Estée Lauder Posts Strong FY14 Results On Rising Demand For Prestige Cosmetics Globally

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Estee Lauder

Estée Lauder (NYSE:EL) reported its fourth quarter and fiscal year 2014 results on August 15. The manufacturer of prestige cosmetics reported an 8% jump in sales in fiscal year 2014, supported by strong performances from its skin care and make-up product lines. On a quarterly basis, Q4FY14 revenues increased 13% to $2.73 billion compared to a 7% growth in Q4FY13. Surprisingly, currency fluctuations – which had severe repercussions on reported revenues for consumer goods’ companies, had minimal impact on Estée Lauder’s sales throughout fiscal year 2014. In constant currency terms, the company reported revenue growth rates of 8% for entire fiscal year 2014 and 13% for the fourth quarter, similar to its reported revenue growth rates for the respective periods.

During fiscal year 2014, Estée Lauder has eliminated more than $800 million in costs through the implementation of the Strategic Modernization Initiative (SMI). [1] These cost-savings from the SMI initiative helped improve margin performance through higher investments into business-driving activities such as advertising, resulting in operating margins expanding approximately 1.7 percentage points between FY13 and FY14. So far, approximately 93% of Estée Lauder’s sales are SAP-enabled through the SMI initiative, and the company expects to see greater efficiencies in the months and years to come.

We are in the process of updating our $75 price estimate for Estée Lauder’s stock, based on the recently announced results.

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See Our Full Analysis for Estée Lauder

New Product Rollouts and SMI Lift Esteé Lauder’s FY14 Performance

In addition to Esteé Lauder’s largest contributors, the skin care and make-up product lines, fragrances and hair care products also contributed to the company’s top line during fiscal year 2014. Skin care sales increased 7% to reach about $4.8 billion in FY14. Similarly, make-up product sales increased 9% to cross $4.2 billion in revenues. Comparatively, these segments posted sales growth of 6% and 5% respectively in FY13. The acceleration in sales in FY14 was facilitated by two factors.

One major factor that resulted in strong top line performance was the rollout of new products catering to key demographics in growth markets. The skin care segment continues to remain a strategic priority to Esteé Lauder, driven by market share gains from new launches such as Advanced Night Repair Synchronized Recovery Complex II and Micro Essence Skin Activating Treatment Lotion. [2] The company’s luxury skin care brand, La Mer, was among the top 10 stock keeping units (SKUs) in the U.S. during FY14. [2] On a smaller scale, acceleration of orders from some retailers in advance of the rollout of SMI in July 2014 resulted in revenue recognition of $178 million from Q1FY15 into Q4FY14. [1]

The higher revenue base, along with significant cost efficiencies from SMI, resulted in double-digit expansions in segmental operating incomes. Operating income from the skin care and make-up segments alone expanded 20% to reach about $1.7 billion. These two segments alone accounted for approximately 93% of overall operating income in fiscal year 2014. This proportion from skin care and make-up products is expected to decline in the near term, facilitated by key launches in the fragrance and hair care segments.

“Our goal is to grow at double-digit compound rate over the next three years by strengthening our largest brands and making them more locally relevant. We also expect to increase the pace of innovation in key subcategories and deepen our penetration in smaller cities,” said Fabrizio Freda, CEO of Esteé Lauder. ((ref:1))

In the near term, we expect sales and margins to expand through increased proliferation of higher price-point luxury products in local markets, particularly in emerging markets, contributing to an expansion in the company’s global reach. Additionally, greater efficiencies from the SMI initiative should deliver significant cost efficiencies, expanding operating margins going forward.

Luxury Products See Higher Growth Globally

Esteé Lauder, known for its prestige line of cosmetics products, witnessed an acceleration in demand from developed markets in FY14. Revenues from the Americas region reached about $4.6 billion, 7% higher over FY13. Europe, the Middle East & Africa (EMEA) reported much higher growth in revenues, growing about 11% year on year to reach $4.2 billion in FY14. Comparatively, these markets reported growth rates of 5% and 4% a year ago.

The acceleration in sales in these developed markets is an indication of the shift in consumer buying pattern from lifestyle cosmetics products to upscale, prestige products. Mainly in the EMEA market, sales increased at double-digit pace in the U.K, Turkey and other parts of Central Europe, with Germany and France contributing solidly to the region’s growth in net sales. Within the Asia-Pacific region, the strongest double-digit growth was generated in China, Japan, Hong Kong and Singapore, partly due to the launch of new watery lotions across Asia, a local preference that was largely under-represented previously. [2] Going forward, Esteé Lauder is expected to see significant benefits over its peers from the ongoing economic recovery across its geographic portfolio.

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Notes:
  1. SEC 8-K Filing, Investor Relations [] []
  2. The Estée Lauder Companies’ (EL) CEO Fabrizio Freda on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, August 2014 [] [] []