaluating the timing of a stock repurchase program.
Coty, which launched a turnaround plan last July, withdrew its fiscal 2020 guidance and said it expects third-quarter net revenue to fall 20% on a like-for-like basis. Even Estee Lauder (NYSE:EL), which has grown revenue the past three quarters and surpassed analysts' earnings estimates for the past four, isn't faring any better. The maker of perfume, skincare, and cosmetics reported in a filing that it was withdrawing fiscal 2020 second-half and full-year guidance, saying it doesn't expect to meet that guidance due to temporary store closures in North America and Europe.
Estee Lauder shares have fared better than Ulta and Coty so far this year, slipping only 20%. But as all three companies proceed with caution due to the coronavirus outbreak, so should investors.
Even after the health crisis is over, cosmetics makers and sellers may suffer from weaker demand until the U.S. employment picture brightens and the overall economy improves. Investors should pay close attention to the companies' next earnings reports to see how they weathered the crisis and how they plan to recover.