Estee Lauder Is Addressing Its Pain Points Prudently And Its Q2 FY2016 Earnings Might Show The Benefits

Estee Lauder (NYSE:EL) is slated to release its second quarter fiscal 2016 (fiscal year ends in June) earnings on February 5th. After a weak show in fiscal 2015, the company started fiscal 2016 on a note of recovery. On a constant currency basis, Estee Lauder’s net sales grew by 8% in Q1 FY2016 to $2.83 billion and its net earnings grew by 36% t0 $309.3 million. The global premium beauty market’s buoyancy was one of the reasons for Estee Lauder’s stellar performance. However so far this year, the company’s travel retail growth and the demand for its larger brands were falling behind. The company is currently taking strategic actions and releasing a new product line-up to address those areas. We expect Estee Lauder to continue with its recovery in Q2 FY2016 and show even better performance in the future.

We will shortly update our price estimate of $85 for Estee Lauder.

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Strategies To Revive Growth

Estee Lauder’s flagship brands are on the company’s radar right now. Though there is no dearth of growth for its smaller brands, the larger ones such as Estee Lauder and Clinique had been suffering lately. This can be attributed to the sluggish sales in the travel retail channel and in the Asian markets (skincare accounts for almost three-fourths of beauty sales in Asia). The demand for these products in its most important North American market has lost steam. The company has been currently undertaking certain initiatives to rectify these issues.

1. Travel Retail Ramp Up:

• Estee Lauder targeted the revival of the travel retail channel through a host of product launches in October 2015. The products include face contouring, eye makeup, lipstick, serums, treatment creams, and fragrances under some of its brands including Clinique, Tom Ford, M-A-C, Bobbi Brown, and Jo Malone.
• The company also announced Sue Fox as its new Vice President/General Manager, Travel Retail Europe, Middle East, and Africa. Prior to this Fox has served in Estee Lauder’s travel retail  in EMEA and lately was the General Manager, South Africa. According to Olivier Bottrie, Estee Lauder’s President for Travel Retail Worldwide, Fox’s vast experience with Estee Lauder is what made her the best choice for the current role, which entails further developing the company’s Travel Retail business.

2. Targeting A Younger Beauty User Base:

• The company realized that there was a slowdown in the demand for its bigger brands in North America. Hence along with promoting these brands with greater vigor through new product launches, advertisements, and a stronger digital influence, the company has also been trying to capture a younger base of beauty users.
• According to the Bureau of Labor Statistics, for the first time, the 18-34 year old Millennium Generation leads the labor force in the U.S. with 53.5 million workers, surpassing the Generation X’s (35-50 years old) at 52.5 million, and the baby boomers (44.6 million). ^[1]
• The brands like Clinique and Estee Lauder had lost its previous sheen and more importantly, were not able attain a roaring success among millennials. Hence, the company has decided to launch a new line of products to specifically target the younger clientele. Estee Edit is slated to be opened through Sephora in March 2016. The Estee Edit range would comprise of over 70 make-up items and 10 skincare products. Industry experts predict the sales from this line to reach around $60 million in North America in the first year itself. Sephora is one of the most popular beauty retail chains for the millennials. Estee Lauder had been increasingly trying to lure in a younger customer base. The company has also roped in social media sensation, Kendall Jenner, as its newest face in order to make the younger generation identify more with its brands.

3. Innovation And Asia Focus

• In October 2015, Estee Lauder bought a stake in Have & Be Co. Ltd., a South Korean skincare company. Have & Be Co. owns brands like Dr. Jart+ (a manufacturer of innovative skincare products and the brand which helped popularize the BB creams internationally) and Do The Right Thing (a men’s skincare brand that is popular for fusing Korean innovation with New York’s style). The partnership might help Estee Lauder launch more innovative products as Korea is the global hub for fresh beauty innovations. Additionally, this partnership might give Estee Lauder’s sales a boost in Asia (China and Korea are its most important sales region in Asia) where it had been witnessing a slowdown in recent times.

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1. Estée Lauder gives itself new youth, Premium Beauty News, Feb 1, 2016 [↩]