Estee Lauder Thrives In Beauty Product Spending Surge

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There's nothing like a bright new lipstick shade or a moisturizer that smooths and brightens the skin to lift a woman's spirits.

The folks atEstee Lauder Cos. ( EL ) know all about it. The beauty products powerhouse has seen profits rise by at least double digits in all but two of the past 12 quarters.

In the most recent fourth quarter ended June 30, earnings climbed 42% to 17 cents a share, topping views. Sales rose 9% to $2.25 billion, also ahead of views. Its shares popped 9.31% after reporting the strong results on Aug. 14.

Estee Lauder makes prestige beauty products, which are sold at better department stores and specialty stores. Its lineup includes skin care, hair care and fragrance products sold under brand names such as its namesake, Clinique, M-A-C, Bobbi Brown and Aveda.

"The strong fourth quarter was driven largely by continued momentum in the U.S. and strong growth in China and travel retail," said Chief Executive Fabrizio Freda in a press release.

Spending Surge

Estee Lauder and beauty product retailers such asUlta Beauty ( ULTA ) have been cashing in on a surge in spending on prestige beauty products. U.S. sales of these products surged 11% to $9.5 billion in 2011, according to market research firm NPD Group.

"Last year was a record year with double-digit increases across all categories," said Karen Grant, vice president and senior global industry analyst at NPD. "This year, we're seeing continued growth, but not at the same rate."

But the pace is still very strong, she adds, pointing out the industry is up against very tough comparisons.

The jump in spending on prestige beauty products reflects a renewed interest in grooming and the desire to have a more polished appearance on the part of men and women, Grant says.

Also, she adds, beauty products are a "pragmatic luxury." The average price point for these items is under $50, and these products typically last a long time, roughly a few months.

"What it comes down to is this is a really tough environment where people are getting hit hard and they're changing their lifestyles," said RBC Capital Markets analyst Jason Gere. "They may not be able to buy themselves a $500 purse, but there are certain affordable luxury brands that allow women to feel good about themselves. Estee Lauder is one of them.Lululemon ( LULU ) is another."

Prestige beauty has been one of the few categories within household products that's seen growth during the downturn on a global basis, Gere adds.

They fetch higher prices than those sold through the mass channel, such as drugstores and mass merchants. Still, says Grant, beauty products sold through the prestige channel in the U.S. have been outperforming the mass channel in terms of sales growth since 2011, and again in the first half of 2012.

Estee Lauder, which posted a 10% gain in sales in fiscal 2012, grew sales at twice the rate of the worldwide prestige beauty category, said Freda. He credits the success to "highly innovative products, marketing prowess and personalized services."

Broad-Based Growth

"Despite pockets of economic uncertainty around the globe, our growth was broad-based with strong gains in every geographic region and product category and many distribution channels," he said.

For the year, Estee Lauder saw particularly strong growth in skin care, with a 15% increase in sales, vs. a year earlier. The Estee Lauder brand saw strong sales from its recent launch of Revitalizing Supreme Global Anti-Aging Creme. It enjoyed continued growth from products such as Advanced Night Repair Synchronized Recovery Complex.

Makeup sales rose by double digits, driven largely by strong gains from the company's artist brands, where it got a nice boost from new offerings. Higher sales reflected recent launches such as Lid Smoothie Antioxidant 8-Hour Eye Colour from Clinique.

Thanks to financial discipline throughout the company, said Freda, Estee Lauder was able to bring much of its sales growth to the bottom line. Its operating margin rose 120 basis points to a record 14.2%.

Analysts polled by Thomson Reuters expect 2013 earnings to rise 13% to $2.56 a share. They forecast a 15% increase in 2014.

On the fourth-quarter conference call, Freda forecast the global prestige beauty category will grow by 3% to 4% in fiscal 2013.

"Our anticipated growth rate will again be twice that pace," he said.

He expects sales to grow 6% to 8% annually over the next several years.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: EL , LULU , ULTA

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