Is Estee Lauder Playing Down Its Japan Woes?

The recent events in Japan caused us to review how much Asian markets contribute to Estee Lauder’s (NYSE:EL) growth. While we see no reason why Estee Lauder should change its 2013 goals of broadly improving operating margins to the range of 13% – 14% and drawing over 60% of its sales from outside U.S., we were somewhat surprises that Estee Lauder stood by its fiscal-year forecast for 2010. The company still expects sales to rise 8%-10% excluding foreign exchange impact, in the fiscal year ending June 30’ 2011. Estee Lauder competes with other leading beauty and consumer companies such as L’Oreal (PINK:LRLCY), Revlon (NYSE:REV) and Avon (NYSE:AVP) with its portfolio of well known brands like Aramis, Clinique, Aveda, La Mer and its flagship Estee Lauder brand.

We currently value Estee Lauder with a $71.65 Trefis price estimate of its stock, which is around 20% below its current market price.

Asia-Pacific, a Growth Engine for Estee Lauder

Asia Pacific contributes close to 20% of Estee Lauder’s sales from just 15% in 2008. ^[1] While the double-digit growth rates in emerging economies such as China and India are partly responsible for this, developed markets in Asia such as Japan still contribute a meaningful 4%-5%. It seems unlikely that if sales were to slow in this region either from the earthquake or from a slowdown in spending, other regions would be able to compensate for this loss, especially when other affluent economies such as the U.S. and those in Western Europe are still recovering from the downturn.

Skin Care is Popular in the Asian Market

Skin care has been gaining prominence in Estee Lauder’s portfolio rising from 38% of total sales in 2008 to current levels of close to 42%. Skin care product segment is the most significant to Estee Lauder and makes up almost 52% of our $71.65 Trefis price estimate of Estee lauder’s stock. What’s more, it is poised for healthy growth in the future backed by anti-aging skin care and the relatively new range of skin care for men, which is supporting already healthy growth in skin care products. ^[2]

Airports a Significant Source of Sales for Estee Lauder

Estee Lauder makes beauty care products and being consistent with their premium image, sells them through high street department stores, upscale perfumeries and pharmacies, and prestige salons and spa…basically any place that maintains an aura of exclusivity to validate their its pricing. The travel retail channel, which includes duty free shops at airports, railway stations and inflight shopping makes up almost 10% of Estee Lauder’s sales and so this will remain an important area of growth.

Given the events in Japan, we want to monitor these channels for signs of slowing growth and whether or not it will impact company wide sales.

We currently value Estee Lauder with a $71.65 Trefis price estimate of its stock.

1. Estee Lauder Investor Presentation, Company Website, March 2011 [↩]
2. China, the next engine of growth for Estee Lauder, Trefis, Jan7′ 2011 [↩]