Estee Lauder Q3 FY15 Earnings Preview: Acquisitions In Focus

Global premium cosmetics giant, Estee Lauder (NYSE:EL) is scheduled to report its third-quarter results on May 5th. (Fiscal years end with June.)  For the first two quarters of fiscal 2015, the company’s revenue stood $5.68 billion, reflecting a 0.3% year-on-year decline.

The company experienced a setback in its first quarter due to weak economic conditions in regions such as China and Latin America, underperformance of its travel retail division, and internal issues such as the Strategic Modernization Initiative (SMI) implementation, that led to sellers and distributors pre-ordering products in Q4 FY14 and resulting in a slowdown of orders in Q1 FY15. The company recovered in the Q2 FY15 due to success in the U.K. and emerging markets, the strong performance of the makeup and luxury segments, and sales growth in the online and freestanding store channels.

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.

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 Recent Acquisitions Should Help Bolster Estee Lauder’s Sales In Some Of Its Crucial Business Segments

Estee Lauder’s spate of acquisitions towards the end of 2014 should fuel the company’s growth in Q3 FY15. The companies which it acquired were:

• GLAMGLOW, a prestige skincare brand specializing in facial mask treatments.
• Le Labo, the high-end fragrance and sensory lifestyle brand.
• Editions de Parfums Frédéric Malle, the storied fragrance brand established by the iconic perfumer Frédéric Malle.
• RODIN olio lusso, a luxury skin care brand, offering a selection of luxury skincare oils.

The acquisitions might boost the performance of some of the important business segments in the third quarter. The U.S. consumers were on the lookout for innovative skincare products such as masks and oil. The acquisitions in the beautifying mask (GLAMGLOW) and oil based treatment (RODIN olio lusso) categories could fulfill this demand, and in turn grow the company’s sales.

The newly acquired luxury brands might add on to the success story of Estee Lauder’s existing brands in the luxury category, such as La Mer, Jo Malone and Tom Ford. These brands have been delivering double-digit growth for the company and the newly acquired brands might follow tow. Estee Lauder expects global prestige beauty to continue to grow at 3% to 4% in fiscal 2015 and 4% to 5% thereafter.

Finally, the travel retail segment, one of Estee Lauder’s key growth channels should receive a boost by the acquired brands. Luxury cosmetics is one of the highest selling items through the travel retail channel. For FY 2014 (ended in June 2014), Travel Retail was one of the highest growth channels for Estée Lauder, contributing to 13% of product distribution. The main drivers to the travel retail segment growth were: the launch of new initiatives, an expanded distribution network, an increase in global airline passenger traffic, and accelerated orders. ^[2] (See our article on how travel retail boosts cosmetics sales here).

Estee Lauder’s Performance In China Might Lag, Though the Rest Of Asia Is Expected To Display Growth

The Hong Kong unrest dampened Estee Lauder’s travel retail sales in the last few quarters. During Q1 FY15, sales in China declined primarily due to a shortfall in outbound travelers from China to regions such as Hong Kong. This in turn impacted the travel retail segment in Asia-Pacific. Estée Lauder has a very high market share in the Hong Kong cosmetics market, and the unrest has had a significant impact on sales. Additionally, increased competition from Korean cosmetics manufacturers in the mass and prestige segments lent some pressure to sales from China. ^[3] Due to the strengthening of the U.S. dollars, Estee Lauder expects reduced spending from Chinese travelers in Q3 FY15 as well.

However, we expect continued support from strong brands in Estee Lauder’s fragrance and make-up portfolio to drive growth in the rest of Asia. Also, a recovery in the skin care portfolio following the SMI order acceleration should lend support for sales growth and margin expansion in Q3FY15, particularly in the Asia-Pacific region where demand for skincare products is high.

See Our Complete Analysis for Estee Lauder Here

View Interactive Institutional Research (Powered by Trefis):
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’s 2014 Annual Report [↩]
3. The Estée Lauder Companies’ (EL) CEO Fabrizio Freda on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, November 2014 [↩]
4. The Estée Lauder Companies’ (EL) CEO Fabrizio Freda on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, November 2014 [↩]