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

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The month of September witnessed some digital and restructuring initiatives by the prominent beauty companies, L’Oreal (OTC:LRLCY) and Avon Products (NYSE:AVP). L’Oreal is gearing up to connect its products through the Internet of Things and Avon is looking out for buyers to sell parts of its business. Estee Lauder (NYSE:EL), on the other hand, is getting ready with a new set of product launches to boost its travel retail sales.

L’Oreal

L’Oreal (OTC:LRLCY) is currently conducting research towards connecting its makeup products through the Internet of Things. The Internet of Things is the network of objects or “things” which can collect and exchange data with the help of their embedded electronics, software, sensors, and network connectivity. The successful implementation of this technology will allow L’Oreal to give connectivity to its makeup products, such as lipsticks, nail polishes, or mascaras. This, in turn, will help the company to better track its consumers.

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According to a L’Oreal official, the connectivity through these beauty products might become as important as mobile connectivity in the years to come. The company has a big focus on this initiative as most of its consumers have its products, such as a lipstick or an eyeliner, in their bags every day, just like their cell phones. L’Oreal primarily connects with its customers through the medium of mobile phones currently, but its future plan is to connect through its own products. [1]

L’Oreal has always been proactive in digital initiatives. In 2012, L’Oreal allocated $1.5 billion towards its U.S. media budget and claimed to have witnessed double-digit growth in its digital sales as a percentage of total sales since 2010. [2] L’Oreal’s online sales grew by 30% in 2014 and contributed to around 6% of its total revenues. Around 10% of L’Oreal’s China sales come from digital channels, where it is present in online brand boutiques, allowing a seamless online shopping experience. L’Oreal wants to replicate its China model on a global scale and towards this end, it has appointed Lubomira Rochet as its Chief Digital Officer, a newly created position in 2014. Currently, the company has around 700 employees on its payroll for the development of its eCommerce reach. L’Oreal’s management talked about the company’s increased digital focus in its Q4 2014 earnings call. [3]

In related news, L’Oreal had entered into a partnership with TubeMogul, an independent advertising software platform. L’Oreal’s beauty campaigns in the U.S. will be managed using TubeMogul’s advertising software. With this step, L’Oreal took a different path than its agency led advertising strategy. TubeMogul’s automated software platform will be used to plan and optimize the advertisements. L’Oreal aims at creating its brand presence at every consumer touch point and offering personalized content to its users.  [4]

Recently, an increasing number of brands are allegedly following this strategy, wherein they are buying media space directly rather than depending on the typical brand-owner and media agency format. This step is expected to help companies gain more insights into customer data and also make their media spend more transparent. [5]

L’Oreal’s stock gained around 1% over the last month. We have a  price estimate of $36 for L’Oreal’s stock which is slightly above 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 $1.36, respectively.

Avon Products

Avon Products (NYSE:AVP) is probably on the brink of a major restructuring initiative. The company is currently in talks with private equity firms in order to sell-off parts of its business, as there seems to be no taker for the entire company. There was previous news from Wall Street where Avon was allegedly trying to sell its North American business and later there was another rumor in May about Avon being acquired by private equity firm PTG Capital Partners. However, though the company denied both stories, this time, Avon seems to be really looking into the selling option and is in talks with Cerberus Capital Management LP and Platinum Equity LLC. [6]

Avon witnessed more than a 70% stock price decline over the last year. The company has seen its last profitable year in 2011. Currently, its cash position is rapidly deteriorating, its debts are high, and its bonds have been rated junk. The primary reason for Avon’s downfall was its direct selling model which has long become outmoded compared to the sale of beauty products through retail outlets and online shopping. The company is also suffering from the attrition of its active representative base and currency headwinds from its major areas of operation. You can read more about Avon’s current condition, here.

Avon’s stock lost over 35% over the last month. We have a  price estimate of $3.82 for Avon’s stock which is over 15% 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.

Estee Lauder

Estee Lauder (NYSE:EL) is about to launch a series of new products at the Tax-Free World Association (TFWA) Exhibition, held at Cannes in October. There will be new product launches under a host of its brands including Clinique, Bobbi Brown, Jo Malone, Tom Ford, and M.A.C. Some of the categories in which the new products will be launched are: face contouring, eye makeup, lipstick, serums, treatment creams, and fragrances. All the new products will be available through its travel retail channels. [7]

Estee Lauder has been demonstrating a lukewarm performance over the last few quarters primarily because of the deceleration of its travel retail sales growth and the slowdown in the sales of Clinique, one of its biggest brands. [8] The company witnessed double-digit growth through the travel retail channel in the past, however, its performance has lately deteriorated on account of the sales decline in Asia due to China’s economic slowdown, and the spread of the MERS virus in Korea, which had dampened travel and tourism, and hence the travel retail sales. [8] You can read more about Estee Lauder’s fourth quarter performance, here.

However, in its Q4 FY2015 call (fiscal year ends in June), the management claimed that these were temporary roadblocks and it expected sales to bounce back through the travel retail channel. Therefore, these new product launches might provide a fresh boost to Estee Lauder’s travel retail sales.

Estee Lauder’s stock gained around 1% over the last month. We have a  price estimate of $85 for Estee Lauder’s stock which is slightly above 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.

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Notes:
  1. Connected mascara? L’Oreal explores the Internet of Things, Marketing Magazine, September 17, 2015 []
  2. Digital Gives Boost To Beauty Sales, CosmeticsDesign.com, March 5, 2014 []
  3. L’Oreal’s (LRLCY) CEO Jean-Paul Agon on Full Year 2014 Results – Earnings Call Transcript, Seeking Alpha, February 13, 2015 []
  4. TubeMogul Announces Partnership With L’Oreal USA, MarketWatch, September 9, 2015 []
  5. Are brands shifting to an in-house media strategy? L’Oréal USA partners with TubeMogul, Global Cosmetics News, September 16, 2015 []
  6. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 []
  7. The Estée Lauder Companies prepares for key launches at Cannes, The Moodie Report, September 3, 2015 []
  8. Q4 Fiscal 2015 Earnings Conference Call, Estee Lauder, August 17, 2015 [] []