EUR 850.00 For Business Accounts Only

Morningstar | Estee Lauder Continues to Grow at Double-Digit Clip in Asia in 1Q; Shares Moving Toward FVE

Wide-moat Estee Lauder began its first quarter on solid footing, with net sales up 9% in constant currency and operating margin expanding 110 basis points to 18.5%. From a geographic perspective, the Asia-Pacific region (24% of sales) continued to grow at a rapid clip, with sales in the region up 26% in constant currency (and lapping a 17% increase in the prior year period) and improved overhead cost leverage, as well as improved channel mix, driving about 100 basis points of segment operating margin expansion to 24%. From our perspective, this evidences the underlying strength of the Asian beauty market, with wide-moat L'Oréal also reporting a 26% increase in like-for-like sales in Asia Pacific, despite ongoing concerns about macroeconomic risks in the region. We contend growing per capita beauty consumption and further premiumization trends should fuel double-digit sales growth in the region through fiscal 2020. Performance was also strong in the Europe, Middle East, and Africa region (41% of sales), with constant currency sales up 16% thanks to double-digit growth in the travel retail channel and in emerging markets (particularly the Middle East and India) and operating margin expanding to 32% (from below 28% in the prior-year period).

While management raised its adjusted EPS guidance for fiscal 2019 (to $4.73-$4.82, from $4.62-$4.71 prior), our $4.79 estimate remains at the high end of this new range. As a result, we aren't expecting significant changes to our $145 fair value estimate or longer-term outlook, which calls for around 6% sales growth and high-teens operating margin on average over the next five years. While shares remain at a modest discount to our valuation, we'd suggest investors wait for a slightly more attractive entry point at current levels.

Excluding the impact of Bon-Ton store closures, a new accounting standard, and currency effects, net sales in the Americas were roughly flat, as double-digit growth online and high-single-digit growth in the specialty multibrand channel helped offset declines resulting from reduced traffic in midtier department stores (although management posits this channel has improved sequentially). In our view, this underscores the importance of Estee Lauder's efforts to diversify its distribution over the past several years; its exposure to North American department stores stood at 18% in fiscal 2017, versus 22% the year prior.