The Lipstick Effect and how that will play out in a recession for stocks. Picture Getty
The Lipstick Effect: Why Silk Laser and other ASX beauty stocks could do well in a recession
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- What The Lipstick Effect means and how it could help stocks in a recessionary environment
- Fashion stocks like Cettire and Lovisa have increased significantly over the past year
- Stockhead reached out to SILK Laser CEO, Martin Perelman
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 according to a report from GlobalData.
The report lends credence to the widely held belief that when times are tough, women may not be able to afford expensive luxury goods, but they will still indulge in small luxury items like lipstick to boost their mood.
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 tend to buy shorter ones when the economy is doing well, and longer ones during a downturn.
A good 12 months for ASX fashion and beauty stocks
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% increase in gross revenue, while its EBITDA has gone from a loss of $9.9m in the pcp to a profit of$16.7m.
Lovisa Holdings (ASX:LOV), a retailer of fashion jewellery and accessories, has seen its share price surge by 50% over the past year.
In the last half, Lovisa’s revenue rose by 45%, while its Net Profit After Tax has gone up by 32% to $47.7m.
At the higher end of the beauty scale, SILK Laser Clinics (ASX:SLA), a network of clinics providing laser hair removal, cosmetic injections and skin treatments, also saw its first half revenue rise by 21% and statutory NPAT by 22%.
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 is not recession proof, it’s 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. Just yesterday, SILK Laser received a non-binding, indicative and conditional proposal from Australian Pharmaceutical Industries to acquire 100% 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 spend 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.
Overall, 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.
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%, and we own 50%. 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% that we are very well positioned to have a good strong result through this period,” he said.
SILK Laser Australia share price today:
Other beauty related stocks on the ASX
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.
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.
Mosaic Brands is a specialty fashion retailer for women that operates in Australia and New Zealand, sold through its network of approximately 1,000 stores and its online digital department platforms.
The group owns and operates nine retail clothing brands including Noni B, Rockmans, Rivers, Autograph and Crossroads.
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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