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Estee Lauder (EL) Beats Earnings, Cuts View on Currency Woes

Estee Lauder Companies Inc.EL posted mixed second-quarter fiscal 2017 results, wherein earnings beat the Zacks Consensus Estimate, revenues missed the same. The cosmetic giant has provided weak earnings guidance for fiscal 2017, probable due to currency headwinds and other global issues.

Adjusted earnings of $1.22 per share beat the Zacks Consensus Estimate of $1.16 by 5.2%. It was flat from the prior-year quarter earnings. Excluding currency impact, adjusted earnings improved 5% year over year to $1.28 per share.

Estee Lauder Companies, Inc. (The) Price, Consensus and EPS Surprise

Estee Lauder Companies, Inc. (The) Price, Consensus and EPS Surprise | Estee Lauder Companies, Inc. (The) Quote

Revenues and Margins

Estee Lauder's net sales of $3.21 billion missed the Zacks Consensus Estimate of $3.25 billion by 1.2%. However, sales grew 3% from the prior-year quarter, driven by acquisitions of By Kilian, BECCA and Too Faced, which contributed approximately 90 basis points to sales growth. Strong product portfolio driven by small, mid-sized and luxury brands continued to lead growth.

Adjusted gross profit increased 1.6% to $2.58 billion. Adjusted gross margin shrank 90 basis points (bps) to 80.3% as improved revenues were offset by higher cost of sales. Adjusted operating margin also contracted 30 bps to 20.5% due to higher operating expenses.

If we look into the price performance of the company over the past one year, we note that the stock price declined 7.6% in the last one year, narrower than the Zacks categorized Cosmetics and Toiletries industry's fall of 12.8% in the same time frame. Notably, the industry is part of the bottom 40% of the Zacks Classified industries (158 out of the 265). The broader Consumer Staples sector is placed at the bottom 13% of the Zacks Classified sectors (14 out of 16).

Segment Results

Sales, on a constant currency basis, grew in each of the categories, except for the Hair Care, where it declined 7% due to a difficult comparison with several Aveda product launches in the prior year. Other category reported flat sales growth in the quarter.

By Geography

Americas: Sales in the Americas inched up 1% year over year on a constant currency basis. Most of the company's brands generated sales growth driven by acquisitions. Sales in the company's online and specialty-multi channels grew strong double-digits. However, decline in retail traffic in the U.S. mid-tier department stores negatively impact the growth. Further, lower tourism adversely affected sales in certain U.S. MAC freestanding stores.

Europe, the Middle East & Africa: Sales improved 9% year over year on a constant currency basis, backed by growth in all countries except Middle East. Many emerging markets and developed countries also posted double-digit sales growth. In travel retail, net sales increased on new launch initiatives, global airline passenger traffic growth and expanded distribution.

Asia/Pacific: Sales in the region climbed 5% on a constant currency basis backed by double-digit growth in China and the Philippines. The company also witnessed strong growth in Korea.

Other Financial Update

Cash and cash equivalents at the end of second quarter was $1.26 billion, while long-term debt was $1.89 billion.

Fiscal 2017 Guidance

Estée Lauder expects continued growth opportunities in the global prestige beauty industry, which is expected to grow 4-5% during the year. However, volatility and economic challenges are slowing the pace of market growth in Hong Kong and several emerging markets. Nevertheless, the company's annual growth has consistently outpaced global prestige beauty and, despite these global issues, is expected to continue to grow at least one percentage point ahead of the industry for the fiscal year.

For fiscal 2017, Estée Lauder maintained net sales growth projection at 6-7% on a constant currency basis. Foreign currency is now expected to negatively impact sales by 2%, compared with 1% forecasted earlier.

The company has lowered its earnings guidance for fiscal 2017. The company now expects adjusted earnings in the range of $3.29-$3.33 per share, compared with $3.38-$3.44 per share estimated earlier for fiscal 2017. On a constant currency basis, adjusted earnings are expected to grow 8-9%, narrower than the earlier guidance of 8-10%. We believe the lowered guidance is due to unfavorable currency headwinds and increasing promotional environment in emerging markets.

Third Quarter Fiscal 2017

Net sales are forecasted to grow 7-8% in constant currency for the third quarter. Adjusted earnings are expected to grow in the range of 65-70 cents per share.

Currency is expected to impact sales by 2%, while earnings are expected to be hurt by 3 cents per share.

Zacks Rank

Currently, Estee Lauder carries a Zacks Rank #3 (Hold), while its peer Helen of Troy Ltd. HELE holds a Zacks Rank #2 (Buy). Other better-ranked companies from the broader consumer staple sector include B&G Foods, Inc. BGS and ConAgra Foods, Inc. CAG .

Helen of Troy has an average positive earnings surprise of 23.21% in the trailing four quarters and long-term earnings growth rate of 10.75%, while both B&G Foods and ConAgra Foods have long-term earnings growth rate of 8.00%. All of them carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

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


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

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