Estee Lauder Delivers Above Guidance Q3 FY15 Growth, Despite Currency Headwinds

Global premium cosmetics giant Estee Lauder (NYSE:EL) reported its third quarter results on May 5th. (The fiscal year ends with June.) The company’s shares rose by 7.5% to a record high $89.84 in the wake of strong earnings. ^[1]

For the quarter, sales grew by 1% on a year-on-year basis to $2.58 billion. Estee Lauder reported a 200 basis-point increase in operating margin and net earnings for the quarter grew by 28% year-over-year to $272.1 million. Diluted net earnings per common share increased 30% to $0.71, compared with $0.54 in the prior year. In terms of constant dollars, Estee Lauder’s net sales grew by 8% and its diluted net earnings per common share increased by 49%. ^[2]

Growth of its new brands in the U.S. market (from where the company derives almost 50% of its revenues), recovery in the emerging markets and in Europe despite the weak currency, healthy sales through the travel retail and the digital channels, and continuous double digit growth of its brands such as M-A-C, Jo Malone London, Smashbox, Bobbi Brown, and Tom Ford were the primary growth drivers for the company. The third quarter growth had been above the high end of the guidance range, and the management is optimistic that the company will end its fiscal 2015 on a buoyant note.

For the fiscal fourth quarter, Estee Lauder has raised it guidance in view of its healthy third quarter performance. The constant currency net sales growth is expected to lie within 6% to 7% and earnings per share to lie between 8% and 10%, excluding the effect of the retailer orders accelerated into fiscal 2014 from the rollout of the Strategic Modernization Initiative (SMI). ^[2].

We are in the process of revising our price estimate of $82 for Estee Lauder on the basis of its current earnings.

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Estee Lauder’s Plans To Revive Demand For Its Established Brands In The U.S.

While most of Estee Lauder brands delivered growth in the U.S. market, demand slowed down for some important brands such as the flagship Estee Lauder and Clinique. The company is working towards regenerating growth for these brands and has launched programs for the next 12 to 18 months. Estee Lauder is also focusing on its younger customer base to generate demand for these brands. Towards this end, the company has recently hired teenage model Kendall Jenner as its brand ambassador. Estee Lauder will also launch newer products under these brands over the recent future. It plans to launch New Dimensions, the new face contouring skincare line in July 2015. ^[3]

According to its management, global prestige beauty is growing at mid-single digits. Some of the products experiencing high growth are contouring treatments and kits, facial oils and masks, eye and lip makeup and high-end fragrances. Its 2014 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.

International Business Led By China

Estee Lauder’s local currency sales from emerging markets (excluding China) grew by 29% with significant growth in Brazil, Turkey, and South Africa. China was one of the regions with highest growth. The constant currency sales in China grew by 14% and most brands witnessed double digit growth. Estee Lauder has stores in 94 cities across China. The rapidest growth was through online sales which more than doubled in Q3 FY15. ^[4]

Focus On Digital And Mobile Channels

Estee Lauder’s compounded annual growth rate for the last five years was 25%. The global technology platform, combined with the local market’s good performance and the online distribution channels, helped the company grow. Taking into consideration the increasing consumer preference of shopping via online or mobile channels, the company aims to bring its high-touch services online. Presently, the company has 130 direct-to-consumer e- and m-commerce sites in 30 countries. It observed that shoppers presently are more prone to buying products digitally through the e-commerce sites, or through free standing stores. ^[4]

Travel Retail

The travel retail sales grew despite several roadblocks. Sales grew by 7% and the strongest sales were in Asia Pacific, led by Japan, which attracted tourists because of the weak yen. In CY 2014, Estee Lauder benefited in travel retail through accelerated growth by some brands with limited distributions and business improvements in Europe, the Middle East and Africa. ^[4]

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1. Estee Lauder to focus on young consumers, new product launches, Reuters, May 6, 2015 [↩]
2. The Estée Lauder Companies Third Quarter Results Exceed Expectations, Estee Lauder, Investor Relations, May 5, 2015 [↩] [↩]
3. Estee Lauder Q3 2015 Earnings Call Transcript, Seeking Alpha, May 5, 2015 [↩]
4. Estee Lauder Q3 2015 Earnings Call Transcript, Seeking Alpha, May 5, 2015 [↩] [↩] [↩]