The Estee Lauder Companies Inc



The Estee Lauder Companies Inc. |(EL-NYSE) |$75.32 | |

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated.

Reason for Report: Flash Update 1Q13 and FY13 Earnings Update

Previous Ed.: Aug 21, 2013; 1Q13 and FY13 Earnings Update

Flash Update

Estee Lauder Beats but Narrows View – Oct 31, 2013

Estee Lauder Companies Inc. posted first-quarter fiscal 2014 earnings of 76 cents per share (excluding restructuring charges). The earnings exceeded the Zacks Consensus Estimate of 74 cents by 2.7% and management’s guidance of a range of 67 cents to 71 cents. However, earnings were down 3.7% from 79 cents reported in the prior year quarter due to lower operating income.

Quarter in Detail

Net sales climbed 6% to $2.67 billion on the back of higher sales in most of the geographic regions and major product categories. However, quarterly sales lagged the Zacks Consensus Estimate of $2.69 billion.

In the quarter under review, the Hair Care category was strongest with 10% growth. Fragrance product line followed with 6% growth over the year-ago quarter. Makeup and Skin Care followed next with 4% and 5% growth, respectively. Other products, with less than 1% of total revenue, declined 23%.

While gross margin inflated 80 basis points (bps) to 79.7% in the first quarter of fiscal 2014 owing to higher sales, higher selling, general & administrative expenses led to operating income margin contraction of 210 bps to 16.8%.

Segment Details

Americas: Sales in the Americas rose 2.0% to $1.2 billion. Sales increased on the back of growth in the company's makeup artist, hair care and designer fragrances brands. Operating income declined 9% to $156.0 million due to higher marketing spend to back new launches..

Europe, the Middle East & Africa: Double-digit growth in travel retail drove overall sales for this segment. Sales grew 7% on a constant currency basis to $891.2 million. Operating income declined 8% to $180.8 million on the back of a strong travel retail business.

Asia/Pacific: Sales in the region improved 7% to $581.4 million, backed by double digit sales growth in China, Hongkong and Taiwan. However, weakness in Korea partially offset the sales growth. Operating Income increased 1% to $113.9 million due to China, Taiwan and Hong Kong, being partially offset by lower operating results in Japan and Vietnam.

Other Financial Update

As of Jun 30, 2013, the company held $1.32 billion cash and cash equivalents compared to $1.49 billion as of Jun 30, 2013. Long-term debt remained flat at $1.32 billion compared to the end of the previous quarter.

EL has announced a dividend of 20 cents per share payable on Dec 16, 2013 to stockholders of record at the close of business on Nov 29, 2013.

Guidance

Following better than expected results in the first quarter, for fiscal 2014, EL raised it earnings per share outlook to the range of $2.80 to $2.87 compared to the previously announced range of $2.74 to $2.87. EL, however, maintained its sales guidance of 6%–8% in constant currency.

For the second quarter of fiscal 2014, earnings per share excluding restructuring charges are projected in the range of 99 cents to $1.04. Net sales are expected to increase between 3%–5% in constant currency, negatively impacted by foreign currency translation of 1%. Estee Lauder expects to augment its advertising spend to back its new product launches.

Portfolio Manager Executive Summary

The Estée Lauder Companies, Inc. (EL or the company) engages in the manufacture, marketing, and sale of skin care, makeup, fragrance and hair care products worldwide. Estée Lauder is controlled by the Lauder family, the dominant shareholder in the company, and also its dominant day-to-day decision-maker.

Of the 17 firms providing ratings on the stock, 11 assigned positive ratings and 6 provided neutral ratings. None of the analysts rated the stock as negative.

Buy or equivalent (11/17 analysts or 64.7%): The firms with a positive outlook expect Estée Lauder to benefit from its long-term growth strategy and management’s strategic modernization initiative (SMI) amid the uncertain macroeconomic conditions. These firms remain optimistic about the company’s increasing growth opportunities in emerging markets, especially in China. The company’s sales are expected to further expand on the back of its strong brand portfolio and consistent performance of its premium brands across geographies. They also believe that the company will gain from its margin expansion.

Neutral or equivalent (6/17 analysts or 35.3%): The firms are encouraged by the company’s fast penetration into emerging markets and decent performance in the other markets. However, they note that the company’s top lines in the future may be negatively affected due to the sluggish pace of economic growth. Moreover, they are also concerned about the company’s conservative guidance for fiscal 2013.

May 23, 2013

Overview

New York-based Estée Lauder Companies Inc. manufactures and markets skin care, makeup, fragrance, and hair care products. The company’s products are sold through department stores, mass retailers, company-owned retail stores, hair salons and travel-related establishments. Estee Lauder’s manufacturing and research facilities are spread across the U.S., Canada, Belgium, Switzerland, Japan, South Africa, and the U.K. The company reports operating results in terms of both product categories and geographic regions.

In terms of product categories Estee Lauder’s primary segments include:

➢ Skin Care division: This segment sells skin care products for men and women. The products consist of moisturizers, creams, lotions, cleansers, sunscreens and self-tanning products

➢ Makeup division: This segment manufactures, markets and sells makeup products. Its products include lipsticks, mascaras, foundations, eye shadows, nail polishes and powders, and related items, such as compacts, brushes and other makeup tools.

➢ Fragrances division: This segment sells fragrance products for men and women. Its products includes eau de perfume sprays and colognes, as well as lotions, powders, creams and soaps that are based on a particular fragrance.

➢ Hair care division includes hair color and styling products, shampoos, conditioners and finishing sprays.

The company sells its products in America, Europe, the Middle East and Africa - EMEA and Asia-Pacific

More information on the company is available at ; and its fiscal year ends on Jun 30.

The analysts identified the following issues as critical to an evaluation of the investment merits of Estee Lauder:

|Key Positive Arguments |Key Negative Arguments |

|Strong Brand Portfolio: Estée Lauder is one of the world's major cosmetic |High Promotion Expenses: Its high marketing and promotional costs put |

|players. A formidable portfolio of globally recognized flagship brands |pressure on margins |

|provides a competitive advantage to the company. |Soft economic conditions: Although customers do not compromise on value while|

|Expanding in Emerging Markets: A strong presence in the emerging markets |buying beauty products, persistent economic challenges may force them to |

|insulates it from the macroeconomic headwinds in the developed regions. |tighten their spending, hurting the company’s top line eventually. |

|Extensive Marketing Strategy: The company has a very strong and aggressive | |

|sales force, which promises to provide personalized customer service. | |

|Additionally, the company’s Strategic Modernization Initiative (SMI) and | |

|advertising, merchandising and sampling strategies are continuously helping | |

|it to enhance its product ranges further. | |

May 23, 2013

Long-Term Growth

The company commands a strong portfolio of premium cosmetic brands like Estee Lauder, Aramis, Clinique, Tommy Hilfiger, Donna Karan and Origins, which bolsters its well-established position in the market.

The company expects that product and service innovation, travel retail, digital and e-commerce, specialty-multi retail and global luxury tier will drive its future growth.

Estee Lauder, unlike its peers, is not affected much by the weak economic conditions in Europe. The company has outperformed its peers in Europe, which reflects the strength of the company’s products and categories, and local relevance of its brands. The company is now focusing more on expanding its coverage in the emerging markets like Brazil, Japan, China and Israel, to enhance its business further.

The company has outlined its long-term strategy in its four-year (FY10-FY13) restructuring plan, which focuses on its core strengths as superior brand builders and innovators, is well on track. As planned, the company increased its global advertising spending versus the prior-year quarter to build momentum and gain share in its key markets and product categories.

May 23, 2013

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

|Rating Distribution |

|Positive |64.7%↑ |

|Neutral |35.3%↑ |

|Negative |0.0%↔ |

|Digest High |$83.00↑ |

|Digest Low |$68.00↑ |

|Avg. Target Price |$74.80↑ |

|No. of Analysts with Target Price/Total |15/17 |

Risks associated with the stock primarily include under-performance of newly launched products, higher-than-expected advertising and promotion expenditures; higher market share gains of competitors through aggressive marketing.

Recent Events

Estée Lauder Earnings Beat Estimates – May 2, 2013

Estée Lauder Companies Inc. posted third-quarter fiscal 2013 earnings of $0.45 per share (excluding restructuring charges), which climbed 19.0% from $0.38 in the prior-year quarter. The results were ahead of management’s guidance range of $0.28 to $0.32. The reported earnings also exceeded the Zacks Consensus Estimate of $0.33 by 36.4%. Profits during the quarter were aided by strong sales growth and strict cost management.

Quarter in Detail

Net sales, excluding foreign currency translation, climbed 3% to $2.29 billion backed by strong sales in makeup and hair. The increase was at the lower end of the company’s guidance of 3% - 4%. The quarterly sales however, missed the Zacks Consensus Estimate of $2.33 billion.

The Hair Care product line was the strongest in the quarter, growing 6% from the year-ago quarter. This was followed by Makeup and then Fragrance, which grew 5% and 1%, respectively. Skin Care product remained flat compared to prior-year quarter. Other products, with less than 1% of total revenue, declined 24%.

The gross margin expanded 160 basis points (bps) to 80.7% in the third quarter of fiscal 2013 owing to strong sales and cost control.

Other Financial Update

As of Mar 31, 2013, the company held $1.44 billion cash and cash equivalents compared to $1.32 billion as of Dec 31, 2012. Long-term debt remained flat at $1.33 billion compared to the end of the previous quarter.

The company has announced a dividend of $0.18 per share on the payable on May 31, 2013 to stockholders of record at the close of business on Feb 28, 2013.

Guidance

For fiscal 2013, earnings per share, excluding restructuring charges, are projected in the range of $2.56 to $2.61 compared to $2.51 to $2.0 as expected previously on the back of a solid third quarter fiscal 2013 results. Net sales are expected to increase by 6% in constant currency for the fiscal year

Revenues

Net revenue increased nearly 2% y/y to $2.29 billion in 3Q13 on the back of solid sales in makeup and haircare segment. Net sales climbed 3% excluding the impact of foreign currency translation.

Provided below is a summary of revenue as compiled by the Zacks Digest model:

|Revenue ($M) |3Q12A |

|Last Done by |Japamala Mukhopadhyay |

|Copy Editor: | |

|Content Ed. | |

|Reason for Update |4Q13 Earnings Update |

|Research Analyst |Japamala Mukhopadhyay |

|Lead Analyst |Sanghamitra Saha |

|QCA |Kinjel Shah |

|Copy Editor |Kamalika Pramanik |

|Content Ed. |Sneha Nahata |

|No. of Broker reported/ Total No.|17/17 |

|of Brokers | |

|Reason for Update |Earnings |

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Dec 31 2014

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