The beauty and wellness stocks to own in 2024, according to Piper Sandler

Looking ahead to 2024, Piper Sandler said while the overall beauty industry is relatively resilient, the firm is taking a more cautious view on macro, preferring names that are more insulated from recessionary headwinds. For the upcoming year, the firm named top ideas for beauty and wellness as Ulta Beauty (ULTA) and Perrigo (PRGO), while downgrading Xponential Fitness (XPOF).

BEAUTY AND WELLNESS SPACE: In its 2024 Beauty & Wellness outlook, Piper said it is favoring companies in the industry that fit as defensive plays. The firm is looking for strong fundamentals as well as names that are less cyclical, positioned to benefit from key trends and come at attractive valuations. Piper said it sees 2024 focusing on who can drive volume amid cost-cutting from consumers, and companies that can gain from trade-down or are evaluating additional growth areas will likely benefit.

However, the firm added it does see opportunity for more discretionary and “growthy” names to come into favor as the year moves forward. Piper sees this taking place if rates decrease, the Misery Index stays low or declines further, and if a re-rating happens early in 2024 after several occurrences of “unjustified” stock outperformance in 2023.

The firm said it expects international growth, innovation and expansion of product portfolios to be crucial for companies to generate above-market growth in 2024, Piper also noted it sees Quiet Luxury playing an even greater role in consumer purchasing this year, partially offsetting and helping support prestige beauty sales.

TOP IDEAS: For 2024, the firm’s top ideas are Ulta Beauty and Perrigo due to their defensive business models. The firm’s top large-cap idea is Ulta as the company is maneuvering well through a challenging consumer environment, making consistent positive comp sales and margins several points ahead of COVID-levels, Piper said. Ulta is also gaining share in mass and has offset heavier promotions through cost optimization efforts and deleveraging events, keeping margins healthy, the firm said. Piper views management’s guidance as prudent with room for upward revisions throughout 2024. Coupled with stock trading at depressed levels, the firm sees opportunity for both earnings and valuation to drive share appreciation as investor confidence rebuilds. Piper has raised the price target on Ulta to $635 from $572 and kept an Overweight rating on the name.

Piper’s top smid-cap idea is Perrigo due to its attractive valuation and position to be one of the top performing names in the HPC space in 2024. The company is well-positioned in the current macro environment to gain share as customers face trade-down decisions, the firm said, adding Perrigo has room to take further pricing. Piper also sees catalysts driving above-market growth over the long-term including Opill, benefits from the Nestle Gateway acquisition and offerings that treat GLP-1 side effects. The firm expects Perrigo to garner more positive attention in 2024 and sees the opportunity for share appreciation from both earnings power and multiple expansion. The firm raised the price target on Perrigo to $42 from $37 and kept an Overweight rating on the name.

DOWNGRADE: Piper also downgraded Xponential Fitness to Neutral from Overweight with a price target of $13, down from $21. The firm is moving to the sidelines given uncertainties it has that it believes offset the company’s current attractive valuation.  Piper said it is less confident in management’s ability to achieve long-term growth and margin targets and reports questioning management’s credibility continue to create an overhang on the stock. 

TARGET CHANGES: The firm adjusted several target prices to reflect its latest views heading into 2024. Piper raised the targets for Neutral-rated AirSculpt (AIRS) to $8 from $6, Neutral-rated Bath and Body Works (BBWI) to $40 from  $34, Overweight-rated Coty (COTY) to $15 from $14, Neutral-rated Estee Lauder (EL) to $148 from $115, Overweight-rated e.l.f. Beauty (ELF) to $177 from $152 and Neutral-rated Hims & Hers (HIMS) to $9 from $7.  The firm also raised targets for Overweight-rated Inter Parfums (IPAR) to $175 from $172, Neutral-rated Kenvue (KVUE) to $22 from $20, Overweight-rated Planet Fitness (PLNT) to $88 from $72 and Overweight-rated Sally Beauty (SBH) to $17 from $12. Lastly, Piper cut its price target for Overweight-rated Kimberly-Clark (KMB) to $145 from $146.