Before the markets opened on Feb. 5, The Estee Lauder Companies Inc. (EL, Financial) reported earnings results for its second quarter of fiscal 2021, which ended on Dec. 31, 2020.
The New York-based manufacturer of prestige skincare, makeup, fragrance and hair care products reported earnings and revenue numbers that beat analyst expectations and provided strong guidance for full fiscal 2021. Shares were up 6% to around $269.19 in mid-day trading following the news.
Earnings results
Revenue for the quarter was $4.85 billion, up from $4.62 billion in the same period a year ago. Meanwhile, GAAP earnings per share increased to $2.37, up from $1.52 a year ago, and adjusted earnings per share increased 21% to $2.61. Analysts had been expecting revenue of $4.49 billion and adjusted earnings of $1.69 per share.
The company surpassed expectations primarily due to strong growth in the skin care segment, online sales and the Asia/Pacific region, partially offset by lower foot traffic in stores and, to a lesser extent, temporary store closures due to the pandemic.
The overall gross margin was 77.7%, up slightly from 77.5% a year ago, while the operating income margin was 21.9% versus last year's 5.6%.
Net sales were boosted by the company's acquisition of Have&Be Co. Ltd. ("Dr. Jart+"), which contributed approximately 3 percentage points of net sales growth. Overall, 10 of the company's brands grew during the quarter, led by double-digit sales growth from the Estée Lauder and La Mer brands.
By region, the Europe, Middle East and Africa area, which is the company's largest market, saw a 5% revenue decline. Meanwhile, Asia/Pacific grew 23%, surpassing the Americas to become Estee Lauder's second-largest market by revenue. Revenue in the Americas declined 19%.
In terms of product category, skin care, which is by far the company's largest product category, saw a 20% revenue increase. Makeup fell 28%, with fragrance dropping 2% and hair care 3%. Other products were down an average of 21%.
The company continues to implement cost-cutting measures as a precaution, primarily through reducing expenses related to advertising and promotion activities, travel, meetings, consulting and certain employee costs. As of the quarter's end, cash and cash equivalents stood at $5.55 billion, while long-term debt was $4.91 billion.
Looking forward
In the third quarter of fiscal 2021, Estee Lauder expects net sales to increase between 13% and 14% versus the prior-year period. Meanwhile, GAAP earnings per share is projected to be between 99 cents and $1.11, while adjusted earnings is expected to increase between 26% and 38% on a constant currency basis. The company also plans to record restructuring costs between 9 and 11 cents per share related to the Leading Beauty Forward programs and its Post-COVID Business Acceleration Program.
For full-year 2021, the company did not provide earnings or revenue guidance. Cost-cutting measures will continue, but once the recovery from the pandemic begins, the company will also once again see in-store and office-related costs, as well as advertising once it feels comfortable that such measures can (safely) bring in increased foot traffic to stores.
Valuation
The trailing 12-month earnings per share give Estee Lauder a price-earnings ratio of approximately 108 as compared to its 10-year median price-earnings ratio of 28. The GuruFocus Value chart, which considers historical multiples as well as past returns and growth and analyst estimates of future earnings, assigns the stock a rating of "significantly overvalued."
Estee Lauder is a prestigious brand name within the skin care and makeup space, with a long history, a well-established customer base and a renewed focus on global growth that has shown tremendous success in recent years. However, in order to see satisfactory capital gains from the stock, investors would likely need to rely on earnings multiples remaining significantly elevated from the historical norm even as the growth story unfolds.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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