Beauty Product Company Valuations – June 2023

The beauty industry has undergone significant change over the last several years. McKinsey’s The Beauty Market in 2023: A Special State of Fashion Report shows that the overall beauty and personal care market value generated approximately $430 billion in revenue in 2022 and is expected to reach $580 billion by 2027, or a 6% per year average growth rate. Consumer surveys continue to indicate that a large portion of prospective customers in China, France, Germany, Italy, the U.K., and the U.S. enjoy trying new brands. These preferences, along with increasing e-commerce purchases, will continue to shift revenue away from legacy brands to emerging brands.

As will be seen in this analysis, valuations of publicly-traded beauty product companies (largely comprising the legacy brands referenced above) have fluctuated over the last several years. This article will briefly examine how these and other factors appear to impact valuations as of June 30, 2023.

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 and are consistent with our prior analysis of the market sector. The effective date of this analysis is June 30, 2023.

Key Trends

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” (2022), while the latest 12-month period is abbreviated “LTM” (the latest available information as of June 30, 2023).

Figure 1 shows that the public beauty product companies generated significant revenue and EBITDA growth between 2020 and June 2023. Valuations, on the other hand, peaked in December 2021, declined through December 2022, and then have increased through June 2023.

Digging deeper into the data, the recent increase in valuations has been inconsistent across the industry’s constituents. Inter Parfums, e.l.f. Beauty, Coty, and L’Oreal posted substantial increases in their valuations between December 2022 and June 2023. Meanwhile, The Estee Lauder Companies, Nu Skin, and Mannatech posted significant declines in valuations.

Valuation Multiples

Figures 2 and 3 present the industry’s historical trend of revenue and EBITDA multiples.

Fig. 2 – Trend of historical median revenue multiples

Fig. 3 – Trend of historical median EBITDA multiples

Figures 2 and 3 show that revenue and EBITDA multiples declined through December 2022 before picking up again in June 2023. 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 2023 for most companies).

Fig. 4 – Comparison of historical and projected revenue growth: prior year vs. current year

Fig. 5 - Comparison of historical and projected EBITDA growth: prior year vs. current year

The orange line in Figures 4 and 5 represents data as of June 30, 2022. NFY projections for the industry at the time called for solid growth in revenue and EBITDA. Actual results in 2022 fell in line with these expectations, as is seen in the blue line from LFY-1 to LFY in the charts above.

As of June 2023, public beauty product companies are expected to generate higher revenue and EBITDA growth compared to a year ago. 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.

Fig. 6 – Chart plotting revenue multiples against projected revenue growth rates

Fig. 7 – Chart plotting EBITDA multiples against projected EBITDA growth rates

Based on the data points in Figures 6 and 7, revenue and EBITDA growth expectations appear to have an impact on the valuations of publicly traded beauty products companies. We noted, however, the small dataset and inconsistency in certain companies’ multiples relative to their projected growth rates.

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, there appeared to be a general relationship between size and valuation multiples among companies with less than $10 billion in market capitalization.

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 debt-to-total capital ratios (where available).

Based on the data shown in Figure 10, companies that had greater amounts of debt generally traded at lower multiples than companies with lower levels of debt. However, no meaningful correlation between debt levels and multiples were observed among the highest and lowest levered companies.

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. The key observations discussed in this article are summarized below in comparison to observations as of our prior analysis.

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 maintain significant market share, their aging customer base and disruption from more relatable brands create considerable 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.