Business Manager: Julian Cassady
Email: jcassady@umassd.edu
This article is not financial advice
An economic recession is on the horizon for the United States, and I’m here to prove it using something called the “Lipstick Index.”
The Lipstick Index is a fascinating way to measure future economic performance. It was a term created in 2001 by Leonard Lauder of Estée Lauder to explain why lipstick sales went up despite ongoing economic turmoil.
An index is a helpful tool for measuring changes in data. Indexes are often used as indicators of economic performance, acting as a crystal ball for economists.
The premise is that during economic downturns, women tend to spend less on typical luxury goods like handbags and instead splurge on small luxury goods like makeup.
This demonstrates that women’s retail therapy habits don’t disappear in a recession; they just change.
However, calling it the Lipstick Index is sort of misleading.
Time Magazine concluded that the label should be changed to “Nail Polish Index.”
Lipstick sales have nosedived since the COVID lockdowns and mask mandates. Many women saw lipstick as a less essential part of their look, substituting it for visible cosmetics such as eyeliner or nail polish.
Makeup retailers like Sephora and ULTA have been reaping profits throughout the last year.
Sales have been so good for them that they now have pop-up storefronts within other big retailers like Kohl’s, Target, and JCPenney.
The picture shown above is an example of a new ULTA popup within a remodeled Target. The Target located just off-campus on State Road was recently renovated to accommodate one of these ULTA pop-ups.
Sephora and ULTA are doing all they can to tap into every crevice of the beauty industry by merchandising popular products, zeroing in on new “aesthetics” as they pop up on social media.
ULTA stock is up 40% since March 14th, 2022.
ULTA also has some good financials to further back up its enormous stock price.
For example, ULTA’s total revenue has grown to over $8 million. In 2019, ULTA ended the year with just over $6.7 million, with its worst recent year being 2021, when it only had $6.15 million in total revenue.
Additionally, ULTA’s earnings-per-share (EPS) has skyrocketed since last year, ending 2022 at $17.98 per share compared to 2021’s $3.11 per share.
EPS is a valuable metric because it shows corporate value through how much money the company makes for each share of its stock outstanding.
It’s safe to say that betting against the beauty industry during the COVID-19 pandemic was actually quite a bad idea.
Shown above is a chart comparing the performance of ULTA Beauty and the S&P 500 since March 13th, 2020, starting at the height of COVID-19 lockdowns nationwide.
The orange line denotes ULTA, while the blue represents the S&P 500.
It’s plain to see that for much of the pandemic recovery, ULTA and the rest of America’s economy were in lock-step pace with each other.
This all changed in January of 2022 when the performance of the two equities started to diverge from one another.
The divergence between the two charts has grown exponentially, with ULTA rising as the total economy continues to lag behind.
Based on the Lipstick Index, investors may see the divergence as a signal towards an economic downturn and will respond to it accordingly.
ULTA’s stock price has grown monumentally, which begs the question: is America spiraling down into an even worse recession?