By Tonya Garcia, MarketWatch
With consumers spending so much time at home, there’s no need for makeup.
But Cowen analysts say Ulta Beauty Inc. /zigman2/quotes/210513442/composite ULTA +0.05% is weathering the uncertainty brought on by the coronavirus pandemic and the beauty retailer will bounce back thanks to the benefits of the “lipstick effect.”
The “lipstick effect” is based on the theory that people will spend on less expensive luxuries such as lipstick when economic times are tough.
According to an online study conducted by consumer insights platform Poshly, shoppers are stocking up on items like body lotion, facial skin care products and hair care products like shampoo during the outbreak. Two-thirds of respondents said they were using less face and eye makeup.
“Ulta’s loyal customer base, 90% off-mall presence, and virtual try-on capabilities through augmented reality could collectively drive continued market share gains as consumers reorient shopping patterns through a socially distant lens,” Cowen analysts wrote in a Monday note.
“Furthermore, the beauty category has proven relative resiliency through economic turbulence relative to other discretionary categories, i.e. ‘the lipstick effect’, evidenced by Ulta’s mid-single digit percentage decline in comps through ‘08/09 versus apparel and higher discretionary categories declining 15%-to-30% year-over-year.”
To be sure, Cowen analysts say that even with these purchases, consumers are going to be more cautious and focus their spending on the basics rather than on pricier items.
D.A. Davidson analysts say E.L.F. Beauty Inc. /zigman2/quotes/202760864/composite ELF -0.63% is a brand that shoppers are “stocking up on.” Many items on the E.L.F. website are priced at $10 or less. D.A. Davidson rates E.L.F. stock buy.
Still, Cowen analysts expect Sephora, which sells some higher-priced goods, to give a boost to its luxury parent company, LVMH Moet Hennessey Louis Vuitton SE /zigman2/quotes/201350549/delayed FR:MC -0.56% . Cowen estimates that Sephora accounts for about 18% of LVMH’s revenue.
“Typically, after an economic downturn, the luxury sector recovers rapidly and customers demand heritage brands over smaller luxury brands,” Cowen wrote.
With more people indulging in at-home workouts, B.Riley analysts upgraded Lululemon Athletica Inc. /zigman2/quotes/204011506/composite LULU -1.38% to buy from neutral with a $210 price target.
“We believe Lululemon is well positioned to benefit from exercise/lounge at home, and to take market share as it increases loyalty through online classes being offered,” analysts led by Susan Anderson wrote in a Friday note.
“Additionally, athletic retailers with a strong athleisure offering, such as Lululemon, should benefit from an increase in casual wear, as consumers work from home and seek comfort.”
B. Riley upgraded Under Armour Inc. /zigman2/quotes/208967132/composite UA +2.80% /zigman2/quotes/204420722/composite UAA +3.49% to neutral from sell for these reasons, along with valuation. Under Armour stock has plunged 55.2% over the past year.
Lululemon shares have gained 15.5% over the past year.
B. Riley is also confident about Abercrombie & Fitch Inc. /zigman2/quotes/206677024/composite ANF -1.39% , which it upgraded to buy from neutral with an $11 price target, down $1. Analysts think the “robust” digital business, accounting for 30% of sales, will give the company a lift. Plus the company’s teen and young adult target market are less likely to change their shopping habits, analysts say.
Finally, B. Riley thinks Abercrombie shoppers will benefit from the CARES Act.
“Many teens/college-aged kids currently work in retail/restaurants and have likely been furloughed,” analysts wrote. “They will likely receive unemployment benefits that could be more than their paycheck under the CARES Act, as well as a stimulus check from the government for $1,200 due to the pandemic. Under the CARES Act, even part-time workers will receive unemployment benefits.”
The Consumer Discretionary Select Sector SPDR ETF /zigman2/quotes/200844504/composite XLY -0.55% has tumbled 11.2% over the past year, while the decline for the Amplify Online Retail ETF /zigman2/quotes/206522380/composite IBUY -1.94% is 9.5%. The S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.22% is down 5% for the period.