Estee Lauder’s Q2 FY 2017 Earnings Preview

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Estee Lauder

Estee Lauder is slated to release its Q2 FY2017 earnings results on February 2nd. Though the company is growing both organically and inorganically, yet macroeconomic problems across certain international markets and the slow traffic in the US mid-tier department stores, thwarted its growth in the last quarter. The company plans on taking advantage of its stronger products, regions, and channels to boost further growth. The highlight of the second quarter’s earnings call is expected to be its two recent acquisitions in the makeup category. Makeup has acquired a stature of prominence in the company’s portfolio and hence the acquisitions were strategically driven. Fragrance is another growing category for the company and its multiple acquisitions over the last couple of years in this segment is boosting growth in this category. Finally, the company is focusing on its digital initiatives as its e-commerce and m-commerce channels continue to drive growth. For the full fiscal 2017, Estee Lauder has guided its net sales to grow by 6% to 7% year-on-year on a constant currency basis, while foreign currency translation is expected to dampen sales by less than 1% year-on-year. The net diluted earnings per share are expected to lie between $3.20 and $3.30.
Estee Lauder’s Focus On Its Makeup Segment Is Evident With Its Recent Acquisitions
The last few months were busy for Estee Lauder when it signed an agreement to acquire Becca Cosmetics for $200 million in October and announced the decision to acquire another makeup brand, Too Faced, for $1.45 billion in November. What makes these acquisitions significant is that prior to buying these two makeup companies, Estee Lauder’s last acquisition in the makeup segment dates back to 2010, when it had acquired Smashbox.
We might wonder why the company suddenly got so interested in the makeup category. Makeup is currently one of the biggest drivers for the company’s growth. In Estee Lauder’s last annual report (fiscal year ends in June), makeup ($4.7 billion) contributed to around 50% of Estee Lauder’s revenues and it is also the fastest growing segment for the company with a 9% year-on-year growth rate. Though its skincare revenues were also at $4.4 billion, yet the segment showed no growth over the previous year. This reflects how important it is for the company to keep growing its fastest growing segment, which is also its largest contributor. So far, Smashbox and MAC has been some of the best selling brands in this category. Too Faced and Becca might help grow the company’s global makeup market share with their unique and diverse range of products, popularity among the younger beauty users, and a strong presence in the digital sales channels.

Fragrance Segment Is Growing Well

Besides makeup, fragrance is another promising segment for the company. The company is building a stronger presence for its recently acquired brands. Jo Malone is currently the third largest women’s prestige fragrance brand in the United States despite having a limited presence in the country. It is also the second largest prestige fragrance brand in the UK, its home market, and is growing by double digits there.

Digital Drives

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In Q1 FY2017, Estee Lauder’s sales through e-commerce and m-commerce continued to show healthy growth. M-commerce contributed to over 40% of online sales in the quarter. The company’s sales from mobile devices rose by 23% y-o-y in Q1 FY2017. Estee Lauder has launched almost 100 new sites over the recent past especially for its international buyers.

Currently, Estee Lauder is trying to boost its sales by offering digital services through offline channels as well. Focusing on the younger customers’ tendencies to switch from their emails to other modes of communication such as text messages, the company is testing the concept of sending texts to consumers whose profiles are already present in the brand’s ecommerce website. Instead of going to an actual store or an ecommerce website and comparing a host of products, the consumer gets the option of directly buying Estee Lauder’s product simply through a text message. This simplicity might inspire the consumer to forego the comparison part and hence lessens the chances of them selecting a product from another company.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Estee Lauder

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