VALUATION HIGHLIGHTS

1. Skin Care constitutes 60% of the Trefis price estimate for Estee Lauder's stock.
2. Makeup constitutes 22% of the Trefis price estimate for Estee Lauder's stock.
3. Fragrance constitutes 17% of the Trefis price estimate for Estee Lauder's stock.

WHAT HAS CHANGED?

EL Stock Performance

EL stock has suffered a sharp decline of 45% from levels of $265 in early January 2021 to around $150 now (early March 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

However, the decrease in EL stock has been far from consistent. Returns for the stock were 39% in 2021, -33% in 2022, and -41% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that EL underperformed the S&P in 2022 and 2023.

Q2 2024 Earnings

Estee Lauder reported net sales of $4.3 billion in Q2 2024, down from $4.6 billion in Q2 2023, since demand has pulled back due to the current turbulent economic conditions and a slower recovery of travel in Asia. Gross margin declined by 60 bps, but operating margins expanded by 140 bps compared to the prior-year quarter due to lower costs. The company's adjusted EPS stood at $0.88, vs. $1.54 in Q2 2023, reflecting a sharp 43% decline.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Skin Care

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 2022, this metric stands at 32.9%. We expect margins to remain near 36% 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.

Makeup

Estee Lauder's Makeup EBITDA margin: Estee Lauder's Makeup EBITDA Margin increased from 19% in 2008, to 22% in 2016, but has dropped to 8% in FY 2022, as makeup has taken a backseat due to work from home and quarantine. We expect it to gradually increase to 14% going forward. There could be close to 10% downside to our price estimate if margins were to rise only to 9%.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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%.

KEY TRENDS

Booming Skin Care due to anti-aging creams

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.

Growth of natural products categories and "Masstige" segment, as well as male product lines

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.