Driven By Its Strong Brand Portfolio And Distribution Channel Diversification, Estee Lauder Delivered A Robust Q2 FY 2017

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Estee Lauder

Estee Lauder released its Q2 FY 2017 earnings on February 2nd (fiscal year ends in June). On a constant currency basis, both its net sales and adjusted diluted earnings per share grew by around 5% year-on-year. Estee Lauder’s top line grew by just 2% year-on-year in the first quarter of FY 2017, hence this quarter reflected significant improvement. This growth was achieved despite the company’s ongoing problems with declining sales in the U.S. mid-tier department stores due to lower traffic, slow growth in the Middle East, and a persistent negative trend in Hong Kong. All its three main segments, namely, makeup, skincare, and fragrance, grew significantly in terms of constant currency. It is noteworthy to mention that the company’s skincare division which remained flat over the last few quarters has been reviving once more. Its luxury fragrance cluster including brands such as Jo Malone, Tom Ford, AERIN, By Kilian, Frédéric Mall, and Le Labo have grown by over 30% during the quarter showing how insightful its acquisitions in this category has been.

The company benefited from the positive impact of its diverse brands portfolio. The strongest performing brands for the quarter were some of its midsized and luxury brands, including Tom Ford, La Mer, Jo Malone, Darphin and some of the brands acquired over the recent past. Estee Lauder is known for following the strategy of acquiring small and innovative brands and then expanding their reach and customer base. Last year, it acquired Too Faced and Becca Cosmetics in the makeup segments. These brands are known for their makeup products including foundations, primers, and highlighters, that suit diverse skin tones.

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Guidance For Full Fiscal Year 2017 

For the full fiscal 2017, Estee Lauder’s management expects net sales to grow by 6% to 7% year-on-year on a constant currency basis. This will include around 1% incremental sales from its recent acquisition of Too Faced. The sales and profit margins are expected to show a stronger growth towards the second half of the fiscal year. The probable drivers of this growth would be: organic growth, the upward price revision of some brands that took place in January, and a greater customer reach thanks to its recent acquisitions. The biggest growth channels are expected to be its luxury brands, and the online, travel retail and specialty-multi channels. It  expects the continued robust growth in the Chinese market and a stabilization in the Hong Kong market.

Two Of Its Biggest Brands Continued Showing Improvement

  • Estee Lauder
The Estee Lauder and MAC brands, two of the company’s biggest brands showed significant improvement in their performance and demonstrated constant currency growth across its global markets. The sales for the Estee Lauder brand increased by mid-single digits driven by both its skincare and makeup products. The skincare growth was primarily driven by a sales acceleration in China and in the travel retail channels, while makeup was boosted by the strong sales in the UK where it has a high penetration. In January, the company won one of the most prestigious awards meant for research and innovation in the area of beauty. At the 2017 Marie Claire Prix d’Excellence de La Beaute Awards in Paris, three of Estee Lauder’s skincare brands, namely, Advanced Night Repair (ANR) Intensive Recovery Ampoules, Advanced Night Repair Concentrated Recovery Powerfoil Mask, and the Revitalizing Supreme + Anti-aging Wake Up Balm were given the spotlight for their scientific breakthroughs. Even after being in the market for the last 35 years, the ANR range of products are constantly upgraded with the help of new innovation to appeal to  contemporary beauty users.
  • MAC

Overall, the MAC brand grew in terms of constant currency, while internationally the brand’s sales rose by double digits in most of its markets. Travel retail sales fueled its growth even further. Though there was an improvement in the brand’s sales in the US when compared to Q1 FY 2017, however, the decline still continued mainly due to a lag in traffic in the mid-tier departmental stores and also its freestanding stores.

 

Recent Acquisitions

Towards the end of last year, Estee Lauder signed an agreement to acquire Becca Cosmetics for $200 million and  Too Faced for $1.45 billion. These two prestige makeup brands are known for being two of the most rapidly growing entities in the makeup segment. Their massive popularity with the millennial consumers and in the multi-retail channels benefited Estee Lauder. When Too Faced came under the Estee Lauder umbrella last December, the brand was launching its Sweet Peach collection. This launch turned out to be Too Faced’s most successful launch till date with the collection attracting around 100,000 consumers online, who waited for hours to get their hands on the products.

The company plans on expanding the global presence of these two brands, while capitalizing on their multi-channel reach and strong fan following. Estee Lauder’s last acquisition in the makeup segment prior to these two brands was in 2010, when it acquired Smashbox. The company must have realized how its makeup portfolio needs to be upgraded to pull in more younger clientele. Makeup happens to be the fastest growing segment for the company with a 9% year-on-year growth rate. With $4.7 billion revenues in fiscal 2016, makeup is its largest segment, contributing to around 50% of its revenues.

 

Diversification Of Distribution Channels

Estee Lauder’s channel diversification strategy is reaping benefits for the company. The company is trying to grow its presence in the multi-retail, travel-retail, and online channels (all of which showed double-digit growth in Q2), as more and more brick-and-mortar department stores show lackluster demand.

In the rapidly growing specialty-multi retail channel, the company is introducing an increasing number of its brands so that those become more accessible to the global consumers. In Q2 FY 2017, Estee Lauder was launched in 30 Ulta stores and also on Ulta.com and the results were impressive. Clinique was launched in over 50 new Sephora outlets in JCPenney and the brand was also launched on Korea’s largest specialty-multi retailer.

Estee Lauder already has a strong presence in travel retail where it expanded its makeup portfolio after gauging the rising demands. Jo Malone’s impressive growth was one of the main drivers for the growth of its fragrance sales through this channel. The company is on its way to  launch some of the newer artisanal fragrance brands through this channel in select locations. Though the travel retail sales growth was more than twice the 8% of the passenger traffic growth, the company fears that this channel might face some fluctuations in the future due to political turmoils and currency rate fluctuations.

Digital Growth

Estee Lauder’s e-commerce and m-commerce channel sales continue to grow significantly. It launched almost 100 new sites over the recent past and started online sales in Hong Kong, the Middle East, and the Balkans. Its North American online sales for brands such as Estee Lauder, Clinique, Origins, and Aveda broke previous records with the aid of the holiday season. Its m-commerce sales showed 75% year-on-year growth over the Thanksgiving Cyber Monday weekend. The company’s online business grew well in China too, with almost a doubling of sales driven by the Singles Day sale on Tmall where its six brand stores experienced twice the amount of sales than the previous year. Tmall also helped in introducing Estee Lauder’s brands to a huge number of new customers.

 

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