Estee Lauder Performs Above Expectation In Q2FY15, Though Currency Headwinds Continue Dampening Growth

Estée Lauder (NYSE:EL) reported its Q2FY15 earnings on Thursday, February 5th.  (Fiscal years end with June). The sales for the prestige cosmetics manufacturer increased by 1% on a year-over-year basis, to $3.04 billion, impacted by a global growth in the demand for its products and a strong holiday season. Net earnings for the quarter grew by 0.74% to $435.7 million and diluted net earnings per common share increased 3% year-over-year to $1.13. Excluding the impact of foreign currency translation, net sales increased 5% and diluted net earnings per common share increased 10%. ^[1]

The company displayed growth despite currency headwinds and attributed the major reasons for its growth to:

• Success in the U.K. and emerging markets
• Strong performance of the makeup and luxury segments
• Sales growth in the online, multi-speciality and freestanding store channels

Estee Lauder announced a string of acquisitions in the  span of two months between October and December, 2014. The company’s last acquisition prior to these was in May 2010, when it acquired Smashbox Beauty Cosmetics.

The companies that Estee Lauder completed acquiring between October 2014 and January 2015 were: 1)  GLAMGLOW, a prestige skin care brand specializing in facial mask treatments; 2) Le Labo, the high end fragrance and sensory lifestyle brand; 3) Editions de Parfums Frédéric Malle, the storied fragrance brand established by the iconic perfumer Frédéric Malle; and, 4) RODIN olio lusso, a luxury skin care brand, offering a selection of luxury skincare oils.

For the second half of fiscal 2015, Estee Lauder has given guidance as follows: constant currency net sales growth estimate of 5% to 6% and earnings per share of 7% to 10%, excluding the effect of the retailer orders accelerated into fiscal 2014 from the rollout of the Strategic Modernization Initiative (SMI). ^[1] In July 2014, some retailers accelerated their sales orders due to the company’s rollout of its last major wave of Strategic Modernization Initiative (SMI), in some locations. While those additional orders benefited fiscal 2014 results, Estee Lauder’s full year fiscal 2015 results will reflect a corresponding adverse effect. The company’s fiscal 2015 full year outlook includes the impact of this shift.

The company also forecasts that the global prestige beauty industry would grow between 3% and 4% and it expects to outpace the growth of the industry primarily by concentrating on its fastest growing product categories, channels, and countries. Estee Lauder also expects its business to be adversely impacted by the reduction of spending by Chinese, Russian and Brazilian travelers and the unfavorable currency headwinds due to the strengthening of U.S. dollars.

In this article, we discuss the trends that impacted the company’s performance in Q2FY15.

We are in the process of revising our price estimate of $85 for Estee Lauder on the basis of its current earnings.

See Our Full Analysis for Estée Lauder

The Hair Care And Makeup Segments Experienced Growth; Whereas The Skin Care and Fragrance Division Lagged Behind

The hair care category experienced  strong growth in operating income which was due to higher net sales (net sales increased 1% to $137.1 million) driven by expanded global distribution primarily in salons, department stores and travel retail for Aveda and from specialty-multi brand retailers for Bumble and Bumble. This, coupled with new product launches, as well as strategically lower investment spending, led to the success of this segment. ^{[1] [2]}

Makeup net sales increased 4% to $1.18 billion, due to the robust growth of the company’s makeup artist brands.  These include:  double-digit growth from Smashbox and the Tom Ford line of cosmetics, the recent launches of Pure Color Envy sculpting lipstick and Perfectionist makeup from Estee Lauder. The expanded distribution network in a number of channels, including freestanding stores, also helped in the growth of the makeup division. ^{[1] [2]}

The skin care net sales increased 1% to $1.27 billion due to the launch of new products such as Advanced Night Repair Eye Synchronized Complex II from Estee Lauder, Clinique Smart custom-repair serum from the Clinique brand, and launches from the company’s luxury skin care brand, La Mer. However, the skin care operating income declined due to the reduced sales from certain heritage brands. ^{[1] [2]}

The fragrance sales decreased 8% to $439.7 million due to the lower sales of some of the Estee Lauder fragrances, as well as certain designer fragrances. The recent launches of Jo Malone Wood Sage & Sea Salt, DKNY, and other such brands along with expanded distribution, partially offset the lower sales in this division. ^{[1] [2]}

Demand For Luxury Products And Travel Retail Boosts Sales In Most Geographies; However, Currency Headwinds and Political Unrest Impact Overall Growth

Driven by new product introductions, the holiday season, expanded distribution and a surge in sales of the makeup and luxury segments, the net sales in the U.S. increased. Estee Lauder’s  net sales for the Americas (comprising of the U.S., Canada, and Latin Americas) increased 1% to $1.202 billion. However, the Americas region experienced a decline in operating income, due to lower sales in Canada and Latin America, as a result of the impact of foreign currency translation. The increased investments in research and development, information technology, multiple acquisitions, led to a decline in operating income by 21% to $120.8 million from the Americas. ^{[1] [2]}

In the Europe, Middle East and Africa Region, the net sales increased in almost all the countries. The net sales from this region increased 3%to $1.212 billion. United Kingdom, the Nordic region, and a number of emerging markets such as Russia, the Middle East, Turkey, South Africa and Central Europe experienced a double-digit constant currency growth. However, sales in Russia were adversely impacted by the weakening of the Russian ruble. Retail sales grew by mid-single digits in travel retail but net sales decreased due to a rebalancing of inventory levels at certain retailers, the timing of shipments attributable to a later Chinese New Year, and the softness of some key foreign currencies affecting travel and consumption. ^{[1] [2]}

In the Asia-Pacific Segment, Australia experienced double digit growth (in constant currency terms) and China experienced robust growth in sales due an increased demand of the heritage brands. On the flip side, the operating income from China received a setback due to increased spending on advertisements. Other regions that witnessed sales growth include Thailand, Japan, and India. In contrast Singapore, Taiwan, and Hong Kong experienced decline in sales. The political unrest in Hong Kong is expected to adversely impact sales growth in the future as well. Net sales in Asia Pacific decreased by 2% to $631.6 million. The operating income from Asia Pacific fell by 7% to $156.8 million due to weak results in Taiwan, Korea, China and Hong Kong. ^{[1] [2]}

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. The Estée Lauder Companies Reports Strong Fiscal 2015 Second Quarter Results, Exceeding Expectations, Estee Lauder News Releases, February 2015 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Estee Lauder Form 10-Q [↩] [↩] [↩] [↩] [↩] [↩] [↩]