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Estée Lauder: Ecommerce, Acquisitions And Millennials To Drive Growth

May 15, 2015 | About:

Estée Lauder (NYSE:EL) is a cosmetics company that manufactures, markets, and sells prestige skin care, makeup, fragrance, and hair care products worldwide and has a portfolio of over 30 brands. The company posted a robust third-quarter fiscal 2015 results and proved its dominance yet again. As a result, shares of the company moved up and hit a new 52-week high after the results, with year-to-date gains of over 15%.

Stellar quarter

Estee Lauder registered sales growth of around 8% year-over-year in constant currency terms, much higher than industry average of about 1.5% and managed to beat company’s guided range of 6% to 7%. After correcting for currency movements, sales growth was 1% year over year. This was on the back of robust sales in Americas, United Kingdom and APAC region of 8%, 10% and 5% year over year, respectively. As a result, net sales came in at $2.58 billion, beating consensus estimates of $2.55 billion.

The company’s gross profit expanded 1% year over year to $2.07 billion. Gross margin increased by 10 basis points, or bps. Operating income surged 6% year over year to $397.2 million, while operating margin expanded 70bps on the back of lower operating expenses.

Online sales and millennials to drive growth

Online sales channel continued to show exceptional performance in the quarter. The company currently operates 130 direct-to-consumer and e-commerce sites in 30 countries. The company attracts around 325 million online visitors globally each year. Collectively, this generates about 60% of global online sales and retailer sites generate 40%. Together, this contributes over 25% growth every year.

China is a focus market for Estee Lauder, and according to a report from Kline Group China, has become the largest internet cosmetics market in the world. In 2013, the value of beauty market in China was US $54.32 billion and is estimated to increase up to US $113.9 billion in 2017. Skincare is the most popular category in online beauty market, with more than two-thirds of the market and the make-up products account for 20% sales.

With Estée Lauder having firm footing in the e- and m-commerce space, and product line covering the major market, this presents a huge growth opportunity going forward. In the current fiscal year, online sales is estimated to grow to 30% of net sales.

Estée Lauder is also planning to woo the millennials. To this effect, Fabrizio Freda, the President and CEO, announced the revitalization of two of the company’s iconic brands – Estée Lauder and Clinique – over the next 12 to 18 months. This includes launching entry-point products for Clinique and new skin creams for Estee Lauder.

Shopping for growth

Estée Lauder recently announced a string of three acquisitions toward the end of last year as part of its growth strategy. In October 2014, the global premier cosmetics giant acquired RODIN olio lusso. The brand provides a selective line of premium, sensorial products targeted at consumers of all ages and skin types.

In November 2014, Estee Lauder completed its acquisition of Le Labo. In addition, the cosmetic giant also announced acquisition of Editions de Parfums Frédéric Malle.

In December 2014, Estee Lauder completed the acquisition of GLAMGLOWE. "The acquisition of GLAMGLOW marks the beginning of a very exciting future for the brand we created,” said Glenn and Shannon Dellimore. “We are thrilled to be joining The Estée Lauder Companies.”

These acquisitions will complement the company’s product portfolio and also increase the addressable market size.

Wrapping up

Estée Lauder expects the growth momentum to continue. In fact, buoyed by stellar third-quarter results, the company revised upwards the fiscal 2015 earnings guidance. Earnings per share are expected to be in the band of 8%-10% versus the earlier guided range of 7%-10%. Top-line is expected to grow in the range of 3% to 4% in constant currency terms.

The company has seen seven upwards revision in earnings estimates during the last 30 days and no downward revision. Analysts expect next five year growth to be at a CAGR of 9.33%. With ecommerce booming, and bolstering of brand equity through spate of multiple acquisitions will definitely help the company to sustain the growth momentum.

Hence I recommend a buy for long-term.


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