Last week’s Dick Davis Investment Digest featured the chart below on the front page.
What those two lines tell us is that consumers are shopping more now than they were at the beginning of the year, even though they feel worse about the economy. This is unusual: retail sales normally decline when consumer sentiment is falling.
One reason that has been suggested for the anomaly is the finite nature of willpower—and the length of this economic downturn. Studies show that human willpower acts like a limited resource in many ways. In one study, for example, volunteers who had been asked to make a series of decisions earlier in the study couldn’t hold their hands in ice water (a classic test of willpower) as long as volunteers who hadn’t had to make any decisions. Another study found that lower-income shoppers are more likely to eat while at the grocery store, because their willpower to resist snacking is depleted by making tough choices about what food to spend their limited budget on. It’s no coincidence that candy bars are displayed by checkout counters, the last place decision-fatigued customers visit before leaving the store.
This should ring true to anyone who has ever tried to furnish an apartment at IKEA—by the time you’re halfway through the maze they’ve laid out for you, you couldn’t care less whether your new rug is yellow or blue. (For more on the phenomenon of decision fatigue, I highly recommend this August article from the New York Times.)
Couple our limited willpower with the length of the recent recession, and it’s no wonder that consumers are starting to slip. Maintaining disciplined spending habits for a few hours is tough—and many Americans have been doing it for years!
This fact has spawned its own mini-phenomenon of consumers splurging on small luxuries, even as they keep the rest of their budgets tight. The same trend was observed and termed “the lipstick effect” during the Great Depression, when consumers faced an even longer lean period.
Now as then, lipstick and other beauty products are some of the prime beneficiaries. Generally less expensive than clothing, shoes or jewelry, makeup still feels like a self-indulgent purchase for many women. Spending $15 on lipstick or $7 on mascara can make it easier to resist a $40 dress or $80 pair of boots. It may also make it easier to buy store-brand juice on the next grocery trip.
Or as the manager of a beauty supply store in Hingham, Massachusetts, told local paper The Patriot-Ledger for an article last week: “I find that our business stays afloat the best in the worst times. I think it’s because skin care and makeup are an affordable luxury. People aren’t taking those big vacations or building their wardrobe for fall. They aren’t buying a Chanel suit or an outfit from the runway, but they can certainly identify and replicate a trend in makeup.”
She’s not the only one to have noticed; the beauty-supply business is enjoying a mini-boom on Wall Street. The Street’s two favorite plays on this trend are both national beauty-supply store chains: Sally Beauty Holdings (SBH) and Ulta Salon (ULTA).
SBH had a fantastic October, gaining 15%, compared to the S&P’s 10%. Two different experts recommended it in the latest Investment Digest: Cabot Top Ten Trader’s Mike Cintolo and Stock Prospector’s Eric Dany. Here are both their recommendations:
“Sally Beauty Holdings opened its first beauty supplies and equipment store in New Orleans in 1964. The company went international in 1987 and has expanded over the years by acquiring smaller chains of beauty supply stores. Now the largest such company in the world, Sally Beauty came public in 2006. ... With 10 quarters of double-digit earnings growth (including a 68% jump in Q2) the potential for this industry is clear. The company announced a 15 million share secondary offering (non-dilutive) on October 12, and the increased liquidity should make the stock more attractive to institutional investors. ... Technical Analysis: SBH has been in an uptrend since late 2008, but its low price and frequent corrections have made it a tough stock to hold on to. The latest correction came in July and August and dropped the stock from 19 to 15. But after spending September trading sideways under resistance at 18, the stock came alive on the news of the secondary offering and moved out slowly to 18 at the beginning of last week, then blasted off on Friday, gaining nearly a point on heavier volume. Today’s action has pushed the stock out to a new all-time high. Look for a pullback to 18.5 as an entry point. Suggested Buy Range: 17-18.5"—Cabot Top Ten Trader
“Sally Beauty is trading near its 52-week high of $18.62. The beauty supply business is strong even in the weak economy. The company is expanding overseas in Europe and South America. My earnings estimates are $1.25 for FY ending 9/12 and $1.50 for 9/13. Applying a P/E ratio of 15x makes my 12-18 month target price $22.50. Buy!"—Stock Prospector
Ulta Salon is the smaller of the two, with 415 U.S. stores to Sally’s 3,000-plus. The stock is definitely on Wall Street’s radar though; it jumped 15% the day after reporting earnings in September. And no wonder: revenue grew 23%—the fourth quarter in a row of double-digit growth—and the company issued third-quarter guidance above analyst estimates.
ULTA spent October building a base, consolidating gains from the September spike. However, just last Friday, the stock pushed to new highs, gaining 4% in a day! It looks like an auspicious beginning for a renewed uptrend from the stock.
As for Sally Beauty, it’s already in a nice uptrend, but its upcoming earnings (November 16) could give the stock—and the sector—yet another push.
Wishing you success in your investing and beyond,
Chloe Lutts
