Estee Lauder (EL) makes premium makeup, skin care, fragrances and hair care products and sells them through high end department stores, perfumeries, pharmacies, prestige salons and spas. Estee Lauder competes with other leading cosmetics companies such as L’Oreal (LRLCY), Revlon (REV) and Avon (AVP) with its portfolio of well known brands like Aramis, Clinique, Aveda, La Mer and its flagship Estee Lauder brand.
Our $71.65 price estimate for Estee Lauder notably stands about 25% below market price.
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Estee Lauder recently released its fiscal 2011 second quarter earnings. Estee Lauder grew revenues by an impressive 11.6% along with significant operating margins improvement of over 170 basis points. Estee Lauder’s performance over calendar-years 2009 and 2010 can be attributed to the following three factors.
Calendar-Year Changes Between 2009 and 2010
Robust Growth in the Skin Care Segment
The skin care market has been the fastest growing segment within beauty care, predominantly due to anti-aging skin care and skin care for men. Estee Lauder draws over 40% of its sales from skin care and recorded 15% growth in revenues from this segment during 2010 due in part to improved market share. We estimate that Estee Lauder grew its market share in the $90 billion skin care market from 5.9% in 2009 to 6.6% in 2010.
Much Needed Improvement in Fragrances Operating Margins
Fragrances constitute about 17% of Estee Lauder’s sales, but saw notably low EBITDA margin at around 4% compared to the company average EBITDA margin in excess of 14% in 2009. Estee Lauder recorded improvement in this metric during 2010, raising its fragrances EBITDA margin by over 500bps to beyond 9% by year-end.
Healthy Growth in Emerging Economies in Asia/Pacific
Emerging markets in Asia have been the engine of growth for Estee Lauder. The Asia-Pacific region, which currently contributes only 20% to Estee Lauder’s total sales, grew at over 15% in 2010 due largely to strong revenue growth in China and India. The rising affluence of the Chinese, the expanding middle class in India and the growing popularity for skin care amongst Chinese males have all contributed to Estee Lauder’s growth in 2010, albeit at marginally reduced operating margins.