Estee Lauder’s Growth Story Is Expected To Continue In The Fourth Quarter Of Fiscal 2015

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Estee Lauder

Global premium cosmetics giant Estee Lauder (NYSE:EL) will report its fourth quarter results on August 17th. (The fiscal year ends with June.) The company had been bravely weathering currency headwinds over the past few quarters and has been topping its management’s guidance. We believe the trend will continue in the fourth quarter of fiscal 2015 with Estee Lauder’s recent acquisitions and product launch initiatives. Additionally, some of the growth drivers that might positively impact the company’s Q4 FY15 earnings might be the rise in demand for its new products in the U.S. market, its slow yet steady growth in the emerging markets, and the growth of its travel retail and digital channels. 

Estee Lauder’s management had guided net sales growth to lie between 6% to 7% and an earnings per share growth between 8% and 10%, excluding the effect of the retailer orders accelerated into fiscal 2014 from the rollout of the Strategic Modernization Initiative. [1]

We will update our price estimate of $82 for Estee Lauder post the upcoming earnings.

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See Our Full Analysis for Estée Lauder

U.S. Market Revival Is Expected To Continue

Estee Lauder derives around 50% of its revenues from the U.S. and hence it is the most crucial market for the company. In the third quarter of fiscal 2015, the company witnessed a revival of demand for most of its brands in the erstwhile sluggish U.S. market. However, a lackluster demand was observed for its most crucial brands, such as the flagship Estee Lauder and Clinique. The company has launched several promotional activities and products under these brands, and will continue to do so over the next few quarters to attempt to revive the demand. The company is currently focusing towards the younger clientèle base, and has hired teenage model Kendall Jenner as its brand ambassador. [2]

On the flip side, there might be further competition for Estee Lauder in the U.S. market with L’Oreal‘s cosmetics brands (such as Maybelline, L’Oreal Paris, and NYX) demonstrating solid growth in the first half of 2015. L’Oreal’s 2014 acquisition, NYX, has been demonstrating explosive growth over the last few years and is a direct competitor for Estee Lauder’s M-A-C brand of cosmetics. NYX displayed around 70% growth in sales in the first half of 2015. In its recent earnings release, L’Oreal spoke about its recovery in the U.S. markets, and that might not be the best of news for Estee Lauder.

Recent Acquisitions Might Help Sales Growth

After a hiatus of around four years, Estee Lauder acquired a series of companies towards the end of 2014. The acquisitions pertained to the prestige skincare segment (GLAMGLOW and RODIN olio lusso) and the high-end fragrance division (Le Labo and Editions de Parfums Frédéric Malle). Read more about Estee Lauder’s earnings here.

How are these acquisitions significant for Estee Lauder’s earnings?

  • The management estimates that the global prestige beauty market is growing at mid-single digits, with products like contouring treatments, facial oils, facial masks, eye and lip makeup, and high-end fragrances witnessing high growth. Hence, since the acquisitions fall under some of these categories, they might further boost the company’s sales.
  • Despite weak international currencies, Estee Lauder’s travel retail channel grew significantly in Q3 FY15 and we expect it to have grown in the fourth quarter, as well. Travel retail is one of the most important growth channels for the company. Luxury cosmetics is one of the highest growth drivers in the travel retail channel. Hence, the new luxury products will further help boost sales through the travel retail channels. [2] The main drivers boosting Estee Lauder’s travel retail sales are the launch of new initiatives, an expanded distribution network, an increase in global airline passenger traffic, and accelerated orders. See our article on how travel retail boosts cosmetics sales here.
  • Estee Lauder’s U.S. growth might be further boosted with the new additions to its product portfolio. According to the management, the customers in the U.S. were searching for newer products like masks and oils. Estee Lauder’s acquisitions in the beautifying mask (GLAMGLOW) and oil based treatment (RODIN olio lusso) categories could help fulfill this demand.

  • A lot of Estee Lauder’s luxury brands, such as La Mer, Jo Malone, and Tom Ford, have experienced double-digit growth over the past and the newly acquired brands might also imitate the same success story.

Hence, we believe that Estee Lauder will be delivering solid growth in the final quarter of its fiscal year 2015, and continue ruling the premium cosmetics segment in the near future.

See Our Complete Analysis for Estee Lauder Here

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Notes:
  1. The Estée Lauder Companies Third Quarter Results Exceed Expectations, Estee Lauder, Investor Relations, May 5, 2015 []
  2. Estee Lauder Q3 2015 Earnings Call Transcript, Seeking Alpha, May 5, 2015 [] []