Beauty Product Company Valuations – June 2022
The beauty industry has undergone significant change over the last several years. Common Thread Collective’s 2021 Beauty Industry Trends & Cosmetic Marketing Report shows that the overall beauty and personal care market value grew from $483 billion in 2020 to $511 billion in 2021. The industry is expected to increase further to $785 billion by 2027. Driven by shifting demographics and targeted social media marketing, consumer demand for beauty products has started to move away from legacy providers to emerging brands. This shift has attracted more consumers willing to pay higher prices for higher quality products that meet their specific needs.
As will be seen in this analysis, valuations of publicly-traded beauty product companies (the legacy brands noted above) grew over the last several fiscal years but have since declined. This article will briefly examine how these and other factors appear to impact valuations as of June 30, 2022.
Important notes: This article examines potential driving factors for beauty product company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will only touch on some observations in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. We included public companies traded on major exchanges and headquartered in developed countries. The companies included in this analysis needed a stock price greater than $1.00 as of June 30, 2022, and have been traded for at least a year. Revlon, Inc., a mainstay brand within the beauty industry, filed for Chapter 11 reorganization on June 15, 2022, and, therefore, was excluded from this analysis. The effective date of this analysis is June 30, 2022.
Figure 1 summarizes three items for the publicly-traded beauty product companies:
- Total enterprise value (“TEV”) calculated as the sum of market capitalization and interest-bearing debt less cash;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is abbreviated “LFY” (2021), while the latest 12-month period is abbreviated “LTM” (the latest available information as of June 30, 2022).
Figure 1 shows that the public beauty product companies generated stable annual growth over the last several fiscal years, which was reflected in generally increasing valuations. As revenue growth slowed and EBITDA stagnated in the LTM, valuations declined significantly from their LFY peak. The recent decline in market values coincides with the broad market declines observed around June 2022.
Digging deeper into the data, some companies (Mannatech and The Beauty Health Company) experienced the most significant declines in enterprise values at 76% and 46%, respectively. The only company to experience continued growth in its valuation was e.l.f. Beauty, which also generated revenue and EBITDA in the LTM.
Valuation Multiples
Figures 2 and 3 present the industry’s historical trend of revenue and EBITDA multiples.
Figures 2 and 3 show that revenue and EBITDA multiples declined through June 2022. The median revenue as of June 30, 2022 was 3.19x, while the median EBITDA multiple was 13.9x. We will examine what may be impacting the valuation multiples next.
The Growth Story
Growth often strongly influences how multiples differ among companies in an industry. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year and NFY = calendar 2022 for most companies).
The orange line in Figures 4 and 5 represents data as of June 30, 2021. NFY projections for the industry at the time called for solid growth in revenue and EBITDA. Actual results in 2021 fell in line with these expectations, as is seen in the blue line and the increase in revenue and EBITDA from LFY-1 to LFY.
As of June 2022, public beauty product companies are expected to generate revenue growth compared to a year ago. EBITDA growth is expected to decelerate somewhat from the prior year. Next, we looked to identify a meaningful correlation between growth and observed revenue and EBITDA multiples. These observations are summarized in Figures 6 and 7.
Based on the data points in Figures 6 and 7, revenue and EBITDA growth expectations appear to have a measured impact on the valuations of publicly traded beauty products companies.
Interestingly, The Beauty Health Company was observed to have the sharpest decline in valuation from LFY to LTM and still traded at the highest revenue multiples (and also had the highest growth rate). However, this company’s projected NFY growth rate is less than half that expected last year. e.l.f. Beauty, Inc., the only company to experience growth in its enterprise value in the LTM, had the highest EBITDA growth rate and traded at the highest EBITDA multiple.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies due to improved product or geographic diversification, deeper management teams, access to a variety of distribution channels, and better availability of capital, among other factors.
Figure 8 presents the industry constituents’ market size (measured by market capitalization) relative to each company’s LTM revenue multiples.
In this instance, we did not observe any meaningful correlation between size and valuation multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold true for the beauty products industry, as shown in Figure 9 below.
EBITDA margins appeared to impact revenue multiples in the beauty products industry.
The Leverage Story
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Greater levels of perceived financial risk to equity holders tend to reduce valuation multiples. In Figure 10, we plot LTM revenue multiples against their associated LTM interest coverage ratios (where available).
The interest coverage ratio measures a company’s ability to pay its interest obligations. The higher the ratio, the greater the company can cover its interest expense with its operating income. Based on the data shown in Figure 9, we did not identify a meaningful relationship between interest coverage ratios and revenue multiples.
Tying It All Together
The trends observed in this article suggest that valuations of publicly-traded beauty product companies appear to be impacted primarily by growth and profitability.
At the beginning of this article, we identified that shifting consumer demographics and preferences have favored newer brands in this industry. These trends have undoubtedly impacted expected growth rates for the legacy players considered in this analysis. While the larger and more established brands continue to claim significant market share, their aging customer base and disruption from emerging brands (to which younger consumers can better relate) create some uncertainty for their future success. Only time will tell how this manifests in their valuations.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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