How Important Is Cost Of Sales To Estee Lauder’s Expenses And Overall Profitability?

Estee Lauder’s (NSYE: EL) total expenses have grown from $10.57 billion in 2017 to $13.07 billion in 2019. However, as a percentage of total revenue, expenses dropped, going from 89.4% in 2017 to 87.9% in 2019.
Selling, general & administrative (SG&A) expense is the biggest expense head for the company, with it being 63.1% of revenue in 2017, before dropping to around 59.6% of revenue in 2019. This drop has helped bring in an additional $1.50 in earnings per share between 2017 and 2019.
Also, despite strong expected revenue growth going forward, SG&A expense as % of revenue is expected to stay the same, leading to a marginal rise in net income margin from 12.1% in 2019 to 12.4% in 2021.
The company’s efforts to cut costs over the past 2 years, and steady EPS growth, have helped drive a ~60% growth in share price since January 2018.
In our interactive dashboard How Does Estee Lauder Spend Its Money?, we take a look at the key drivers of Estee Lauder’s expenses and net margins.

Estee Lauder’s Net Income Margins have remained volatile, dropping slightly from 10.6% in 2017 to 8.2% in 2018, before rising back to around 12.1% in 2019. Margins are expected to hover around the same levels in 2020 and 2021, coming in at 12.2% and 12.4% respectively.

Breakdown of Estee Lauder’s Total Expenses

• Cost of Sales rose from $2.43 billion in 2017 to $3.39 billion in 2019, in line with a growth in revenue. As a % of Revenue, Cost of Sales rose slightly from 20.6% to 22.8% due to lower average selling prices as emerging market demand grew. Going forward, we expect this metric to stay above 22%, coming in at 22.6% and 22.2% in 2020 and 2021, respectively.
  
• SG&A Expense has risen gradually from $7.46 billion in 2017 to $8.86 billion in 2019, in line with the company’s steady revenue growth. However, SG&A as a % of revenue, has dropped from 63.1% to 59.6% over the same period, on the back of the company’s cost-cutting initiatives. Going forward, we expect this expense to rise steadily with revenue and cross $10 billion by 2021.
• Restructuring and other charges have gone from $195 million in 2017 to about $216 million in 2019. As a % of Revenue, restructuring and other expenses dropped marginally from 1.6% to 1.5% during the same period. Going forward, we expect this metric to rise to 1.7% by 2021.
• Impairment of goodwill and other intangibles went from $31 million in 2017 to about $90 million in 2019. We expect this metric to come in at around 0.1% of total revenue in 2020 and 2021.
• Non-Operating Expense has dropped from $87 million in 2017 to $6 million in 2019. There was a drop in 2018 and 2019, as Estee Lauder’s other non-operating expenses dropped. Total debt has also dropped from $3.57 billion in 2017 to $3.41 billion in 2019. Going forward, we expect non operating expenses to grow to around $92 million by 2021.
• Income Tax Expense has increased from $361 million in 2017 to $513 million in 2019, with tax expense rising to $863 million for 2018, due to a one-time tax expense. Going forward, we expect the effective tax rate to be around 22.5% in the near term.

Additional details about how Estee Lauder’s Revenues and Key Operating Metrics compare with that of L’Oreal’s are available in our interactive dashboard.

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