Waning Demand For Flagship Brands, Slowdown In Travel Retail Lead To Weak Quarter For Estee Lauder

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Estee Lauder

Estee Lauder (NYSE:EL) released its fourth quarter fiscal 2015 results on August 17 (fiscal year ends in June). The company demonstrated a lackluster performance. The most important factors pulling down growth were the economic crisis in Hong Kong and Macau, and the MERS attack in Korea, which, in turn, decelerated travel retail sales, one of the most significant growth drivers for the company. Additionally, the slowdown of sales of its biggest brands, Estee Lauder and Clinique, resulted in slower growth in America and Asia. Finally, weak international currency provided headwinds to the already decelerating sales. [1]  For Q4 FY2015, Estee Lauder’s net sales were $2.52 billion, compared with $2.73 billion in the prior-year period. Adjusting for the impact of the accelerated orders due to the earlier implementation of its Strategic Modernization Initiative, net sales in constant currency terms, would have increased by 7%. For the full fiscal year 2015, Estee Lauder registered sales to the tune of $10.78 billion, reflecting a 2% year-on-year decline. [2]

In contrast to one of the strongest performance in its history by L’Oreal in the last quarter, Estee Lauder seemed to have presented an unimpressive performance in the same time period. Though the company attributes economic crises to its slowdown, we believe Estee Lauder really needs to chalk out a more sturdy and resilient growth plan, if it wishes to maintain its dominant position in the premium beauty segment.

We will update our price estimate of $82 for Estee Lauder shortly.

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See Our Full Analysis for Estée Lauder

Flagship Brands, Estee Lauder And Clinique, Lag Behind

Though Estee Lauder’s mid and smaller sized brands experienced double-digit growth, its flagship Estee Lauder brand and Clinique have been lagging behind. One of the reasons for this was that the Lauder and Clinique brands are much bigger in size with a broader distribution channel. A significant portion of their sales takes place through the travel retail channels and in the Asian markets where skincare contributes to almost 70% of beauty sales. The weak performance in both these channels adversely impacted the growth of these two brands. The smaller brands, on the other hand, are targeted at specific consumer segments and hence the growth can be achieved more easily. [1]

The company feels that these brands are some of the strongest pillars for advancements and hence, is undertaking initiatives to improve their performance. Clinique has an appeal with the millennials as some of its products are available at the entry price points in the premium category. The company has planned a host of new launches for Clinique in the coming quarters, and is also focusing on more aggressive marketing of the brand. For the Estee Lauder brand, the company has recently hired teenage model Kendall Jenner as its brand ambassador to increase its appeal to younger consumers. Estee Lauder is also focusing on the digital advertising and social media publicity to rev up the demands for these brands. [1]

Has Travel Retail Lost Steam?

Estee Lauder’s travel retail sales, that demonstrated double-digit growth in the past, have been lagging behind lately. The management attributed the slowdown to the decline in sales in Asia, specifically Hong Kong, Macau, and Korea. Estee Lauder’s travel retail channel had been developed with a  strong focus on Asia. However, recently, the economic and natural calamities, such as the macroeconomic slowdown in China and the spread of the MERS virus in Korea, have caused a decline in travel, and consequently a deceleration in the travel retail sales growth. This was compounded by the economic crises in Brazil and Russia, as well. The travel retail growth for Q4 FY2015 had been 6%, but the management claimed that the growth trend has been solid even till the third quarter. [1]

The company believes that the setbacks are temporary and Estee Lauder will continue demonstrating solid sales from this channel. However, given travel retail’s growth rate decline over consecutive quarters, a lot of Estee Lauder’s overall underperformance can be attributed to this channel for the time being.

The Staying Power Of The Brand Despite Currency Headwinds And Slowdown In Key Regions

Estee Lauder’s management spoke about the 7% year-on-year growth of the company (on a constant currency basis), which surpassed the global premium beauty market growth and emphasized how this was achieved despite the slowdown in crucial business regions, such as U.S. and China, along with the adverse impact of currency headwinds. This was possible due to the robust performance of its makeup and fragrance segments, new product launches, and a strong digital presence. The company is focusing on the product launches and advertising initiatives to drive further growth in the future. Over the fiscal year 2016, Estee Lauder plans on considerably expanding its brand presence via TV, digital, in-store, and print advertisements. [1]

Full Fiscal 2016 Guidance [2]

  • Net sales growth between 8% and 10% in terms of constant currency.
  • Company’s recent acquisitions might contribute to around 50 basis points to the overall sales growth.
  • Acquisitions are estimated to dilute earnings per share by approximately $.05.
  • On a constant currency basis and after the adjustment for the effect of the accelerated retailer orders, diluted EPS is expected to grow between 8% to 10%.

See Our Complete Analysis for Estee Lauder Here

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Notes:
  1. Q4 Fiscal 2015 Earnings Conference Call, Estee Lauder, August 17, 2015 [] [] [] [] []
  2. The Estée Lauder Companies Reports Strong Adjusted Constant Currency Sales and Earnings Growth in Fiscal 2015 Fourth Quarter and Full Year, Estee Lauder News Release, August 17, 2015 [] []