Estee Lauder (NYSE:EL) posted healthy sales and earnings growth last quarter, led by its Skin Care category. However, the stock slumped 4% after a disappointing growth forecast from its key Asian markets. The prestige beauty company has fueled a significant part of its recent growth through expansion into Asia-Pacific and other emerging markets, but now expects growth to slow down in its major Chinese market. Estée Lauder is one of the leading cosmetics and beauty care players globally and competes with Revlon (NYSE:REV), L’Oreal (PINK:LRLCY) and Avon Products (NYSE:AVP).
Skin Care Continues to Deliver Growth
Estee Lauder’s 3Q performance was led by a 9% growth in the Skin Care category (that generates almost half of the company’s sales) and excellent sales growth in the U.S. Last year, it outpaced the overall prestige beauty market and outperformed rivals like L’Oreal, Revlon and Avon. It posted strong growth in the U.S. and China as well as capitalized impressively on the high growth in the airport travel retail and online channels. However, there has been some pressure on the operating margins in makeup, fragrance & hair care categories, even though its largest segment skin care showed continued improvement. The margins could continue to be under more pressure as the company plans to ramp up its advertising expenses this quarter to support its new product launches and market share growth.
Red Flag In China Disappoints Investors
The company has benefited strongly from the prestige beauty market growth and international expansion last year. Strong growth in China and among Asian travel shoppers has been a major driver for Estee Lauder’s international success and double digit growth over the last few quarters.
As a result, the stock rose 30-40% in 2011, pricing significant growth momentum expectations into the stock. Disappointing growth forecast for the company in Asia, particularly in the key Chinese market, invited a sharp reaction from investors. Nonetheless, the company might try to offset the potential slowdown in the Chinese market through expansion into smaller cities and more airports.
We have a revised $67.55 Trefis price estimate for Estee Lauder stock, at 15% premium to the current market price.