Estèe Lauder Earnings Preview: APAC Sales, Use Of Cash In Focus

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Estee Lauder

Estée Lauder (NYSE:EL) is expected to report its fiscal third quarter results Friday, May 02, before markets open. In the six months into fiscal 2014 (fiscal years end with June), the company reported sales of approximately $5.7 billion. The third quarter is usually the weakest quarter for Estee Lauder. Last fiscal, the company reported revenues of approximately $2.3 billion during the Q3 period, 2% higher than revenues from a similar period in FY12.

Q3FY14 sales are expected to be weaker than third quarter sales from previous fiscals, impacted by tough weather conditions in North America. Estèe Lauder derives the largest percentage of revenues from the Americas region, and the weak sales environment should strain overall top line growth this quarter for the company. Operating profit margins for the company are also expected to remain close to 10%, lower than the prior two quarters. Higher investments into SG&A activities in Q3 and Q4 will strain operating margins for its fiscal year for Estèe Lauder.

See Our Full Analysis for Estée Lauder

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APAC Performance in Focus

Revenues from the Asia-Pacific market for Estèe Lauder increased about $110 million over fiscal 2012, reaching $2.12 billion for fiscal 2013. Excluding currency volatility of 1%, constant currency revenues grew 6% in fiscal 2013. China and Hong Kong were the biggest drivers for the company’s APAC strategy. Together, sales from these geographies expanded by approximately $160 million, higher than the overall APAC growth observed in fiscal 2013. The rapid growth in China and Hong Kong for Estèe Lauder was offset by lower net sales in Korea and Japan. The Korean market continued to remain a challenging economic environment, while sales in Japan were impacted by the weakening Yen.

For the six months into fiscal 2014, net sales for the region were 6% lower at $643 million. Currency headwinds were approximately 3%, which indicates a contraction in overall sales for the company on constant currency terms. In addition to weakness in Korea and Japan, the Chinese market witnessed a contraction in sales during the Q1-Q2 period of FY14. The sales contraction was a result of an acceleration in orders during the similar period in FY13, facilitated by the Strategic Modernization Initiative (SMI). Excluding the impact of this order acceleration, net sales would have increased 1% on a reported basis.

Estèe Lauder Could Put Cash Pile To Use

At the end of December 2013, Estèe Lauder’s cash reserves stood at approximately $1.75 billion. Over the past three years, the company has been piling cash, which has expanded its cash and cash equivalents balance from approximately $320 million in 2007. During the same 2007 – 2013 period, its Debt/Equity ratio has declined from 1.00 to 0.35, indicating a strong improvement in its operating performance.

We believe inorganic growth in the APAC market would be the most effective way to put its cash to good use. The company has not made an acquisition in the past four years, since acquiring Smashbox Beauty Cosmetics in May 2010. With a strong foothold in the prestige beauty space, Estèe Lauder might be looking to bolster its top line growth rate in the APAC region.

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