Estee Lauder’s Dynamic Strategy Of Growth Based Investment Allocation Led To An Impressive Second Quarter Fiscal 2016

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Estee Lauder (NYSE:EL) reported a strong second quarter fiscal 2016 (fiscal year ends in June) on February 5th. While its reported net sales increased by 3% to $3.12 billion, its net earnings rose by 2% to $446.2 million, and its net earnings per common share grew by 5% to $1.19. On a constant currency basis, the net sales and net earnings per common share increased by 8% and 15%, respectively. [1] Estee Lauder shares a symbiotic relationship with the global premium beauty industry. The company is one of the primary drivers to bolster the industry’s growth and the resilient nature of the industry, in turn, had been aiding Estee Lauder in its  current success. Estee Lauder is growing at twice the pace in which the premium beauty market is growing. The company isn’t reliant on one particular channel, product, or country, and that acts as a buffer towards regional slowdowns or political problems. It was proactive in picking up market cues and reallocating capital investments as per situations demanded, for example, it decreased investment in the slow Hong Kong market and increased the same in the U.S., U.K., and Canada as demand rose in those regions. In travel retail, Estee Lauder expanded into Europe due to an increased tourist influx. The company ramped up investments in free standing stores and eCommerce due to the growth in the direct-to-consumer business. [2]

In Q2 fiscal 2016, the company’s strong performance has been especially evident in makeup and luxury brands, direct to consumer channels, and the EMEA region. Similar to Q1 FY2016, the company’s growth was especially impressive because it was achieved on the backdrop of tough economic conditions over several markets across the world. The main takeaway from the earnings call was that Estee Lauder’s key to success was its dynamic strategy of reallocating resources to markets, brands, and channels which are witnessing growth. Below, we talk about a few important areas of current and future growth for the company, as was discussed in its earnings call. [2]

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

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See Our Full Analysis for Estée Lauder

Estee Lauder Is One Of The Largest Online Premium Beauty Players

The beauty industry’s focus is currently on the direct-to-consumer channels, such as digital and retail stores, travel retail, and specialty stores. Estee Lauder has a  strong presence in all these channels. Estee Lauder is currently one of the largest premium beauty players on the online prestige beauty segment. The company expects its online sales to surpass $1 billion in fiscal 2016, depicting the doubling of the business over the last three years.

The eCommerce and m-commerce business contributed to around 30% growth in the second quarter. The number of orders through digital media has increased by 27% and mobile transactions account for almost 36% of all online transactions. The company added 69 new brand retailer and third party websites on its platform in the second fiscal itself.

Also, Estee Lauder focuses on the omni-channel experience, or the linking of websites to the free-standing store, which is increasingly gaining popularity among retail shoppers. Estee Lauder has launched several programs to strengthen the omni-channel experience for its customers across the globe. [2]

Estee Edit Aims To Wow Younger Customers

Estee Edit, the Estee Lauder range targeted at millennials, is slated to be launched in 320 Sephora stores in North America and in Sephora.com in March 2016. This is a strategic initiative to modernize the Estee Lauder brand for ushering in a younger generation of customers. The Estee Edit products have been formulated in collaboration with the team at Sephora. The range will be strongly advertised through the digital media and magazines. [2]

It is noteworthy to mention that the two largest brands for the company, Lauder and Clinique,  had started showing a revival of demand and both the brands combined grew by around 1% in Q2 FY2016. [2]

 

Travel Retail Regains Its Former Glory Once More

Travel retail continues to be one of the primary growth drivers for Estee Lauder. So, a significant recovery through this channel definitely came as a good news for the company. In Q2 FY2016, each of the parameters: the net sales, retail sales and traffic in travel retail, grew by mid single digits. The company’s strategic reallocation of its inventories was the key to the revival. The investments were channeled towards regions generating more tourist traffic. For example, Korea’s travel growth resumed after the MERS virus scare subsided and Europe was an attractive tourist destination on account of the weak Euro. On the other hand, regions like Hong Kong, China, and those frequented by Russian and Brazilian tourists remained weak. The company witnessed double digit growth in around half of its 30 most important  markets.

Estee Lauder is expanding the travel retail stores and has also witnessed strong growth in pre-order business wherein travelers collect the products they’d ordered online, at an airport store. The Korean markets deserve a special mention because the company’s business is not only recovering but posting solid growth once again. In 2015, Estee Lauder acquired a stake in the Korean beauty company Dr Jart+ and it seems that  the partnership is working to the benefit of Estee Lauder. In Asia, South Korea and China are its two most important markets.

The changes in currency rates are a deciding factor in travel retail. Since customers try to take advantage of the duty free section to buy products which might be cheaper than what they are in their home countries, exchange rate fluctuation causes a difference in the customer’s shopping spree. Hence, cosmetics, like makeups, are a huge hit in travel retail, because consumers don’t really look for big discounts for the same. So, the product categories to be pushed is also decided strategically.

Finally, high-end fragrances sell like hot cakes through travel retail, and so Estee Lauder is expanding the collection of luxury fragrances sold through this channel. Along with this, strategies like makeup artists in the store, and gifts for items brought in duty free, are some of the attractive features to lure travelers to buy its products. [2]

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Notes:
  1. The Estée Lauder Companies Delivers Strong Sales and Earnings Growth in Fiscal 2016 Second Quarter, Press Release, Feb 5, 2016 []
  2. Estee Lauder Cos. (EL) Fabrizio Freda on Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, Feb 5, 2016 [] [] [] [] [] []