Estee Lauder Q1 FY16 Pre-Earnings: Travel Retail Revamp, New Product Launches, And Alliances In Focus

Estee Lauder (NYSE:EL) ended fiscal 2015 (fiscal year ends in June) on a weak note. The company’s travel retail sector – one of its most important growth drivers – suffered due to problems such as the Hong Kong and Macau’s economic crises and the MERS virus attack in Korea. Also, Estee Lauder’s most prominent brands such as Clinique and Estee Lauder experienced lagged demand. Finally, international currency headwinds dampened sales, even further. ^[1] Estee Lauder’s sales for fiscal 2015 witnessed a 2% year-on-year decline and stood at $10.78 billion. ^[2] However, Estee Lauder has geared up with new launches and alliances to recover the weaknesses. For full fiscal 2016, Estee Lauder expects net sales growth to range between 8% to 10% and the company’s recent acquisitions might contribute around 50 basis points to the overall sales growth.

Despite Estee Lauder’s weak performance in fiscal 2015, the management did mention that the company’s revenues grew by 7% year-on-year on a constant currency basis. This rate surpassed that of the global premium beauty market growth rate. The growth drivers were strong performing makeup and fragrance segments, new product launches, and a strong digital presence. The company is currently concentrating on the product launches and advertising initiatives to drive further growth. ^[1]

Our price estimate of $85 for Estee Lauder is slightly above the current market price. we will update our estimate post the earnings release.

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Estee Lauder Plans To Revive Flagship Brands

Estee Lauder’s smaller brands are exhibiting double-digit growth, however, the flagship brands such as Estee Lauder and Clinique are generating lukewarm responses from their users. A major reason is that for the mentioned brands, most of the sales take place through the travel retail channel and through the Asian markets (where skincare generates around 70% of beauty sales). The company had mentioned in its Q4 FY2015 call that it had been taking initiatives towards reviving the flagship brands through new launches, more advertisements, and a stronger digital presence. ^[1]

Travel Retail Focus

Estee Lauder recently launched a vast array of products under several brands including Clinique, Bobbi Brown, Jo Malone, Tom Ford, and M.A.C., at the Tax-Free World Association (TFWA) Exhibition, held at Cannes in October. The products include face contouring, eye makeup, lipstick, serums, treatment creams, and fragrances. These new products will be available across Estee Lauder’s travel retail channel. ^[3]

Estee Lauder’s travel retail has been lagging behind over the past few quarters. Travel retail is one of the biggest revenue generators for the company. The company, having witnessed double-digit growth through this channel is recently lagging behind on account of macroeconomic slowdowns in different parts of the world, especially in China – one of its top markets for travel retail. Estee Lauder’s management spoke about these issues as temporary hindrances and said that the travel retail channel will bounce back very soon. The new product launches can further help the channel to revive sales growth.

Partnership With South Korean Dr. Jart+

Estee Lauder recently announced the purchase of a stake in Have & Be Co. Ltd., the South Korean company which owns skin care brands such as Dr. Jart+ and Do The Right Thing. The deal is expected to be completed by the end of 2015. (Read Press Release.)

The Seoul-based Dr. Jart+ manufactures innovative skincare products such as moisturizers, cleansers, masks, and serums. The brand has been instrumental in spreading the popularity of BB creams from Korea to the rest of the world. The brand, which most appeals to millennials, is sold across the world, specifically in Asia and the U.S., through stores and specialty-multi and digital channels.

Men’s skincare brand, Do The Right Thing (DTRT) is famous for fusing Korean innovation with New York’s style. DTRT’s products are sold in Korea and the U.S. through Sephora and BirchboxMan.

 Reasons Why This Partnership Might Be Important For Estee Lauder?

• Korea is considered as one of the centers for innovative beauty products and the partnership can open doors for Estee Lauder to launch a newer, more innovative range of products.
• Estee Lauder’s recent weak performance in Asia can be recovered to some extent with the alliance with an important player in the region. China and Korea are the company’s most important sales regions in Asia, and the acquisition can boost Estee Lauder’s performance in those regions.

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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 [↩]
3. The Estée Lauder Companies prepares for key launches at Cannes, The Moodie Report, September 3, 2015 [↩]