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Morningstar | Estee Lauder’s Focus on Innovation Across Its Brand Set Should Bolster Its Top-Line Trajectory

In our view, Estée Lauder’s enviable portfolio of high-end beauty brands--including Clinique, MAC, Bobbi Brown, and Aveda, in addition to its namesake--has helped the firm carve out a wide economic moat and defend its leading position in the prestige beauty category, where it enjoys an above 14% global share. We think the firm's premium positioning has allowed it to develop durable brand intangible assets. Its investments in advertising, promotion, and research and development (in aggregate, averaging 25% of sales over the past decade) further support its retail relationships. We believe this spending will enable Estée Lauder to keep its brand equity intact as it expands its presence across a variety of channels and geographies in the high-end cosmetics category.Estée Lauder has diversified its products' distribution over the past few years. It has shifted its channel mix away from department stores (which we estimate now contribute slightly below 40% of sales, versus 54% in fiscal 2012) and toward the rapidly growing online, travel retail and specialty multibrand channels that in total represent above one third of the firm's sales. Even some of the firm's core brands remain underpenetrated in their global distribution; for example, MAC has less than 15% of the distribution of top brands like Estée Lauder. We think this reflects a prudent distribution strategy; rather than flooding its products into a new region or distribution channel, the firm slowly and selectively allocates brands to various channels to protect brand equity.Estée Lauder isn’t resting on its laurels; we believe it is pursuing inorganic and organic means to support its trajectory and competitive prowess. For one, the firm has pursued tie-ups (like its 2016 acquisitions of Too Faced and Becca) to broaden its reach into specialty multibrand retailers and with millennials. We think Estée Lauder’s ongoing cost-saving initiatives, which target $350 million-$450 million in annual savings (or 3%-4% of fiscal 2018 cost of goods sold and operating expenses, excluding depreciation), should also allow it to maintain its strong brand investments, supporting top-line growth and its competitive edge.