Estèe Lauder (NYSE:EL) is a renowned prestige cosmetics manufacturer with annual revenues of approximately $10.4 billion and a market capitalization of $29 billion. More than 80% of revenues are generated from the sale of skin care and make-up products. Additionally, EBITDA margins for the skin care and make-up product segments are relatively higher than the other segments (fragrances and hair care), at 24% and 23% respectively. The huge contribution to revenues combined with the high margin nature of these segments stretch the combined valuation of skin care and make-up segments to 94% of total value for Estèe Lauder.
In this note, we assess future growth potential for the skin care and make-up segments of Estèe Lauder. We have a $75 Trefis price estimate, which is approximately in line to its current market price.
Asia-Pacific Markets Could Drive Skin Care Sales Higher
Geographically, Estèe Lauder generates 42%, 38% and 20% in total revenues from its three geographic regions, viz. 1) The Americas 2) Europe, the Middle East & Africa (EMEA) and 3) Asia-Pacific, respectively. From the above revenue share, it is difficult to clearly demarcate revenues from the emerging economies from those of developed economies. Revenue contribution from Asia-Pacific increased from 15% in 2007 to 20% in 2013. The revenue share expansion was facilitated by the relatively higher growth rate from the Asia-Pacific market. Between 2007 – 2013, Estèe Lauder’s revenues from the Americas and EMEA grew 3% and 6% annually, while the Asia-Pacific market grew 12% annually.
The success from Asia-Pacific investment is much more resounding in the skin care division. Between 2012 and 2017, the Asia-Pacific region is expected to add close to $12 billion in sales from skin care products, according to Euromonitor.  This is followed by the Latin American market, which is estimated to add approximately a fourth of the $12 billion added by Asia-Pacific sales during the same period.  This enormous demand for skin care products from emerging economies should result in growing skin care sales for Estèe Lauder. This should translate into further expansion in revenue share from the Asia-Pacific market for Estèe Lauder.
Prestige Make-up Brands Take Center Stage in Developed Markets as Customer Sophistication Increases
Contrary to the skin care products segment, where demand is being driven by the Asia-Pacific market, make-up products have witnessed a similar demand surge from Latin American economies. Estèe Lauder’s revenues from the make-up segment grew at an annualized pace of 6% since 2007. Much of this growth is from Latin American economies of Brazil, Argentina, Mexico and Uruguay. In addition to being the world’s largest consumers of fragrance products, Latin Americans have increased their consumption of nail products and BB creams over the past few years, according to research by Euromonitor.
With the developed economies beginning to stabilize, consumers in these regions are loosening their purse strings for discretionary products. The demand for products beyond the BB/CC creams, with multi-benefit combinations, are becoming ubiquitous in developed markets. Combination products such as foundations with anti-ageing serums and nail products with UV protection and anti-ageing properties are expected to penetrate into other markets, pushing the need among manufacturers to develop market innovative products.
Smashbox, a Los Angeles based photo studio-inspired make-up brand that Estèe Lauder acquired in 2010, announced the intention to expand its product portfolio as well as increase its retail presence to TV retailing. A report in the Wall Street Journal indicates Smashbox’s intention to expand its U.S. presence by partnering with the Home Shopping Network (HSN). Through this partnership with the broadcaster, Smashbox would be offering a variety of make-up products such as primers, mascaras and perfecting powders to an expanded customer base. Going forward, entry into multi-benefit products and increasing marketing budgets and retail channels should accelerate revenue growth rate for Estèe Lauder’s make-up product segment.Notes: