Prestige Beauty Segment Drives Estée Lauder’s Robust Q2 Performance

Estée Lauder (NYSE:EL) continued to outperform its Q2 guidance and global beauty industry growth reporting a strong financial performance last quarter boosted by holiday sales. It recorded 10% sales growth and 15% higher earnings year-on-year. The key markets for sales growth were the U.S. and China and key segments were travel retail and online sales. Healthy top-line numbers also ensured continued improvement in gross margin and operating margin. Estee Lauder is one of the leading cosmetics and beauty care players globally and competes with others such as Revlon (NYSE:REV), L’Oreal (PINK:LRLCY) and Avon Products (NYSE:AVP).

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Skin Care Leads Sales Growth

The global prestige beauty market grew strong in 2011 with sales growth exceeding 8%, which significantly outpaced the mass segment sales growth. This helped Estée Lauder achieve double digit growth last quarter given its comprehensive prestige beauty and luxury products portfolio.

Sales in skin care business, which contributes over 53% to Estee Lauder’s stock price and is a strategic priority for the company, increased 14% y-o-y.

Operating income improved 15% aided by high-margin product launches from Estee Lauder’s heritage brands as well as higher-end prestige skin care products. It also saw success with its company-wide efforts to reduce costs. As a result, gross margin expanded 150 bps and operating margin increased 50 bps last quarter, excluding restructuring charges. In the previous quarter, Estee Lauder had exceeded its operating margin target of 12%-13% by fiscal 2013, two years in advance, and had set a new operating margin target of 14%-15%.

Estee Lauder’s stock swelled by more than 40% in 2011 riding on strong growth momentum in the prestige beauty segment, consistent double digit growth rates and expanding market share, despite weak macroeconomic conditions. The company recently went for a two-for-one common stock split.