Estee Lauder Earnings Shows the Beauty of Luxury Brands in Gloomy Times

November 17th, 2011 by Trefis Team
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EL: Estee Lauder logo
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Estee Lauder

Estée Lauder (NYSE:EL) recently announced its Q1 results with 18% sales growth, broad-based across geographies and its leading brands, Estée Lauder, Clinique and M-A-C. It continued its growth momentum in the prestige beauty segment, growing in double digits much ahead of the market and expanding market share. It also continued to strengthen its bottom line, well on its way towards its revised operating margin target of 14.5-15% by 2014. Estee Lauder’s enviable double-digit revenue growth amid a weak macro backdrop and corresponding earnings growth is responsible for the stock’s impressive run over the past few quarters. Estee Lauder, one of the leading cosmetics and beauty care players globally, competes with others such as Revlon (NYSE:REV), L’Oreal (PINK:LRLCY) and Avon Products (NYSE:AVP).

Luxury Segment Blooms Despite Mass Segment Gloom

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Globally, the luxury sector remained very strong with sales growth looking to exceed 13% this year. The affluent consumers remained more resilient than the lower income shoppers. Last year’s trend of prestige beauty sales outpacing mass segment sales further accelerated this year. For example, according to NPD research, from July to September, prestige beauty sales for U.S. department stores and online retailer Sephora rose 11%, compared to barely 2% for mass brands. This helped Estée Lauder achieve 18% growth last quarter given its strong prestige beauty and luxury products portfolio. It also grew its market share in its top priority Skin Care category by 1.3%, the division that contributes over 53% of Estée Lauder’s stock price.

Gross Margins Shoot Up With Positive Mix
Riding over excellent international growth, last quarter, Estee Lauder exceeded its cost-saving projections and achieved its operating margins target of 12-13% by fiscal 2013, two years in advance. This quarter, its gross margin further improved by 170 bps, helped by positive mix of 150 bps and cost savings initiatives. Operating expenses fell 140 bps to 60.9% and operating margin rose 310 bps to 17.5% of sales.
With the buoyant top and bottom line performance, Estee Lauder raised its sales forecast for fiscal 2012 by 2 percentage points, over its previous August guidance, despite European risk and volatile currency markets. Having extended a new operating margin target of 14.5% to 15% by 2014 , it is also expecting an overall operating margin improvement of 80-100 basis points this year, compared to last year.

We have a revised $116 Trefis price estimate for Estee Lauder stock, which is almost in line with its current market price.

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