Estée Lauder Q1’15 Preview: Weakness In Europe And LatAm To Temper Sales Growth

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Estee Lauder

Prestige cosmetics manufacturer Estée Lauder (NYSE:EL) is scheduled to report its first quarter fiscal year 2015 results on Tuesday, November 04th. Sales in fiscal year 2014 (ended June 2014) exceeded analyst estimates, at $10,969 million vs. estimates of $10,896 million. The company’s sales weathered adverse currency headwinds last fiscal year, resulting in exceeding estimates over the prior year period. Additionally, earnings per share for FY14 was also greater than expected, at $3.16 vs. estimates of $3.06, helped by higher sales.

We estimate H1FY15 sales of $5,527 million for Estée Lauder, about 3% lower from H1FY14 sales of %5,694 million. Below, we provide key trends that we expect from Estée Lauder in its Q1FY15. We have a $85 price estimate for Estée Lauder, about 13% higher than its current market price. Year to date, Estée Lauder shares have fared relatively lackluster against the broader S&P500 index, remaining flat compared to a 9.6% gain in the S&P. However, it has outperformed its competitor L’Oréal during the same period, driven by better-than-expected earnings.

See Our Full Analysis for Estée Lauder

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Performance in Latin America and Europe in Focus

Estée Lauder’s sales are cyclical in nature, with sales expanding rapidly in the second half of a fiscal year in comparison to the first half. H2FY14 sales from the Americas region increased nearly 10% to $2,175 million. Comparatively, full FY14 sales from the region increased 4% to $4,572 million. Although the rapid increase in sales in H2FY14 was due to structural changes in Estée Lauder’s distribution networks, such as expanding into smaller cities and reaching underserved areas, the cyclical trend should weigh on revenue growth rate for the upcoming quarter.

Moreover, macroeconomic factors such as increasing inflation in Latin America and deflation in Europe could add to the cyclical slowdown in Estée Lauder sales. Markets such as Brazil, Argentina and Venezuela have been struggling to curb increasing inflation, which is driving down organic sales volumes. Additionally, major Latin American currencies and the Euro have depreciated significantly against the U.S. Dollar, adding pressure to weak organic sales growth. Europe is also witnessing a strong deflationary environment and a broader GDP slowdown, which is reducing discretionary spending from consumers and also putting a lot of pressure on prices and margins for consumer goods companies.

Sales from North America and Asia-Pacific to Expand on Stabler Economies

While Latin America and Europe are likely to contract owing to their individual weaknesses, sales from North America should expand on the improving economic scenario. Similarly, sales from Asia-Pacific should remain strong due to lower currency headwinds on the back of economic stability in most Asian markets in Q1FY15. China is the company’s most valuable market in Asia. And although the slowdown in the Chinese economy is a cause for concern, outbound travel remains a strong driver for the company’s top line. As a prestige cosmetics player, travel retail is an important channel for Estée Lauder. And the company’s three largest markets for travel retail are in Asia, with each of them growing at double-digit pace last fiscal year. We expect North America and Asia-Pacific to see an expansion in reported sales, boosted by a growth in organic sales and supported by strong local currencies in Asia.

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