Yahoo Finance Beauty retailers Target, Ulta are benefiting from ‘the lipstick effect’: Analyst
Target (TGT) and other retailers are seeing strength in the beauty category, even as they strike a cautious tone overall on consumer spending.
The continued outperformance of cosmetics isn't surprising, one analyst said, even in the face of inflationary pressures.
"The makeup category is a beneficiary of something that we call in economics 'the lipstick effect,'" Sucharita Kodali, retail analyst at Forrester Research, told Yahoo Finance Live (video above).
The lipstick effect, she explained, is "an affordable luxury for consumers that may not be experiencing gains in other places. It's a way to indulge yourself in an affordable way, and it's something that we see happen in almost any type of economic hardship."
Kodali pointed to a decline in discretionary spending, particularly for physical goods. In February, U.S. retail sales dropped 0.4% from the previous month led by slowing sales at furniture stores, restaurants, and department stores.
But recent earnings from Ulta (ULTA) and Target tell a different story for the beauty category.
Ulta's annual revenue surpassed $10 billion for the first time in 2022, with double-digit growth in prestige and mass-market makeup in the fourth quarter.
"Importantly, consumer engagement with beauty is stronger than ever and is more connected with wellness," Ulta CEO Dave Kimbell said on the earnings call. "These factors give us confidence that the growth of the U.S. beauty category will remain healthy but moderate to the higher end of the category's historical annual growth rate of between 2% and 5%, barring a major economic event."
In its most recent quarter, Target also highlighted that consumers are finding room in their budgets for cosmetics despite the challenging economic environment.
Christina Hennington, Target's chief growth officer, noted that spending on beauty, along with food and essentials, offset the pullback in discretionary categories like home and apparel.
Target has benefited from its partnership with Ulta and the 350 Ulta shop-in-shops launched within Target stores. Target’s makeup sales have also been boosted by the retail giant’s 40 new beauty brands, including clean and Black-owned brands.
"In beauty, we continue to be a market leader, delivering the highest growth rates of any category we sell," Hennington said in the Q4 earnings call. "We've been seeing outsized growth across the entire portfolio from everyday beauty assortments to new and exciting offerings like those we've added through our partnership with Ulta Beauty."
"In fact, last year's sales from Ulta Beauty at Target were more than 4x higher than in 2021, and this growth was almost entirely incremental," Hennington added. "As such, we remain excited to continue opening additional Ulta Beauty at Target locations this year and beyond."
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
