Estee Lauder reported net sales of $17.7 billion in FY 2022, up strongly from $16.2 billion in FY 2021, since demand has been picking up steadily even after the initial post-covid surge. Gross margins dropped slightly from 76.4% to 75.7% over this period, but with SG&A expenses in control, operating income rose from $2.62 billion to $3.17 billion despite a higher impairment charge. Due to a drop in other income and a rise in the effective tax rate, EPS dropped from $7.91 in FY '21 to $6.64 in FY '22.
Estee Lauder's Skin Care Market Share: Estee Lauder's Skin Care Market Share expanded from 6.6% in 2008 to 8% in 2014. However, its share declined to ~7% in 2015 and 2016, partly due to cannibalization of its older products, and partly due to a shift in order realizations following its SMI implementation. However, in 2018 the skin care segment alone grew by 24% and we forecast Estee Lauder's skin care product market share is expected to gradually grow to over 10% by the end of our forecast period. There could be a marginal downside to our price estimate, if the market share were to remain flat throughout the forecast horizon.
Estee Lauder's Skin Care EBITDA margin: Estee Lauder's Skin Care EBITDA Margin increased from 20% in 2008 to 26.2% in 2012, before declining to 25.7% in 2013. The EBITDA margin grew to ~27% in 2014 and remained at almost the same level in 2015 before increasing to around 29% in 2016. As of FY 2021, this metric stands at 36.5%. We expect margins to remain near 41% by end of our forecast period. There could be almost 20% downside to our price estimate, if margins were to decline to the 2008 levels of 20% over our forecast period.
Estee Lauder's Makeup Market Share: We currently forecast Estee Lauder to gain share in the global makeup market from 14% in 2016 to 19.2% in 2018, it is expected to reach almost 24% by the end of our forecast period. There could be a marginal downside if Estee Lauder fails to gain market share over our forecast period.
Estee Lauder's Makeup EBITDA margin: Estee Lauder's Makeup EBITDA Margin increased from 19% in 2008, to 22% in 2016, but have dropped to -4.5% in FY 2021, as makeup has taken a backseat due to work from home and quarantine. We expect it to gradually increase to 12% going forward. There could be close to 10% downside to our price estimate if margins were to rise only to 9%.
Estee Lauder manufactures and markets premium makeup, skin care, fragrance, and hair care products in the personal and beauty care segment of the market. Estee Lauder's main competitors consist of cosmetics companies such as L’Oreal, Shiseido Company, LVMH Moet Hennessey Louis Vuitton, Revlon, Coty, and Procter & Gamble Company.
Estee Lauder's major brands include Estee Lauder, Aramis, Clinique, M-A-C, Bobbi Brown, La Mer, and Aveda, along with fragrance and cosmetics sold under brands such as Donna Karan, Tommy Hilfiger, Micheal Kors, and Sean John.
Premium priced products that are not branded, yet relatively expensive, are sold through limited distribution channels consisting primarily of upscale department stores, specialty retailers, upscale perfumeries, pharmacies, prestige salons and spas, free standing company owned stores and spas, company websites, authorized retailer websites, stores on cruise ships, direct response television, and in-flight and duty free shops.
Despite a global presence, about 40% of Estee Lauder's net sales come from the Americas, with Europe, Middle East and Africa contributing 38%, and Asia-Pacific constituting the remaining 22%. The company's increased focus on the Asia-Pacific market is expected to further increase in the future.
The Skin Care and Makeup segments have the highest contributions to Estee Lauder's value. Skin Care forms the priority category for the company, contributing ~50% of Estee Lauder's stock value, and Makeup contributes around 40%. The Skin Care segment is also the most profitable of all its beauty products, generating an EBITDA margin of 27%, compared to the company average of around 24%.
The Skin Care market grew by 7.4% in 2014, and 5% in 2015 and 2016. The Skin Care market is currently valued close to $130 billion and could cross $170 billion in the next five years.
In the Makeup category, Estee Lauder had a higher market share of around 14% in 2016 (that increased from 12% in 2010), but the overall market size of the Makeup segment is about half of skin-care. The overall Makeup market is currently valued around $70 billion and could exceed $80 billion by the end of our forecast period.
Anti-aging creams and anti-cellulite skin care products are in high demand among aging populations in developed countries notably Japan (oldest demographic), the US, and Western Europe. Half of Estee Lauder's skin-care business comes from anti-aging products. The anti-aging market comprises of those products that can treat multiple signs of skin aging at one time, and is a fast-growing segment under the anti-aging beauty products.
There is a growing demand for natural / organic products in most countries, a trend led by the developed markets in the US and Western Europe. Additionally, there is an increased preference for less synthetic, eco-friendly, and more natural products and packaging.
There is a growing trend toward the so-called "Masstige," or premium brands sold at lower prices through mass distribution. In addition, beauty care products focused on men is the latest niche being targeted by most players globally. In developed markets, particularly in the US and Western Europe, the introduction and extension of the men’s product lines is a major source of growth.