The Lipstick Effect: Why Silk Laser and other ASX beauty stocks are doing well in tough times

While our nation deals with an unattractive economic outlook, Aussies are spending plenty on looking good. And these stocks are dazzling.

During hard economic times, the Lipstick Effect can still dazzle. Picture: Getty Images

Inflation and higher interest rates may have caused our spending to slow, but Aussies are still spending big on looking good.

Our per capita expenditure (PCE) on makeup products in Australia has risen significantly over the past five years, exceeding the global average of $3.90 by a huge margin.

The makeup PCE in Australia was $15.20 in 2021, and is predicted to reach $17.70 by 2026, a report from GlobalData says.

The report lends credence to the widely held belief that when times are tough, women (not only but in particular) may not be able to afford expensive luxury goods, but they will still indulge in small luxury items such as lipstick to boost their mood.

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This phenomenon is called “The Lipstick Effect”, a term coined by former Estee Lauder chairman Leonard Lauder when he noticed that Lauder’s lipstick sales in 2001 surged despite the US economy being in the throes of a recession following the 911 attack.

“Cosmetics are an escape from an otherwise drab everyday existence,” he wrote.

Similar studies have expanded on the lipstick effect to include all beauty products such as fashion purchases.

One study found that while women still bought skirts and dresses during a recession, they tended to choose shorter styles when the economy was doing well, and longer ones during a downturn. Interestingly, there seems to be a lag of around three years.

ASX fashion and beauty stocks look good

Whether or not you find those studies wacky, the proof of the pudding is in the eating because fashion and beauty stocks on the ASX have done particularly well over the past year.

The share price of online fashion retailer Cettire (ASX:CTT), for example, has doubled in the last 12 months as the company underwent a rapid growth in sales and profitability.

In the last half, Cettire reported a 57 per cent increase in gross revenue, while its EBITDA has gone from a loss of $9.9 million in the pcp (previous corresponding period) to a profit of $16.7 million.

The share price of Lovisa Holdings (ASX:LOV), a retailer of fashion jewellery and accessories, has surged by 50 per cent over the past year.

In the last half, Lovisa’s revenue rose by 45 per cent, while its net profit after tax (NPAT) has gone up by 32 per cent to $47.7 million.

At the higher end of the beauty scale, SILK Laser Clinics (ASX:SLA), a network of centres providing laser hair removal, cosmetic injections and skin treatments, also had a first half revenue rise of 21 per cent and statutory NPAT increase of 22 per cent.

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The company says the strong sales have reinforced the idea that the nature of its offering is, in fact, “essential”, as opposed to “discretionary”.

SILK CEO, Martin Perelman, told Stockhead the debate over essential vs discretionary is one of the biggest question marks for investors.

“My belief, and I’ve been in this business for 14 years, is that if you think about our two core services, which are injectable and laser, they really are an essential part of our customers’ regime,” said Perelman.

Perelman says that while the business was not recession proof, it was far down the list compared to many other retailers.

“I like to use the words ‘recession resilient’. I believe we’re in a very good place to withstand a recessionary environment,” he added.

And its performance hasn’t gone unnoticed. On Wednesday, SILK Laser received a non-binding, indicative and conditional proposal from Australian Pharmaceutical Industries to acquire 100 per cent of the shares in SLA, by way of a scheme of arrangement, for cash consideration of $3.15 per share. API is a wholly owned subsidiary of Wesfarmers (ASX:WES).

Perelman, speaking on behalf of the board, said it was “in the best interests of shareholders to engage with API”.

SILK delivering on IPO targets

SILK operates four major business segments - injectables, laser, body and skincare products.

A client undergoing an injectable treatment would outlay around $400-$500 on average, while spending across all its services and products is around $679 per customer.

The company has grown through acquisitions - acquiring Unique Laser (now rebranded to ASC) clinics last year, and purchasing Eden Laser Clinics in March this year.

The company now owns 142 clinics (123 in Australia and 19 in New Zealand), and is fast approaching the 150 clinics target set out in the IPO prospectus in 2020.

“As we start to grow further into the east coast of Australia, we believe that consolidation and M&A could play a big part in our expansion strategy,” said Perelman.

SILK Laser Clinics CEO Martin Perelman

The majority of the stores are franchised apart from a few corporate stores that will also most likely be franchised in due course.

“We’ve also got some stores where the owners only own 50 per cent, and we own 50 per cent. But overall, we are a franchise model,” said Perelman.

Broker Taylor Collison has an Outperform recommendation on SILK, and views SLA’s current share price as an opportunity to buy into the highest quality self-care operator in a growth market.

Taylor Collison believes that SLA has multiple options with which to deploy its capital, including share buybacks or paying dividends.

Perelman meanwhile says that SLA is on track to keep delivering its IPO projections in a recessionary market.

“I do believe 100 per cent that we are very well positioned to have a good strong result through this period,” he said.

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Other beauty related stocks on the ASX

ADORE BEAUTY (ASX:ABY)

Launched in 2000, the beauty focused e-commerce website has evolved to an integrated platform that partners with a broad and diverse portfolio of more than 270 brands and over 12,000 products.

Despite headwinds, Adore Beauty delivered record sales during the four-day Cyber sales event last November. It’s share price, which has taken a 42 per cent hit in the past year, has recovered in the past month, lifting 21.7 per cent.

City Chic Collective (ASX:CCX)

City Chic Collective is a global omni-channel retailer specialising in plus-size women’s apparel, footwear and accessories.

The company sells brands including City Chic, Avenue, Evans, CCX, Hips & Curves, Fox & Royal and Navabi, and has a network of 90 stores across Australia and New Zealand.

City Chic recently acquired European-based online marketplace Navabi and also sells its collective of brands through third-party marketplace and wholesale partners in various countries.

CCX has had a tough year, but has enjoyed a stock bounce of more than 11 per cent in the past month.

MOSAIC BRANDS (ASX:MOZ)

Mosaic Brands is a specialty fashion retailer for women that operates in Australia and New Zealand, sold through its network of approximately 1000 stores and its online digital department platforms.

The group owns and operates nine retail clothing brands including Noni B, Rockmans, Rivers, Autograph and Crossroads.

This content first appeared on stockhead.com.au

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.

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Originally published as The Lipstick Effect: Why Silk Laser and other ASX beauty stocks are doing well in tough times