Morningstar | Estee Lauder's Investments Behind Its Brands Should Support Attractive Growth Trajectory
After a recent visit with wide-moat Estee Lauder's management, we have renewed conviction that the firm's efforts to drive innovation across its brands and geographies will help its top-line momentum persist. We expect mid-single-digit sales growth over the next decade, as the firm continues to expand its reach from both a channel and geographic perspective. For example, the proportion of sales it derives from North American department stores (which have faced eroding foot traffic over the last several years) has fallen from 24% in fiscal 2014 to 15% in fiscal 2018. Over the same time frame, its online business (13% of sales, including retailer sites and third-party platforms) posted nearly 30% compound growth. This has supported comparable sales growth of 8% on average between fiscal 2014 and 2018, versus the global prestige beauty industry's 6% mark. We expect Estee's increased focus on local relevance, particularly in developing markets, should further enhance its market share.At the same time, initiatives to extract costs from its operations (targeting $350 million to $450 million in pretax savings by fiscal 2021) have allowed the firm to bolster investments behind its brands and ensure that its product portfolio remains responsive to evolving consumer tastes and trends. While we expect this brand-related spending to remain robust (with combined spending on advertising and research and development averaging above 25% of sales over our forecast, in line with historical levels and those of its peer group), we expect a portion of savings will also fall to Estee's bottom line, supporting operating margin expanding around 130 basis points of operating margin expansion to 18% by fiscal 2021. Our $154 fair value estimate incorporates above 6% sales growth and high-teens operating margin on average over the next five years. While shares are currently trading near our valuation, we'd suggest investors keep this name on their radar.
For additional detail, please refer to our report, "Estee Lauder's Solid Momentum Due to Innovation Focus."
Estee Lauder Companies is a manufacturer and marketer of skin care, makeup, fragrance and hair care products. The company's products are sold under a number of brand names including: Estee Lauder, Clinique, Origins, MzAzC, Bobbi Brown, La Mer, Jo Malone London, Aveda and Too Faced. The company is also the global licensee for fragrances, cosmetics and/or related products sold under various designer brand names. The company's products include skin care, makeup and related items such as compacts, brushes and other makeup tools, fragrance sold in various forms, hair care, and other ancillary products and services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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