The 'lipstick index' strikes again: Beauty shoppers are still spending big, even as US consumers dial back on everything else

• Beauty sales are bucking a trend of declining consumer spending in other categories.
• The strength in beauty is reflecting a long-held retail indicator called the "lipstick index."
• As beauty and wellness grow more intertwined, the phenomenon is getting reinforced.

We may or may not be heading into a recession, but it appears the "lipstick index" is already in full effect.

Widely attributed to Leonard Lauder, one of the billionaire heirs to the Estée Lauder cosmetics fortune, the lipstick index is a loose measure of the economy's health. When wallets are emptier, the thinking goes, people cut back on major purchases, but they still treat themselves to little luxuries — like a new lipstick. 

It's not a foolproof economic theory, of course, but it has played out multiple times during periods of economic uncertainty or hardship, and it's playing out right now. 

Ulta Beauty was the latest to underscore the trend when it reported strong fourth-quarter earnings Thursday, with double-digit sales growth in categories like makeup, haircare, skincare, and fragrance, beating Wall Street's expectations.

CFO Scott Settersten told investors the company surpassed a revenue milestone of $10 billion in 2022 — two years ahead of its own projections.

Ulta's partnership with Target has also proven especially fruitful for both companies, with Target reporting that Ulta sales in its stores increased fourfold from 2021 to 2022.

For Target more broadly, a double-digit increase in beauty spending arguably salvaged its fourth quarter profits as shoppers dialed back on other categories like home and electronics. 

"It's almost viewed as an essential item, more and more like groceries," said Jennifer Thompson, head of marketing for beauty tools brand Japonesque, in an interview with Insider.

"I had one mom tell me, 'You know, it just makes me feel better to have my face on for the day, but I feel a little less guilty about doing that if I can say I bought something on the same receipt that I bought diapers for my kid,'" Thompson added.

Consumers are spending more on beauty in general, with over a third of survey respondents saying they spent over $500 on beauty products in the past year, up from a quarter the year prior, according to Inmar Intelligence.

And sales of higher-end "prestige" brands topped $27 billion in 2022, a 15% increase over the year before, per NPD Group.

Thompson said she's seeing Gen Z shoppers fuel the trade-up trend, saying they tell her they are "too poor to buy cheap stuff."

"They'd rather invest in the balance of a high quality product that's going to last them or really work, than go just for something that's cheap and possibly spend more money in the end," she said.

Other beauty retail partnerships, like Sephora and Kohl's, are getting a boost from the lipstick index

Ulta and Target aren't the only retailers seeing beauty products fly off the shelves. 

Bernard Arnault, chief executive of LVMH, said Sephora delivered record profit and sales in the fourth quarter and is "really firing on all cylinders" in 2023.

Sephora "generates significant, very significant profits" for LVMH, he said. "I won't give you the number, but let's say, 'very highly significant.'"

Arnault attributed Sephora's success to shoppers returning to physical stores: customers can visit Sephora locations to test products they've seen online, or to discover new brands. 

He also said the in-store experience surpasses shopping for lipsticks, perfumes, or skincare products on ecommerce sites like Amazon. 

To "discover the product on Amazon in the midst of the whole other utilitarian products, I mean it doesn't really make you fantasize," he said. 

Sephora has helped drive sales at Kohl's, too, which operates Sephora shops in hundreds of Kohl's stores nationwide. 

Eight million Kohl's customers bought beauty products at Sephora shops last year, and the department store chain saw beauty sales jump 90% in the fourth quarter of 2022, which helped mitigate the impact of an overall decline in sales during the holiday season.

In fact, the allure of Sephora is so strong that it's helped buoy same-store sales for Kohl's and draw younger consumers. 

The company said high prices elsewhere are still impacting its middle- and lower-income consumers — except when it comes to beauty.

"You bring in Sephora — obviously, a higher-ticket item — it's something that we've seen continually perform for us despite the ups and downs in the inflationary environment," Kohl's CFO Jill Timm said earlier this month.

The trend is likely to get reinforced as the link between beauty and wellness become increasingly intertwined. For example, Japonesque's Thompson pointed to an internal survey in which 87% of respondents said they used a beauty tool at least once a week – for both hygienic and cosmetic reasons alike.

"We've seen this lipstick phenomenon before in times of uncertainty, but this time around, it's been interesting because it's way more broad-based," she said.