Estee Lauder (EL, Financial) recently reported strong 3Q FY2015 results with net sales increase of 8% on constant currency basis. Geography wise, the Americas revenue grew 8% on constant currency basis, while EMEA and Asia Pacific grew 10% and 5%, respectively The company’s adjusted operating margin increased 70 bps to 15.6%. For FY2015, management has guided for a net sales increase of +6% to +7% (on a constant currency basis), adjusted EPS of $2.92 to $2.97, and GAAP EPS of $2.70 to $2.75.
The Estée Lauder Companies Inc., founded in 1946 by Estée and Joseph Lauder, is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrances and hair care products. Its products are sold in more than 150 countries and territories under a number of well-known brand names including: Estée Lauder, Aramis, Clinique, Origins, MAC, Bobbi Brown, La Mer and Aveda. The company is also the global licensee for fragrances and/or cosmetics sold under brand names such as Tommy Hilfiger, Donna Karan, Michael Kors, Tom Ford, Coach and Tory Burch. Each brand is distinctly positioned within the market for cosmetics and other beauty products.
The company’s product portfolio consists of the following major categories:
Skin Care (43% of net sales) – These products include moisturizers, serums, cleansers, toners, body care, exfoliators, acne and oil correctors and sun care products, a number of which are developed for use on particular areas of the body, such as the face or the hands or around the eyes.
Makeup (38% of net sales) – These products include a full array of makeup products, including those for the face, eyes, lips and nails. Many of the products are offered in an extensive array of shades and colors. The company also sells related items such as compacts, brushes and other makeup tools.
Fragrance (13% of net sales) – The company offers a variety of fragrance products. The fragrances are sold in various forms, including eau de parfum sprays and colognes, as well as lotions, powders, creams, candles and soaps that are based on a particular fragrance.
Hair Care (5% of net sales) – Hair care products are offered mainly in prestige salons and in freestanding stores as well as some department stores and specialty multi-brand retailers, and include shampoos, conditioners, styling products, treatment, finishing sprays and hair color products.
In addition to these products, the company also sells ancillary products and services that accounted for less than 1% of its net sales.
The company sells its products primarily through limited distribution channels to complement the high quality and “high touch” images associated with its brands. These channels consist primarily of upscale department stores, specialty multi-brand retailers, upscale perfumeries and pharmacies and prestige salons and spas. In addition, Estée Lauder’s products are sold in company- and distributor-operated freestanding stores, its own and authorized retailer websites, stores on cruise ships, in-flight and duty-free shops, and DRTV, and certain fragrances are sold in self-select outlets. The company believes that its strategy of pursuing selective distribution strengthens its relationships with retailers, enables its brands to be among the best selling product lines at the stores and heightens the aspirational quality of its brands.
As part of the company’s strategy to diversify its distribution, Estée Lauder has been selectively opening new single-brand stores that it or our distributors operate. The MAC, Aveda, Jo Malone and Origins brands have been the primary focus for this method of distribution, and the company is expanding it to other brands. The company operates approximately 940 freestanding stores and, its distributors operate approximately 370 freestanding stores worldwide. The company expects the number of freestanding stores to increase moderately over the next several years.
The company has seen a good growth in sales and profitability over the last five years. Its revenues have seen a total increase of 40% in the last five years while its EPS has more than doubled from $1.19 in FY2010 to $3.06 in FY2014. The company has also raised its dividend per share from $0.275 in FY2010 to $0.78 in FY2014.
Going forward, analysts are expecting the company’s sales to benefit increased distribution, a strong launch calendar and marketing activities. In a recent report, Stifel analyst raised his price target on the company saying that MAC Cosmetics may drive $4.4bn in incremental company sales from new distribution and strong freestanding store productivity. In his investor note, the analyst noted:
"We anticipate continued double-digit growth for the brand for the foreseeable future driven by its affordable luxury positioning and opportunity for increasing global points of distribution, especially in developing markets. The result would increase overall Estée Lauder Companies sales by 40% from the F2014 base.”
Last month, Credit Suisse analyst M. Steib also raised his target price on the company. In his investor note, the analyst noted:
"We think EL is poised for further growth acceleration during the second half of their fiscal year driven by a strong launch calendar and marketing activities, a recovery in Hong Kong and a likely return to more normalized growth in travel retail.
Estée Lauder was also upgraded by Piper Jaffray and Wells Fargo in March this year. Analyst opinion seems to be overwhelmingly bullish on the company and out of 23 analysts covering the company, 16 have buy ratings. I believe the company can see a meaningful acceleration in growth going forward and hence recommend buying the stock.
