Estee Lauder (
) makes premium skin care, makeup, fragrances and hair care
products, which it sells through various high-end outlets across
the globe. The company competes with well-known product
manufacturers like Revlon (
), Avon Products (
). Estee Lauder's brands include Aramis, Clinique, La Mer,
Aveda and designer brands such as Donna Karan, Tommy Hilfiger,
Michael Kors and Sean John.
our current price estimate for Estee Lauder (at
remains well below market value, we highlight here two potential
sources of upside - makeup and fragrances. We estimate that makeup
and fragrance operations contribute roughly 38% and 5%,
respectively, to EL's stock value, both trailing the 52%
contribution from skin care. For further analyses of the company's
skin care operations, see our recent article (Estee Lauder Showing
Upside in Skin Care, but we Remain Cautious).
Makeup Market Share
The makeup segment constitutes over one-third of our $53.28
price estimate for Estee Lauder stock. The company's makeup sales
grew by 11% during its fiscal first quarter ended October 29th,
primarily driven by makeup artist brands such as MAC and the
recently acquired Smashbox brand.
A double-digit growth in sales, much in excess of the increase
in the global market of makeup at close to 3%, signifies a
significant gain in market share. We project that if this trend
continues, the company's market share could breach 12% by 2011, vs.
our current estimate of just over 11%, leading to almost 4% upside
to our base case stock value.
Fragrances Operating Margins
Estee Lauder's fragrance sales increased a healthy 15% during
its fiscal first quarter. We can attribute much of these
improvements to improving macroeconomic conditions and growth in
international travel as business activity recovers and duty-free
shops increase perfume sales at airports and ports.What is
particularly impressive about this segment's results is the
staggering improvement in operating profit (EBIT margins) by over
500 basis points, to roughly 15%.
We have been cautious on this segment's operating profitability,
estimating EBITDA margins between 5% and 6% during 2011 and 2012.
Estee Lauder has given this due attention with cost reductions
combined with focused promotional spending on higher-margin recent
launches and designer fragrances as well as selective markets that
exhibit the greatest potential. If EL's EBITDA margin for
fragrances could breaches 7% by 2011, this creates 3% upside to our
current price estimate. Despite the potential upside, we note that
the scenarios illustrated above would still leave us below current
market value for Estee Lauder.
See our full analysis of Estee Lauder here