Beauty products play a pivotal role in many consumers' day-to-day life as it helps them to look better and more presentable. Therefore, beauty product companies strive to get a little space in someone’s handbag or on the shelves of the bathroom. Estee Lauder Companies Inc. (EL, Financial) is one of the players performing well in the industry.
The company has posted excellent first quarter 2016 results, including an 8% increase in net sales. Further, the company has taken several initiatives to upgrade and modernize its systems and processes.
Estee Lauder is a manufacturer and marketer of several beauty products and operates in four main categories: skin care, makeup, fragrance, and hair care products.
The company’s products are sold in over 150 countries and territories under brand names including: Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy Hilfiger, M·A·C, Kiton, La Mer, Donna Karan New York, DKNY, Aveda, Bumble and bumble, Michael Kors, Darphin, Tom Ford, Smashbox, Ermenegildo Zegna, AERIN, Marni, Tory Burch, RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle and GLAMGLOW. Bobbi Brown and Jo Malone London are primarily for younger customers.
Estee Lauder sells its products through limited distribution channels that include points of sale consisting of upscale department stores, specialty retailers, upscale perfumeries and pharmacies, and prestige salons and spas. It also sells its products through company-operated stores and its own authorized retailer websites.
Strong first quarter results
On Nov. 2, 2015, Estee Lauder released strong financial results for its first quarter of fiscal 2016 ended Sept. 30, 2015. The company’s total revenue increased 8% to $2.83 billion, compared to $2.63 billion in the prior-year quarter. Net earnings and diluted net EPS increased 36% to $309.3 million and 39% to 82 cents. Excluding the impact of foreign currency translation, net sales increased 15% and diluted net earnings per common share rose 58%.
In the reported quarter, Estee Lauder’s gross profit increased 8% to $2.257 billion, compared to $2.094 billion in the previous year quarter. Gross margin remained uniform at 79.6%. Operating income increased 30.23% to $453.2 million, while operating margin increased to 16%.
Estee Lauder ended the quarter with cash and cash equivalents of $408.5 million and long-term debt of $1.612 billion.
Segments’ performance in first quarter 2016
In the skin care division, Origins and La Mer were the strongest contributors to achieve strong numbers. Estee Lauder in China and Hong Kong remained cold due to difficult retail environments. Clinique was also unable to perform due to a difficult comparison with greater launch activity in the prior-year period. Estee Lauder’s makeup sales rose mainly due to excellent growth from the company’s makeup artist brands and strong double-digit growth from Smashbox and Tom Ford.
In fragrance, luxury brands like Jo Malone London and Tom Ford posted strong double-digit gains. Aramis and Designer Fragrances division also posted higher sales. The hair care category’s growth benefited from the expanded global distribution, primarily in salons, freestanding stores and travel retail for Aveda and from specialty-multi brand retailers for Bumble and bumble.
Sales in the Americas were supported by double-digit growth from some of the makeup, luxury and designer fragrance brands, and solid growth from the hair care brands. Further, in constant currency, sales in Canada and Latin America rose double-digits. Sales in Europe, the Middle East and Africa saw double-digit growth led by the United Kingdom, France, Germany and Italy, and a number of emerging markets, including the Middle East, Russia, and Turkey.
Sales in Asia/Pacific region saw double-digit growth in Japan, Australia, and the Philippines. On the other hand, Hong Kong, China, and Singapore reported lower sales.
Projections for second quarter
For second quarter 2016, Estee Lauder expects its total revenue in the range of 6% to 7% on a constant currency basis. The company expects that the acquisitions made in the beginning of the second quarter of fiscal 2015 will contribute approximately 70 bps to its overall sales growth in the second quarter of 2016.
Estee Lauder expects diluted net EPS, including the negative impact of foreign currency translation and acquisitions, in the range of $1.04 to $1.08 per share. Acquisitions are estimated to dilute EPS by approximately 1 cent. Further, on a constant currency basis, diluted EPS are expected to increase 1% to 5%.
Projections for fiscal 2016
For fiscal 2016, Estee Lauder expects net sales growth range of 8% to 10% on a constant currency basis. The company also expects diluted net earnings per share, including the negative impact of foreign currency translation and acquisitions, in the range of $3.10 to $3.17. Further, on a constant currency basis and adjusting for the effect of the accelerated retailer orders, diluted earnings per share are expected to grow between 10% and 12%. Estee Lauder expects that its recent acquisitions will contribute approximately 50 basis points to its overall sales growth.
Growth and initiatives
Estee Lauder in China could not provide remarkable earnings, but the company expects double digit growth from China in the future. The main reason behind this expectation is that 14 brands (which is almost half of the company’s portfolio) are sold in 100 cities in China. Estee Lauder also expects to emerge in 300 cities in China.
To enhance its portfolio, Estee Lauder has made several acquisitions. On Dec. 17, Estee Lauder has completed its investment in Have & Be Co. Ltd., the South Korean company behind skin care brands Dr. Jart+ and Do The Right Thing. Last January, the company completed the acquisitions of of Editions de Parfums Frederic Malle, the storied fragrance brand established by the iconic perfumer Frederic Malle and GLAMGLOW, the Hollywood skin care brand focused on fast-acting treatment masks designed to deliver stunning, camera-ready results.
To sustain growth, Estee Lauder is optimizing resource allocation to the best opportunities. The company plans to transform its global technology infrastructure to fundamentally change the way it delivers information technology services internally. Estee Lauder expects that this initiative will result in related restructuring and other charges of approximately $40 million to $50 million, primarily consisting of non-cash asset write-offs and will generate a positive return on investment.
(Source: Company website)
On a concluding note
Estee Lauder is a rock solid company with a solid financial position, reasonable debt levels, notable return on equity, good cash flow from operations, solid stock price performance, and expanding profit margins. Further, over the past several quarters, Estee Lauder has posted strong results with double-digit EPS growth.
As per statista.com, the revenue of the U.S. cosmetic industry is estimated to amount to about $62.46 billion in 2016 and therefore, Estee Lauder has enough room to grow. Additionally, with the recent quarterly release, the company is aiming for a better future and is all set to create greater shareholder returns.
Disclosure: I do not hold any position in the company.
