The Week That Was For Beauty Companies: Estee Lauder, L’Oreal, Avon

This week premium beauty giant, Estee Lauder (NYSE:EL), had entered into a strategic alliance with a leading Korean beauty company. We believe that Estee Lauder wants to strengthen its Asian presence, as well as give a boost to its innovative product array, through this move.  L’Oreal (OTC:LRLCY) is focusing on Asia too, with the expansion of its Dermacenter presence in travel retail, which will help the traveling consumers in receiving specialized beauty advice and products suited to their skin. Being the beauty leader in digital initiatives, L’Oreal is also aiming to educate its employees about the recent trends in digital marketing through a partnership with New York-based General Assembly. Finally, the fate of Avon Products (NYSE:AVP) still looks bleak with no buyer offering to purchase a stake in the company. We expect Avon’s upcoming Q3 2015 financial results to reflect its previous poor performance.

Estee Lauder

On October 25^th, Estee Lauder announced that it was about to buy a stake in Have & Be Co. Ltd., the South Korean company owning skin care brands like Dr. Jart+ and Do The Right Thing. The deal is expected to be completed by the end of 2015. (Read Press Release.)

Dr. Jart+ is a Seoul-based skincare brand that manufactures innovative products meant for specific skin care needs. The brand name is inspired by the phrase “Doctor Joins Art” reflecting the brand image of a fusion of dermatological science and art. The brand has the greatest appeal among millennials. Dr. Jart+ is sold across the globe, specifically in Asia and the U.S., through stores and specialty-multi and digital channels. Dr. Jart+ has been one of the companies instrumental in the rapid spread and popularity of BB creams across the globe. The company’s other products include moisturizers, cleansers, masks, and serums.

Do The Right Thing (DTRT) is a men’s skincare brand that combines Korean innovation with New York’s style. DTRT’s array of  cleansers, lotions, moisturizers, and serums are sold in Korea through different channels and in the U.S. through Sephora and BirchboxMan.

The global consumer views Korea as a hub for innovative beauty products, hence the partnership with the brand can present Estee Lauder with a fresh new line of products. Also, Estee Lauder had been recently experiencing a lagging demand from the Asian markets on account of the slowdown of sales through travel retail channels. Hence, this alliance might also boost Estee Lauder’s growth in the Asian markets.

Recently, Estee Lauder has also launched a host of new products through its travel retail outlets in order to give a fresh lease of sales boost through this distribution channel. Estee Lauder is slated to release its Q1 FY16 results on November 2nd. Do keep an eye out for our earnings preview which will be published soon.

Estee Lauder’s stock price lost almost 1% over the last week through Friday . We have a  price estimate of $85 for Estee Lauder’s stock which is near the current market price. For the year 2015, we estimate revenues of around $11 billion and EPS of $2.83, both almost in line with the consensus estimate.

L’Oreal

L’Oreal has decided to expand its Dermacenter concept to travel retail Asia, featuring services such as ‘healthy skin treatments’ a tool that can provide customized skin care treatments to travelers. The ever growing concern of pollution in a lot of Asian countries makes L’Oreal hopeful about the popularity of this concept. Making dermatologist interactions available to travelers during their journeys and helping them heal, preserve, or improve their skin health seems like an attractive concept to boost sales. The traveling consumers will, in turn, have access to premium beauty brands such as Vichy, LiftActiv, La Roche-Posay, and so on. L’Oreal’s first Asian Dermacenter was launched in Hong Kong in 2014, and is now present in locations including Igazu downtown, Bangkok, and Seoul. L’Oreal considers the travel retail channel to be the “sixth-continent” in terms of the number of consumers, and believes that this channel might significantly aid the company in its one  billion new customer target by 2020. ^[1] Currently, L’Oreal is also focusing on the Indian subcontinent for its further growth.

L’Oreal has also recently entered into a partnership with New York-based General Assembly, a digital training specialist company. The partnership will result in an online learning platform, called ‘The Essentials Of Digital Marketing,’ for L’Oreal employees. This will help L’Oreal’s marketing team in learning about the recent trends, new strategies, and upcoming technologies in the arena of digital marketing. L’Oreal executives will have access to 70 interactive e-learning modules at their disposal. The company targets to train its 7,000 employees across the globe in the next 18 months. The new partnership comes shortly after L’Oreal’s release of an online beauty tutorial on YouTube, which helps older women with advice regarding beauty products’ usage. ^[2]

Earlier in September, the company has started its research to offer connectivity through its makeup products via the Internet of Things.

L’Oreal is the most advanced beauty company in terms of undertaking digital initiatives. The importance that the company attributes to digital media was further proven by the company’s creation of a new position of the Chief Digital Officer in 2014. The company’s online sales grew by 30% in 2014 and contributed to around 6% of its total revenues. L’Oreal currently has almost 700 employees to further expand its eCommerce reach. ^[3]

L’Oreal’s stock gained around 1% over the last week through Friday. We have a  price estimate of $36 for L’Oreal’s stock which is around 5% below the current market price. For the year 2015, we estimate revenues of around $32 billion and EPS of $1.50, while the consensus estimate is around $28 billion and $1.37, respectively.

Avon Products

Avon Products is about to release its Q3 2015 earnings results on November 4th. Currently, Avon is attempting to sell-off a part or whole of its business, on account of major setbacks in its financial performance. The company underwent more than 70% share-price erosion over the last year, its cash position is deteriorating, and its debts are too high. Avon’s bonds have been rated as junk by Moody’s. Though the company was in talks with a few private equity firms, nothing has materialized as of now. Buying Avon’s stake might not make economical sense to any of its peers or to a private equity firm currently. In case the company fails to find a buyer, the outlook for Avon looks significantly bleak, currently. Avon’s direct selling model has long been an outmoded selling method in this era of retail outlets and online shopping. Also, Avon’s primary selling points are its active representatives and the company is currently witnessing significant erosion in its active representative base. The representatives are contractual workers, consequently, with the improvement in economic conditions in nations such as the U.S. having created more permanent jobs, thus making the representative position less appealing to the job seekers. Along with all these, the currency headwinds in its primary areas of operations are also another roadblock in Avon’s performance. You can read in detail more about Avon’s current state, here.

Avon’s stock gained around 1% over the last week through Friday. We have a  price estimate of $3.82 for Avon’s stock which is slightly higher than the current market price. For the year 2015, we estimate revenues of around $7.5 billion and EPS of $0.34, both in line with the consensus estimate.

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1. L’Oreal Expands Dermacenter Concept In India, Cosmetics Design Asia, October 22, 2015 [↩]
2. L’Oréal signs deal with digital training specialist General Assembly, Global Cosmetics News, October 23, 2015 [↩]
3. L’Oreal’s (LRLCY) CEO Jean-Paul Agon on Full Year 2014 Results – Earnings Call Transcript, Seeking Alpha, February 13, 2015 [↩]