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Steven Chen
Steven Chen
Articles (25)  | Author's Website |

Urbem's 'Wonderful Business' Series: Estee Lauder

A moaty play on the SHEconomy and emerging markets

"Our portfolio strategy includes growing existing brands and discovering new high-potential acquisitions that align with our values and offer a long-term outlook for success. To maintain our leadership position, we nurture and preserve each brand’s distinctive identity and purpose. At the same time, we leverage our global distribution, creative resources and operational expertise across all our brands." - Fabrizio Freda, President & CEO of Estee Lauder

New York-based The Estee Lauder Companies Inc. (NYSE:EL) is one of the world’s leading manufacturers and marketers of quality skincare (44% of fiscal 2019 sales), makeup (39% of 2019 sales), fragrance (12% of sales) and hair care (4% of sales) products. Solely focused on prestige beauty, the company sells its products under many well-known brand names to approximately 150 countries and territories.

As of 2019, the Americas represented 32% of the total revenue, but decreased its sales year over year by 5.5%; sales in Europe, the Middle East and Africa, which accounted for 43% of total revenue, grew by 14.5%; the Asia Pacific region contributed the least to total sales but grew the most at 20.7%. The company leverages diversified distribution channels, including department stores (39% of 2018 sales), travel retail (18% of 2018 sales) and specialty multi-retailers (12% of sales).

Estee Lauder owns an enviable portfolio of world-class brands, which digs a wide and deep moat for the business. According to Brand Finance, the company’s Clinique, MAC and namesake brand were among the world’s 20 most valuable cosmetics brands in 2018. Additionally, Women's Wear Daily said these three brands, along with Tom Ford and Jo Malone, were among the 25 most influential beauty brands this year. MAC is also the most followed beauty brand on Instagram and Twitter at the moment. According to Statista, around 19% of female consumers between the ages of 18 and 74 in the U.S. have purchased Clinique, and 20% have purchased MAC.

Based on our observations, consumers are willing to pay up for the perceived higher-quality products from prestige beauty brands. In particular, consumers in the skincare category tend to be risk-averse to untested, unfamiliar products and instead, shop for the products they know or the brand that is highly recognized. Such opinions of prestige brands can take decades to change, allowing entrenched players to demand durable pricing power, and hence, generate a high customer lifetime value.

Estee Lauder is estimated to occupy around 15% of the global prestige beauty market, up from 13% in 2009. We are positive regarding the long-term prospects of the worldwide prestige beauty market given the increase in middle-class consumers embracing premiumization in emerging markets and a growing SHEconomy as economic participation among women is growing both internally and externally. 

In terms of the total beauty and personal care market, the company is the fourth largest, following L’Oreal (XPAR:OR), Unilever (NYSE:UN) (NYSE:UL) and Proctor & Gamble (NYSE:PG). To break it down, the company shares approximately 19% of the makeup market, 9% of the skincare market and 8% of the fragrance market globally.

We believe that the ongoing efforts to diversify and stretch the distribution network widen the economic moat for Estee Launder. For instance, the reliance on North American department stores has been cut in half, from 30% of annual sales in 2009 to 15% in 2018. In the meantime, travel retail now contributes to roughly 18% of total sales, up from 7% in 2009. The company has also been investing in its digital channel. For example, the e-commerce presence bolstered Estee Lauder's geographic coverage to more than 500 cities in China and almost 1,000 cities in India.

From a financial perspective, the following chart demonstrates the consistency of Estee Lauder’s outperformance over its major competitors, including L’Oreal, Shiseido (TSE:4911), Elizabeth Arden (NASDAQ:RDEN) and Christian Dior (XPAR:CDI).

In terms of risk, investors may want to watch out for economic downturns. The recession caused declines in both revenue and operating profit in 2008-09 and operating profit in 2001-02 (see below). In contrast, we noticed a smaller macroeconomic impact on the L’Oreal side (i.e., no decline in 2001-02 and a minimal decline in 2008-09).

Additionally, investors should note the Lauder family’s controlling stake in the company with approximately 86% of total voting rights and 40% of total common stock.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any stocks mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist. He contributes to well-known financial media sites, such as GuruFocus, SeekingAlpha. Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

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