Estee Lauder’s (NYSE:EL) share price has gained more than 10% since reporting a strong performance for the last quarter earlier this week. This capped a successful year for the beauty company which realized a 10% growth in sales, a 1.1% increase operating margins and 22% higher in net earnings compared to 2011. The performance was led by the skin care and makeup categories, which grew by 14% and 10% last year, respectively.
The skin care category is a strategic priority for Estee Lauder and generates more than half of its stock value. The makeup business accounts for 40% of its stock price. 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 4Q performance was led by a 14% growth in the skin care category which generates almost half of the company’s sales. The company gained share in this segment during the year, across its markets in North America, Europe, Asia-Pacific and Middle East. This occurred despite some slowdown in the Chinese market. The growth was impressive, particularly in view of the 15% growth in the prior year. Estee Lauder also improved its bottom-line by 25% in the last quarter, with a 100 bps increase in both gross and operating margins over the prior year.
The company has benefited strongly from growth in the prestige beauty market and international expansion. A strong performance in China coupled with growth in travel shoppers and online channels, has been a major driver for Estee Lauder’s international success and double digit growth over the last few quarters.
Outlook for Fiscal 2013
Benefiting from strength in the global prestige beauty market, the company has outpaced the industry growth across its markets, particularly in North America and China. The company however faces weakness in West European markets due to the macroeconomic headwinds and volatility in financial markets. It is also positioning itself cautiously to account for a potential Chinese slowdown. Nonetheless, the company might try to offset the potential slowdown in the Chinese market through expansion into smaller cities and more airports.
In 2013, Estee Lauder plans to further ramp up its global advertising spending to stimulate continued sales growth ahead of the industry. It also plans to increase its pricing and mix as well as reducing promotional expenditures to further strengthen its bottom-line.
We have a revised $64 Trefis price estimate for Estee Lauder stock, at 5% premium to the current market price.