Estee Lauder (
EL
) makes premium beauty care products such as skin creams,
lipsticks, fragrances and hair colors and competes with other
leading beauty care players such as
L'Oreal
(
LRLCY
), Revlon (
REV
) and
Avon
(
AVP
). Consistent with its premium image, Estee Lauder sells its
products through department stores, upscale perfumeries, prestige
salons, spas, free standing company stores and duty free shops at
airports. We value Estee Lauder with a
$71.65 Trefis price estimate for its stock
, which is close to a 24% discount to its current market price.
Skin care and makeup are the leading product segments at Estee
Lauder with comparable revenue contributions. In 2010, skin care
brought in $3.5 billion in revenues, only marginally higher than
makeup with $3.1 billion. However, we estimate that skin care makes
up for almost 52% while makeup contributes less than 39% to
Estee Lauder's stock. Here we explore how skin care and makeup
product segments have comparable revenue contributions yet markedly
different valuations.
How Skin Care and Makeup Compare
We estimate that Estee Lauder's skin care products have 6.5%
market share of the $94 billion skin care market compare to 12%
share of the $46 billion market for makeup products. So Estee
Lauder's skin care segment has close to half of its market share in
the makeup segment - but the skin care market is almost double the
size of the makeup market. Profit margins are similar for the two
as we estimate the skin care market segment had an EBITDA margin of
close to 18.5%, which is not markedly different from the makeup
segment at 17.3% in 2010.
Why is Skin Care over 50% of Estee Lauder's Value?
Skin care market is perhaps the fastest growing segment of
beauty and personal care industry.
-
New niche segments within skin care:
Backed by the anti-aging skin care range and the relatively new
skin care range focused on men, skin care market is expected to
grow at close to 6%, while the mature makeup segment's growth
rates are expected to hover around 3%, largely in line with the
increase in the number of users (~2%) along with marginal
increase in prices reflecting rising costs.
-
Increasing demand for premium skin care in emerging
markets
: What is also driving skin care market is the increasing
affluence in emerging markets in Asia such as China and India.
With rising disposable income and standards of living, the
consumers in these markets are increasingly substituting local
products with premium international skin care brands.
-
Much scope for price-ups in skin care
: Skin care market is not only growing in volume but also on
account of healthy year-on-year price-ups. Unlike other beauty
care segments, skin care thrives on high end product innovation
and patented technology to counter the effect of aging, and sun
and pollution damage. All players spend a significant portion of
their R&D budget on skin care, which then validates premium
pricing.
You can see a detailed analysis of our
$71.65 Trefis price estimate of Estee Lauder's stock
here
.