Cash Flow Cosmetics

Net-Cash Innovators Funding Growth Internally While a Leverage-Loaded Incumbent Cuts to Survive

Table of Contents

• Model Portfolio Action

• Company Profiles & Context

• Investment Thesis

• Growth & Moat Analysis

• Conclusion

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Model Portfolio Action

Long Side (1% portfolio allocation, 0.33% each): Oddity Tech (ODD US), Beiersdorf AG (BEI GY) and Milbon Co. (4919 JT).

Short Side (-1% portfolio weight): Estée Lauder (EL US).

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Company Profiles

Oddity Tech (ODD) — an Israeli-US digital beauty platform that owns IL MAKIAGE and SpoiledChild. Everything sells 100% direct-to-consumer, allowing Oddity to own 40m first-party consumer profiles and a training set of 1bn+ skin images. Q225 revenue reached $268m (+27% YoY) and H1 cash flow hit $99m.

Beiersdorf (BEI GY) — 140-year-old German skincare house (Nivea, Eucerin, La Prairie) with €5.2bn H125 sales (+2.1% org.) and 16% EBIT margin. Exposure is balanced: ~50% Europe, 30% Asia/Africa, 20% Americas. The group is net-cash and authorized €1bn of buybacks 24-25).

Milbon (4919 JP) — Japan’s salon-only hair-care champion. FY24 sales ¥51.3bn (+7.4%) with operating margin 13.3%, up 170bps YoY. Although Q125 dipped -2.8% sales / -46.7% op-profit on Korea inventory and higher SG&A, management cites a recovery from March and kept full-year guidance.

Estée Lauder (EL) — global prestige conglomerate (La Mer, MAC, Tom Ford). In Oct 24 the firm withdrew FY-25 guidance and halved its dividend, blaming “continued headwinds in China” and leadership transition. In May 25 it expanded layoffs to up to 7,000 roles within the “Beauty Reimagined” program.

Peer & Sector Context

L’Oréal’s H1 25 like-for-like growth +3.0% with 21.1% operating margin shows that even best-in-class conglomerates are moderating. EL, at high-single-digit EBIT after restructuring, is the outlier on the downside. Meanwhile, Coty and Shiseido print mid-single-digit growth but rely heavily on frag-mix re-loading; Beiersdorf’s derma engine is delivering double-digit, hence recent share gains noted by Bernstein. Capital flows echo fundamentals: Beiersdorf announced €500m 2025 buy-back, whereas EL suspended repurchases and is scrambling to preserve cash.

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Investment Thesis, Why This Long/Short Works

Core thesis: Digital-first, science-anchored challengers with diversified geography will compound faster and more predictably than a legacy prestige player that is over-indexed to a structurally impaired travel-retail channel.

1. Growth Differential Is Structural, Not Cyclical.

   • Oddity’s H1 25 revenue +26% vs EL’s last reported quarter -6% org.

   • Beiersdorf’s Derma arm up +12.2% org. even in a slow market.

   • Hainan duty-free remains -10.8% YTD; that channel is >20 % of EL revenue.
     

2. Moats Are Deepening for Longs, Eroding for EL.

   • Oddity wields an AI/biotech loop yielding proprietary molecules; IL MAKIAGE on track for $1bn revenue by 2028.

   • Beiersdorf’s Epicelline and Thiamidol show patent-protected efficacy driving premium pricing; EL relies on legacy formulas.

   • Milbon’s salon education embeds switching costs; EL fights for commodity shelf space.
     

3. Capital Allocation Divergence.

   • Longs are net-cash and returning capital or funding R&D.

   • EL’s dividend cut and restructuring charges (guidance: $1.2-1.6 bn over two years) constrain marketing, the one lever it still had.

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Growth & Moat Analysis

Oddity Tech ($ODD) — Software Economics in Beauty

“For the first half of 2025 we grew revenue +26% to $509mn, generated adjusted EBITDA $122mn, and free cash flow $99mn.” These figures imply >24% EBITDA margin on a business less than a decade old. Gross margin rose another 116bp to 74.9% thanks to full-stack DTC economics and owned IP. Importantly, 55% of revenue now comes from repeat customers; CAC has been flat YoY despite Apple privacy headwinds, proof of the data moat. Brand 3, launching Q4, addresses 80 m U.S. acne/eczema sufferers, opening a market 3× the size of Oddity’s current colour-cosmetics TAM. Management stresses the “massive opportunity to unlock medical-grade care online without doctor visits”, a natural adjacency leveraging its tele-derm platform.

Beiersdorf ($BEI GY) — R&D Flywheel and Optionality

H1 press release headlines €5.2bn sales, 16.1% EBIT margin, and a CEO message that an innovation pipeline will “accelerate growth in the second half”. The key is Epicelline, a patented epigenetic ingredient first commercialised in Eucerin serums, now migrating to mass-price Nivea. Derma brands delivered +12.2% organic growth, 4× broader skincare, supported by Thiamidol spot-corrector serums. While management cut FY-25 sales guidance to 3 – 4%, it still targets margin expansion and authorised a second €500m buy-back.

Milbon ($4919 JP) — Salon Embeddedness as Switching Cost

FY-24 operating margin rose 170bps to 13.3% even before the May 25 price hike. Q125 was messy, operating profit –46.7% on currency and Korea destock, but management notes a “recovery trend since March” and kept full-year forecasts. Why long: Milbon trains >11,000 stylists/yr and supplies exclusive products; stylists effectively sell the retail take-home inventory, aligning incentives. Regional data show Korea salon visits rebounding, and the U.S. distributor just added 200 new accounts in June. With 75% of revenue from in-salon channels, Milbon is insulated from Amazon price wars that trouble mainstream hair categories.

Estée Lauder ($EL) (short) — A Franchise in Retrenchment

Q3 showed 10% sales decline and the company escalated layoffs to 7,000 employees, promising to restore “double-digit adjusted operating margin” through the Beauty Reimagined program. Travel-retail, the historical moat, is deteriorating: Hainan duty-free sales -10.8% in the quarter of 2025, with local price arbitrage eroding margins. Even if China stimulus bites, EL’s heavy reliance (~20% sales) on that geography means it must win back share from local C-beauty and K-beauty labels now dominating Tmall rankings.

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Why the Moats Diverge

Oddity operates a closed-loop tech platform: 100% of sales flow through its site or app, feeding AI that drives both product design and ad targeting. The resulting 55% repeat-purchase share and 75% gross margin are fundamentally unreachable for legacy wholesalers.

Beiersdorf owns ingredients IP, Epicelline, Thiamidol, backed by >150 active dermatology patents; rivals must license or out-formulate.

Milbon controls distribution through on-premise education: a stylist in Seoul or Osaka cannot switch suppliers without losing Milbon’s training and POS analytics.

Conversely, EL’s historical moat, department-store doors and Hainan boutiques, has flipped into a liability as consumers migrate online and local resellers arbitrage price gaps.

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Conclusion

Digital data loops, proprietary science and embedded distribution give Oddity, Beiersdorf and Milbon durable growth vectors that are not hostage to Chinese tourist flows or department-store traffic. Estée Lauder, in contrast, must navigate a shrinking channel, execute one of the beauty industry’s largest workforce reductions, and rebuild trust, all while its core customers shift online or toward lower-priced, science-backed alternatives. The relative performance gap is likely to widen into FY-26, delivering our opportunity to capture the spread.

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