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Mrinalini Chaudhuri
Articles (517) 

Estee Lauder Looks Promising

June 29, 2015 | About:

Estee Lauder (NYSE:EL) is a global leader in prestigious beauty products. The Estée Lauder Companies Inc. is one of the world's leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products.

The company's products are sold in more than 150 countries and territories under its flagship brand names including: Estée Lauder, Aramis, Clinique, Prescriptives, Origins, Tommy Hilfiger, MAC, Kiton, La Mer, Bobbi Brown, Donna Karan Cosmetics, Aveda, Jo Malone London, Bumble and bumble, Michael Kors, Darphin Paris, Flirt!, Tom Ford Beauty, Coach, Ojon, Smashbox, , Osiao, Marni, Tory Burch, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and GLAMGLOW. Since 1946, The Estée Lauder Companies has built its reputation on the quality of its offerings. It has its presence mainly felt in the USA, UK, China, Middle East, Brazil and South Africa.

It has a huge base of customers – from classic to progressive. With an approximate 1,400 stores globally, EL has started targeting customers in China by planning to open around 90 stores there. When it comes to beauty products, we see that customers are less price-sensitive. They are ready to pay a hefty sum of money for quality products. Global beauty market is growing and EL has good opportunity.

Third-quarter results

Net sales

Net sales during the third quarter was $2.58 billion (which increased by 1% from $2.55 billion in the prior year period).

Makeup: Sales from this segment grew 7% on a reported basis and increased by 14% on a constant-currency basis.

Fragrance: Sales on a reported basis declined by 3% grew 7% on a constant-currency basis.

Haircare: Sales from this segment grew 4% on a reported basis and 10% on a constant-currency basis.

Operating margin

EL reported a 200 bps increase in operating margin during the quarter.

Net earnings

Net earnings during the quarter were $272.1 million (which was an increase of 28% from $213.2 million in the prior year period).

Diluted net earnings

Diluted net earnings per common share during the third quarter was $0.71 (which increased by 30% from $0.54 in the prior year period).

Remeasurement charges

During the fiscal 2015 and 2014 third quarters, the company recorded remeasurement charges of $5.3 million and $38.3 million, equal to approximately $.01 and $.10 per diluted share, respectively, both before and after tax, related to changes in Venezuelan foreign currency exchange rate mechanisms.

Projections for 2015

The company expects the following:

  1. Continued strong top-line growth.
  2. It is planning to increase investment spending to further propel momentum and strengthen its future business.
  3. Constant currency net sales growth to be around 6%-7%.
  4. EPS to be around $2.92 to $2.97 (this translates to 8% to 10% growth in constant currency).
  5. Emerging markets, excluding China rising nearly 30% led by Turkey, Brazil and South Africa.

Drivers to success

The factors driving to the successful third quarter results are as follows:

  1. Disciplined expense management.
  2. Compelling product innovations.
  3. Targeted advertising.
  4. Marketing investments.
  5. Selective distribution expansion.
  6. Strength in the UK.
  7. Emerging markets.
  8. Online, specialty-multi and freestanding store channels.
  9. Cost curtailment.

On a concluding note

The company posted excellent third-quarter results recently and is on a winning spree. The company leveraged into sharply higher earnings per share despite challenges in several countries and continued currency headwinds. The momentum and agility EL has created with the execution of disciplined strategy continues to tap global opportunities in fast growing areas of prestige beauty, while managing changing market dynamics.

Its newly acquired brands have added to incremental opportunity. This company has ever increasing international customer traffic. 40% of the world has connection today and 85% of the internet users shop online. This poses great opportunities for the company. Consumers have inelastic demand and the strong dollar, according to me, should not hinder its demand.

In fiscal 2014, the Europe/Middle East/Africa region represented 38% of net sales and 51% of operating income and Asia/Pacific region represented 20% of net sales and 19% of operating income.

The stock has upside potential attached to it and is here to grow. It is well positioned in the industry and is destined to create shareholder returns. It has tremendous potential in the Chinese and Indian market. Both these markets have a rising cosmetic market. It is exhibiting bullish trend. I feel that the company would create significant results in the near future also. I would recommend this company as a buy.

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