Estee Lauder’s Skincare Products Segment Will Continue To Drive Profits

by Trefis Team
Estee Lauder
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Estee Lauder (NYSE: EL) reported its fiscal third quarter results earlier last week and the company did well to extend its winning streak for a third consecutive quarter. Net revenues for the quarter came in at $3.74 billion, growing by a solid 11% year-on-year despite the negative impact of a stronger U.S. dollar. It must be mentioned here that the company’s top line has received a small boost over recent quarters from its adoption of the ASC606 accounting standards at the beginning of this fiscal year. However, its overall strong showing of late becomes evident from the fact that net revenue growth for the last three quarters were 11%, 11%, and 12%, respectively after adjusting for the impact of the new accounting standard and an appreciation in the U.S. dollar.

Per Trefis estimates, Estee Lauder’s shares have a fair value of $170, which is in line with the current market price. You can view our interactive dashboard on How Has Estee Lauder Fared In Recent Quarters? to observe quarterly revenue trends and modify yearly projections to gauge the impact on the share price. You can also find more of our Consumer Discretionary sector data here.

A Quick Look at Estee Lauder’s Revenue Sources

Estee Lauder reported $13.6 billion in Total Revenues for full-year 2018. This included four revenue streams:

  • Skincare: $5.5 billion in FY2018 (41% of Total Revenues). The segment comprises of all skincare products such as moisturizers, serums, cleansers, etc. under the company’s brand portfolio.
  • Makeup: $5.6 billion in FY2018 (42% of Total Revenues). The segment comprises of all makeup products such as lipsticks, lip glosses, mascaras, etc. under the company’s brand portfolio.
  • Fragrance: $1.8 million in FY2018 (13% of Total Revenues). The segment comprises of all fragrance products such as perfumes, aromatic soaps, lotions, etc. under the company’s brand portfolio.
  • Haircare: $570 million in FY2018 (4% of Total Revenues). The segment comprises of all hair care products such as shampoos, conditioners, colors, etc. under the company’s brand portfolio.

Skincare Overshadows Other Product Categories

  • Estee Lauder and La Mer are the group’s prominent Skincare brands and have been levers of growth across geographies. For the quarter, Skincare’s net revenues came in at $1.72 billion, increasing by 16% year-on-year along-with a 5 percentage point improvement in operating margin. For the full year, we expect Skincare revenues to grow at in high-teens range bolstered by double-digit growth in Estee lauder and La Mer brands.
  • Makeup line has been growing at a CAGR of 9% for the past three years driven by Tom Ford Beauty and Estee Lauder brands. Revenues for the quarter fell by 6% sequentially resulting in a moderate 4% increase for the 9-month period this fiscal year. We expect Makeup line revenues to witness a low single-digit growth for the full year due to the decline in prestige beauty industry sales in the United States.
  • Fragrance and Haircare have reported mixed results in the last two quarters due to changes in promotional strategy and under-performance by a few brands. Sequentially, net revenues for Fragrance and Haircare lines dropped by a sharp 27% and 12%, respectively.

Asia-Pacific Continues To Drive Revenue Growth

The Asia-Pacific region contributes around 20% of net revenues, and has witnessed accelerating revenue growth over recent years. The trend continued in the most recent quarter with net sales of $966 million growing 30% year-on-year (constant currency basis). Europe and Middle East & Africa also reported moderate growth.

The company’s management revised the full year guidance for revenue growth to 7-8% thanks to better-than-expected sales and improved profit margins over recent quarters. While potential systemic risks associated with resurfaced U.S.-China trade dispute and Brexit uncertainties remain, we expect Estee Lauder’s revenues in fiscal 2019 to growth by more than 9% from the figure in 2018 and forecast an EPS of $5.00 for the current year.

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