Morningstar | Estee Lauder’s Skin Care Segment Continues to Shine in 2Q; Shares Fairly Valued
Wide-moat Estee Lauder posted solid second-quarter results, with sales up 7% (versus our 5% 2019 forecast) and operating margin expanding 30 basis points (versus our 40-basis-point estimated expansion in 2019) to 19.3%. We don’t expect a material change to our $146 fair value estimate as we incorporate these results and reiterate our longer-term outlook for around 6% sales growth and high-teens operating margins. Shares ticked up by a low-double-digit percentage on the announcement as management raised its full-year outlook (calling for diluted earnings per share to fall between $4.55 and $4.67, versus $4.40 to $4.53 prior and our $4.55 estimate), leaving shares near our valuation.The skin care category (43% of sales) continued to drive top-line gains, with sales up 16%, thanks to strength in core brands like Estee Lauder (which posted net sales growth in every region), La Mer, and Origins. We expect this segment to lead growth longer term (growing at a 6% to 7% clip) as the firm invests in value-added innovation; we model investments in research and development at approximating 1.5% of sales, or around $300 million annually, over our 10-year forecast. Further, we contend skin care consumers’ aversion to untested products will continue to support categorywide pricing power and therefore expect operating margins in this segment to remain robust. As evidence, segment operating margin expanded roughly 230 basis points to 32.6%.
From a geographic perspective, substantial growth in the Europe, Middle East, and Africa (16% constant currency growth; 44% of sales) and Asia-Pacific (20%; 25%) regions helped offset mid-single-digit percentage declines in North America due to ongoing headwinds from Bon-Ton store closures. While we expect sales in brick-and-mortar department stores to remain tepid, we were pleased to see double-digit growth in the online channel in the Americas (we estimate online accounts for a low-teens percentage of sales for the consolidated firm).
For additional information about Estee Lauder’s competitive positioning and cosmetics distribution dynamics, please refer to our report, "Looking Beneath the Surface: Attractive Dynamics Form the Foundation of Beauty Companies' Moats."
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.
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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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