Puig Brands SA is betting on the Fragrance Index for its multibillion-euro initial public offering. But the owner of Charlotte Tilbury, Jean Paul Gaultier and Nina Ricci will have to pass the smell test to convince investors to buy into it. After three years of stellar growth, we may be past peak perfume.

Puig generated €4.3 billion ($4.7 billion) in revenue in 2023, up 19 percent from 2022, and earnings before interest, tax, depreciation and amortisation of €863 million. With borrowings manageable — net debt at the end of 2023 was €1.2 billion — the up to €2.5 billion proceeds of the IPO would be used to support future growth. The Puig family will retain a majority stake.

Puig’s biggest markets are Europe and the US, with Asia-Pacific accounting for just 10 percent of revenue in 2023. So there is scope to expand in the Asian beauty market, which is dominated by skincare and cosmetics but where fragrance is getting more popular.

Putting Puig’s 2023 Ebitda on a combination of L’Oréal SA and Coty Inc.’s multiples would imply an enterprise value of €17 billion. But this may prove ambitious for several reasons.

Some 72 percent of Puig’s revenue came from its fragrance and fashion business in 2023. Assuming the latter is a small part of the division, then the majority of the unit’s revenue is generated by perfume.

Fragrance sales have surged since the pandemic. Cooped up at home, consumers experimented with scent as a way to make themselves feel good. Demand only accelerated as economies reopened and we stocked up on our favourite perfumes to go back to the office and social events. This sparked talk of a Fragrance Index, with Coty, Estée Lauder Cos Inc. and L’Oréal all seeing strong demand. This is a variation on the Lipstick Index, first observed by Leonard Lauder during the 2001 recession, which described how women facing an uncertain economic environment splurged on more affordable treats.

In this sense, Puig has more in common with Galderma Group SA, which offers dermatological products, another fast-growing category, than Germany’s answer to beauty behemoth Sephora, Douglas AG. While Galderma shares soared 21 percent in its market debut last month, Douglas slumped 11 percent.

There is a question mark over whether Puig’s perfume brands are sought after by Gen-Z buyers. Its overall portfolio is clearly premium, and it has some niche scents, such as Penhaligon’s, L’Artisan Parfumeur, Dries Van Noten and Byredo. What’s more, fully or majority-owned brands account for more than 90 percent of revenue, making it less at risk than some rivals of luxury houses taking control of their beauty offerings and delivering higher margins. Puig had an Ebitda margin of 20 percent in 2023, compared with the almost 18 percent expected for Coty in the year to June.

Puig’s biggest brand is Rabanne, which reached €1 billion of revenue last year, with Carolina Herrera also approaching this level of sales. These are mainstream fragrances, and Puig will need to work hard to ensure these brands appeal to discerning buyers by adding more premium artisanal lines.

Cosmetics and skincare remain smaller parts of the business. The company is building its presence in these markets, for example buying dermatological skincare brand Dr. Barbara Sturm in January. The appeal of Charlotte Tilbury shows no sign of diminishing, with this brand also approaching €1 billion of revenue. But Puig will need to continue to invest in makeup and skincare, particularly to tap Asia. And when it comes to buying either niche fragrance names or beauty brands, prices can be high.

Perhaps the biggest risk is from a cooling in the red-hot beauty market.

Ulta Beauty Inc. chief executive officer Dave Kimbell said last week that the retailer had seen both the mass-market and luxury segments slow “meaningfully” since the beginning of February. He said the deceleration had been “a bit earlier and a bit bigger” than expected.

It’s not immediately clear whether this is a good or bad sign for the broader consumer economy.

A positive reading would be that if women aren’t buying lipstick and premium haircare, perhaps they are splashing out on handbags or getting their hair done at salons. A more worrying scenario is that consumers are pulling back from smaller purchases because of rising prices or because they bought enough moisturiser and mascara over the past three years. Kimbell blamed higher credit-card debt and the return late last year of student loan repayments for the retrenchment.

Either way, the development is an unhelpful one for a beauty business that’s coming to market. Against this backdrop, Puig must put its best face — or fragrance — forward.

By Andrea Felsted

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