Estee Lauder’s Impressive Performance Might Continue In 2018 Due To These Key Drivers

by Trefis Team
-13.25%
Downside
148
Market
128
Trefis
EL
Estee Lauder
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Estee Lauder‘s (NYSE: EL) performance has been extremely impressive in 2017. It delivered some of its most successful quarters last year and rounded out fiscal 2017 (fiscal year ends in June) by outperforming the prestige beauty industry by 2 points with a 7% y-o-y sales growth. In Q1 fiscal 2018, Estee Lauder’s net sales grew by 13% in constant currency terms to reach $3.27 billion. Estee Lauder’s successful growth was achieved even after facing headwinds like instability in certain geographies that resulted in weak demands in many markets. Along with this, it also braved market specific challenges, such as a declining traffic footfall in the U.S. brick-and-mortar establishments and rising competition across the premium beauty industry. The company’s impressive performance that was delivered across all its segments suggests that Estee Lauder’s growth strategies are successfully steering the company as a leading player in the prestige beauty segment. Its strategic acquisition strategy is a big driver for its growth. Estee Lauder is known for following the strategy of acquiring small and innovative brands and then expanding their reach and customer base. Along with this, its soaring travel retail sales, success in the online and multi-retail channels are some of the key drivers that boosts the company’s performance. Below, we discuss the drivers that we believe will steer Estee Lauder’s growth this year as well. Its successful start in fiscal 2018 has boosted the company’s confidence and as a result, it has revised its sales and EPS guidance upwards. In constant currency terms, its full fiscal 2018 sales are expected to grow by 8% to 9% y-o-y and its EPS by 12% to 14% y-o-y. We have a $128 price estimate for Estee Lauder which is around 5% lower than its current market price.

Estee Lauder’s Strategic Acquisitions And Investments Are A Key To Its Success 

  • Estee Lauder made acquisitions and investments in companies that appeal to millennials, the most coveted consumer segment for the beauty companies.
  • In 2016, 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. The company’s growth plans include taking advantage of its stronger products, regions, and channels to boost further growth.
  • The fragrance segment has also been boosted with a host of acquisitions made over the last couple of years.
  • In June 2017, the company announced that it will invest in Deciem, a company which like Estee Lauder’s latest acquisitions, focuses mostly on millennial beauty users and diverse skin tones. Deciem’s unique products are massively popular and further expanding its global presence can help Estee Lauder capitalize on this popularity and seize a bigger chunk of the global skincare market.
  • Luxury brands are a key growth driver for the company: its luxury brands like La Mer, Jo Malone, and Tom Ford have been delivering double digit growth for several years. Hence, the recent acquisitions, of all premium and luxury brands, are best seen in this light.
  • Skincare is the most important segment in Estee Lauder’s portfolio. Consumers are currently demanding products such as masks and oils beyond the traditional skincare formulations like moisturizers and serums. Estee Lauder possesses a strong research and development arm. Its acquisitions in the beautifying mask and oil-based treatment categories might satisfy the changing demands.

Travel Retail, Online, And Multi Retail Sales Are Expected To Keep Growing

  • The strong passenger traffic growth and the increased conversion of the passengers into buyers, especially in the emerging markets, is expected to keep the company’s travel retail sales soaring for the rest of the fiscal year. It plans on boosting investments in China and other developing countries where its products are a success.
  • Estee Lauder’s strong online sales were mainly driven by the third-party and retailer sites. Each of its metrics, traffic, conversions, and orders, witnessed a healthy growth. China’s Tmall witnessed a surge in sales especially since the launch of its makeup brand MAC in May. MAC has further launched an online platform in South East Asia called Lazada, which is owned by the Alibaba Group. With a Tmall-like model, this store might be a further catalyst for the company’s growth in the region. The company’s effort to expand its online footprints continued with the launch of 100 new websites in the quarter. Around 70% of its online sales were contributed by mobile and hence this medium is a prime focus in Estee Lauder’s digital initiatives.
  • Estee Lauder is also growing its position by pushing more of its brands through the specialty-multi retail channels across the world. This channel is specifically attractive to the younger beauty users, a coveted segment for most beauty companies these days. For example, even in the U.S. where the footfall decline in the brick-and-mortar stores is a concern for the company, its sales through pure play cosmetic companies such as Ulta Beauty and Sephora continued to grow.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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