Estée Lauder Shows Consistent Top Line Growth and Steady Margins With Regular Product Launches
Estée Lauder ( EL ) reported strong first quarterly results on October 31, with approximately 5% growth in revenues y-o-y despite a slight dip in operating and net income margins. Sales from the company's largest division, skin care, grew 5% to reach $1,171 million, supported by strong growth in sales of new product launches. The company's makeup, fragrance and hair care divisions also benefited from various new product launches, which resulted in 4%, 6% and 10% rise in y-o-y sales respectively.
On a y-o-y basis, operating profit margins for the quarter declined by 2.1% due to an increase in costs associated with the selling, advertising and marketing of new product launches. This decline in operating profit margins due to higher SG&A expenses also percolated into the company's net profit margin for the quarter, which shrank by about 50 basis points to 11.2%.
The stock showed a tempered response to the Q1 FY14 results, with a 2% decline since October 31 and closed at $70. We have a revised Trefis price estimate of $77 for Estée Lauder which reiterates our confidence in the long term growth prospects for the company.
Burgeoning U.S. E-Commerce Market Could Drive Future Growth
The burgeoning U.S. e-commerce market, expected to grow at 10% CAGR between 2012 and 2017, is driving growth for a variety of industries such as retail, beauty and logistics. According to the U.S. Department of Commerce, sales from online channels totaled up to $225 billion in 2012 and is expected to reach $262 billion in 2013. This growth rate is much higher than the 3.4% annual growth rate predicted for the beauty and personal products industry. Prospects of high growth coupled with limited additional expenditures into building an e-commerce system is driving investments into the e-commerce market.
In the quarter gone by, Estée Lauder reported double digit growth rates in its e-commerce sales from both brands and retailers. A majority of this growth is stemming from the U.S. market, where retailers are quickly migrating towards e-commerce leading to an increasing share of prestige product sales from the channel. Similarly, sales of cosmetics within the Chinese market are increasing from the online channel, indicating faster migration towards online sales from Chinese retailers. Chinese online sales, albeit representing a small percentage of total sales from China, have grown by more than 100% from a year ago. In the short term, we expect Estée Lauder to invest into newer online sales channels, drawn by the immense growth potential offered by the global e-commerce industry. Additionally, e-commerce sales tend to have higher sales margins, which could lead to an incremental expansion in margins for the company in the long run.
Chinese Growth Prospects Look Bright With Strengthening Asian Travel Industry & Luxury Product Market
Estée Lauder's focused expansion into the Asian markets through the travel retail channel is also continuing to show promise by delivering a growth rate of 16% in the region. Travel retail sales, which comprise of product sales from the company's boutique stores in various airports and travel lounges, grew at about twice the growth rate of passenger traffic globally. The company's strong visibility in major travel destinations and its strong portfolio of luxury brands is fueling the growth in travel retail sales. Asian countries such as China, Japan and Thailand accounted for a large part of this growth, bolstered by the increase in outbound passenger traffic from China in 2013. The skin care and fragrance divisions gained most from this increase in passenger traffic, with new products such as Advanced Night Repair Eye Serum and Dramatically Different Moisturizing Lotion+ registering strong double digit growth rates.
Although Estée Lauder entered the Chinese market almost a decade after the entry of competitor L'Oreal ( LRLCY ), the company is fast catching up in terms of market share by focusing on travel retail sales from China. According to industry research firm Euromonitor International, Estée Lauder had an CAGR of approximately 30% in the Chinese premium cosmetics' sales compared to L'Oreal's 19% in fixed currency terms. Going forward, we expect an expansion in Estée Lauder's market share within the Chinese market, driven by an increasing demand for luxury products in the Mainland China region and the rapidly expanding Chinese travel industry.
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