Driven by the the momentum in prestige skin care and makeup product markets in the U.S. and expansion in Asia-Pacific, Estée Lauder's (EL) sales grew by 5% in 2012. The sales from the U.S. and Asia-Pacific account for about 40% and 20% of its total sales, respectively.
We believe that the expansion into the Chinese second and third tier cities aided by the company's marketing and e-commerce strategy will drive its sales growth in the region. In the U.S., the company is now focusing on segments where it has a strong hold besides skincare and makeup, like its recent partnership with luxury Italian fashion house Ermenegildo Zegna to launch a fragrance aimed at the prestigious men's products market.
Estée Lauder competes with the likes of Revlon (REV), L'Oreal (LRLCY) and Avon Products (AVP). We believe that the growth potential of prestige beauty products in the U.S. and the company's foothold in the Asia Pacific region will be instrumental in its future growth and supports our $66 price estimate for Estée Lauder, which is at part with the market price.
Near-Term Focus on China to Drive Asia-Pacific Growth
In Asia-Pacific, sales grew almost 10% in the quarter ending in December. China contributes to about 25% of these sales and is the focus of the company's expansion plans in the region. In 2012, the company had launched its first Chinese beauty brand, and it already has a research and development center in Shanghai to develop products according to local preferences and offers about half of its brand portfolio to its users.
Asia-Pacific is expected to become the largest market of luxury branded products in a couple of years. Prestige beauty products are a part of this category and are expected to participate in the growth. Sensing this opportunity, Estée Lauder has been pushing aggressively in these markets. In its 2012 fiscal year, the company reported sales in the Asia-Pacific region of more than $2 billion of its total $10 billion in sales globally. China is now its third-biggest market after the United States and Britain, and accounts for about $500 million in annual sales.
In China, Estée Lauder sells products at stores in 66 cities across the mainland and plans to open more, particularly in second and third-tier cities. It also plans to expand in Southeast Asian markets such as Vietnam. In a recent statement, the company said that despite being ranked the best digital brand in China, online sales were a small portion of its total sales. Shops and beauty salons remain the major sales channels for its beauty products. We believe that brand recognition developed through online initiatives will bear fruit when the company expands its footprint in the second and third tier cities and help drive sales growth in the region.
The growth in the Asia-Pacific region besides the company's limited presence in the market support our expectation of the region being the growth driver for sales in the near term.
Growth in Asia-Pacific to be Aided by Travel Retail Growth in the Region
Travel retail became a billion dollar business for Estée Lauder in FY 2012. The company is now one of the two biggest beauty players in duty free and travel retail. However in the December quarter, it noted a deceleration in the growth it had witnessed in the segment. With travel retail constituting about 10% of the company's total sales, we expect these sales to grow along with the market. The company's expansion plans in China and the Asia-Pacific region will also help drive growth from the segment as the Asia-Pacific region's share of the world total is expected to soar to half of global airport retailing by 2017.
Prestige Beauty Products to Continue Growing in 2013
Supported by the growth in m-commerce sales and improving economic scenario, prestige channel sales are expected to grow over the next three years. The prestige channel sales outpaced the mass market by two times in 2012, and are expected to continue doing so in the near term. Skin care and makeup segments have driven growth in the past couple of years, and we expect these to continue to be the main growth drivers.
We have a $66 Trefis price estimate for Estée Lauder, which is in line with the market price.
Disclosure: No positions.