Here’s How Estee Lauder Can Be Impacted By Macy’s Store Closures

Macy’s is Estee Lauder‘s (NYSE:EL) biggest customer, accounting for nearly 10% of its net revenues.  As a result, the  former’s decision to close nearly 100 stores over the next few years can impact Estee Lauder’s revenues in the short term.  While the company is pursuing other distribution channels, such as Ulta Salons and Sephora stores, these channels can impact its prestige brand. Apart from generating high revenues, Estee Lauder’s association with Macy’s is also extremely positive for its brand appeal. However, the company is confident that its brand will flourish, even as Macy’s shrinks it footprint.  It will have to attract consumers through alternate ways. Department stores are losing customers to online channels and Estee Lauder needs to strengthen its alternate sales channels without compromising its brand appeal to grow revenues. Macy’s store closures can have an impact on Estee Lauder’s revenues in the short term, until the company is able to compensate this loss through other channels.

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Increased Focus on E-commerce Could Grow Revenues

According to our estimates, the Make-Up segment is the most important division for Estee Lauder, accounting for nearly 45% of its valuation. The company is growing its makeup business and acquired Too Faced for nearly $ 1.5 billion last year. Yet two of its make up brands, Clinique and Estee Lauder, depend heavily on the department stores sales channel. However, department stores have witnessed a decline in traffic, which led to Macy’s decision to shut stores. As a result,  Estee Lauder needs to focus on alternate channels such as e-commerce to drive sales. According to our estimates, Estee Lauder’s makeup market share will increase marginally from around 12.4% in 2017 to nearly 12.9% by the end of our forecast period.

A small decline in this market share in the near term (next couple of years) will not impact the valuation of the company significantly. However, if due to Macy’s store closures, Estee Lauder’s market share declines to around 12% for 2017 and 2018 and grows as per our estimates thereafter, there will be a marginal downside to our price estimate.

While we do not expect a significant impact on Estee Lauder’s valuation due to Macy’s store closures in the long term, the company needs to ensure that Macy’s is no longer its largest customer. Millennial shoppers prefer online shopping, since most of them tech savvy and price sensitive. This trend is likely to fuel growth in online sales of cosmetics.  In fact, Technavio’s market research analysts predict that the global online and beauty and personal care market will grow at a CAGR (compounded annual growth rate) of more than 16% by 2020. While Estee Lauder is focusing on its e-commerce initiatives, this trend suggests that the company needs to reduce its dependence on departmental stores and diversify its sales channels to grow revenues over the long term.

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