Rising E-Commerce Competition Will Crush Premium Beauty Margins

Key Takeaways

• Rising competition, direct-to-consumer trends, and e-commerce growth threaten margins and the viability of Douglas's brick-and-mortar and store-focused strategy.
  
• Shifting consumer preferences and economic headwinds challenge Douglas's premium offerings, risking slower growth, pricing power, and customer acquisition.
  
• Investments in omnichannel retail, exclusive brands, and digital efficiency are driving market share growth, profitability, and resilience in the premium beauty sector.

Catalysts

Operates as an omnichannel beauty company in Europe.

• Sustained promotional pressure and heightened competition, particularly from aggressive online-only beauty retailers, is expected to erode gross margins over the coming years, leading to persistent margin compression and weaker net income growth for Douglas.
  
• The continued shift of consumers toward e-commerce channels risks undermining Douglas's extensive brick-and-mortar investments and store expansion strategy, which could result in higher fixed costs and underutilized assets, ultimately constraining earnings and pressuring profitability.
  
• Leading beauty brands are accelerating direct-to-consumer strategies, bypassing third-party retailers like Douglas, which may limit Douglas's ability to secure exclusive products, compressing future revenue growth and diminishing pricing power.
  
• Demographic shifts, especially aging populations in Douglas's core Continental European markets and evolving consumer preferences toward sustainability and clean beauty, pose risks given Douglas's reliance on traditional premium offerings, endangering long-term customer acquisition and top-line growth.
  
• Elevated inflation and ongoing economic uncertainty threaten to depress discretionary spending in the premium beauty category, resulting in softer like-for-like sales, further gross margin pressure, and reduced operating leverage as fixed expenses remain high.

Douglas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Douglas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Douglas's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.1% today to 4.7% in 3 years time.
• The bearish analysts expect earnings to reach €234.6 million (and earnings per share of €1.99) by about August 2028, up from €233.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, up from 5.6x today. This future PE is lower than the current PE for the DE Specialty Retail industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.81%, as per the Simply Wall St company report.

Douglas Future Earnings Per Share Growth

Risks

• Douglas continues to deliver above-market sales growth across its European footprint, demonstrating resilience and leadership in a still-growing premium beauty sector, which could drive sustained improvements in both revenue and market share over the long term.
  
• The company is further investing in omnichannel capabilities and seamless integration of physical and digital retail, positioning Douglas to capitalize on secular consumer shifts to online beauty purchases and cross-channel experiences, with the potential to lift both top line sales and efficiency-driven profit margins.
  
• Strategic geographic expansion, ongoing refurbishment of stores, and a strong pipeline of new store openings-anchored by flagship concepts-are revitalizing the retail proposition and attracting new customer segments, supporting revenue growth and protecting average earnings per store.
  
• Douglas is expanding its private label and exclusive brands portfolio, particularly with corporate brands such as Jardin Boheme, which are contributing higher gross margins and improved bottom-line results, thus bolstering company profitability and protecting net margins.
  
• Continued focus on digitalization, supply chain optimization-including the rollout of omnichannel warehouses-and successful cost controls are creating scalable efficiencies and helping to mitigate promotional pressures, which is likely to support future earnings and enhance free cash flow as these investments mature.

Valuation

• The assumed bearish price target for Douglas is €11.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Douglas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €22.0, and the most bearish reporting a price target of just €11.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €5.0 billion, earnings will come to €234.6 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €12.18, the bearish analyst price target of €11.5 is 5.9% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.