Riding On The Successes Of Its Established And Newly Acquired Brands, Estee Lauder Delivers One Of Its Best Quarterly Performances

+5.54%
Upside
154
Market
163
Trefis
EL: Estee Lauder logo
EL
Estee Lauder

Estee Lauder released its Q3 FY 2017 results on May 3rd (fiscal year ends in June). Though the management had earlier predicted a stronger second half for the company, Estee Lauder’s third quarter performance exceeded expectations with a 9% y-o-y increase in sales and a 28% growth in its diluted earnings per share (EPS). To provide a context, in the second quarter both its sales and diluted EPS grew by 5% y-o-y and the growth rate was even smaller for the first quarter. Going by the trend, the management expects the fourth quarter to be an even greater success. As we discussed in our pre-earnings, a strong organic growth that was boosted by China and travel retail and stellar performances by its recently acquired brands, Too Faced and Becca, coupled with an efficient cost management, led to this impressive growth for the company.

Growth Was Achieved Despite Existing Hurdles

The growth it experienced in Q3 was not devoid of obstacles. The economic slowdowns in certain geographies like the Middle East, Turkey, and Latin America, the continued appreciation of U.S. dollar’s value against other currencies, and the persistent decline in footfalls in the U.S. brick-and-mortar retail stores (Estee Lauder’s largest domestic channel)  continued to dampen its performance. Along with this was the stiff competition across the world from both established and new brands. The growth it attained despite the headwinds was possible due to the diversification in its business model and its numerous growth engines. Estee Lauder was also benefited by the the prestige beauty market which is its sole focus and which is growing at a faster rate than the overall beauty industry or the mass market, in general.

Its makeup segment witnessed double digit growth and in terms of sales channels the multi-specialty, online, and travel retail channels have all reflected double-digit growth. Geographically, China was one of its most successful markets for the quarter. All its markets as well as its three largest product segments experienced growth due to the launch of innovative products as well the robust performance of the well-known brands, expanded presence in the social media, and a deeper penetration into high-growth channels.
Strategic Positioning Of Brands

Each of its brands was strategically placed to the appropriate distribution channel to target different customers. This strategy yielded huge success for brands like Tom Ford, La Mer, and Jo Malone, each of which generated double-digit sales growth in constant currency in every region. The company had been striving to revive the popularity of its larger brands such as Estee Lauder and Clinique, and over the last couple of quarters they’ve been showing signs of revival. For example, Estee Lauder displayed solid global growth for the second consecutive quarter with improved sales in makeup, skincare, and fragrances. The growth in travel retail and the greater demand from the Chinese customers bode well for the brand which saw its sales growing in the U.K. and Asia. The luxury fragrances such as Jo Malone and Tom Ford witnessed significant success in the travel retail channel and brands such as Le Labo, Frederic Malle, and By Kilian are expected to be the future successful launches in this channel.

Specialty Multi-Channel Growth Is An Important Key To Success

Estee Lauder’s most recent acquisitions, Too Faced and Becca, completed a full quarter’s contribution and their growth surpassed the management’s expectations. The company has started introducing these brands to newer markets. The brands have significantly increased Estee Lauder’s penetration in the makeup and specialty retail segments.

MAC will soon be available in Ulta Beauty, one of the most popular multi-channel retailers in the U.S., with a presence in around 25 stores in June and around 100 by December. The MAC makeup artists will be available at all these outlets creating the original MAC boutique-like feel in the stores.

In order to grow its user base globally, MAC’s penetration in the specialty multi-channels will increase internationally, as well. The management claims that though MAC is the top prestige makeup brand worldwide, it has less than 15% in stores when compared to its direct competitors. In Brazil, MAC is the top brand on Sephora.com and its presence will expand to more stores by August. In Europe MAC is opening more counters with chains like Douglas and other specialty multi retailers like KICKS in Sweden. Estee Lauder’s experience in the specialty multi channel retailing has been an encouraging one both in the U.S. and internationally.

Travel Retail Was One Of The Main Growth Drivers

Travel retail has been a very important channels for Estee Lauder’s sales growth. The channel was extremely successful in Q3 with Asia Pacific leading the way. The travel retail sales for the quarter was the strongest over the last three years and it surpassed the passenger traffic growth for the quarter. Every category witnessed growth in this channel with makeup sales being led by MAC and Tom Ford, Skincare by Estee Lauder, and La Mer, and fragrance, which is the leading category in this channel, was led by brands like Jo Malone and Tom Ford. The company expects the fragrance demand in travel retail to grow even further with its newer launches in luxury and artisan fragrances.

Editor’s Note: We care deeply about your inputs, and want to ensure our content is increasingly more useful to you. Please let us know what/why you liked or disliked in this article, and importantly, alternative analyses you want to see. Drop us a line at  content@trefis.com

Relevant Articles
  1. What’s Next For Estée Lauder Stock After 10% Gains Post Q2 Results?
  2. What’s Next For Estee Lauder Stock After A 19% Fall Yesterday?
  3. Will Estee Lauder Stock Rebound To Its Pre-Inflation Shock Highs?
  4. Cross-Sector Comparison: Is Estee Lauder A Better Pick Over LLY Stock?
  5. What’s Next For Estee Lauder Stock After A 17% Fall In A Month?
  6. Should You Buy Estee Lauder Stock After A 36% Decline Since 2021?

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

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology