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Estee Lauder (NYSE:EL) is scheduled to release its fiscal Q3 2011 earnings on May 5th. The company has produced solid results over the past few quarters and it will be interesting to see whether these trends were sustained through the most recent quarter. Estee Lauder, the maker of premium beauty care products, competes with other big names like Revlon (NYSE:REV), Avon (NYSE:AVP) and L’Oreal (PINK:LRLCY.PK).

We maintain a $71.65 price estimate for Estee Lauder stock, implying a 25% discount to market price.

What to Expect from the Upcoming Earnings Release

Estee Lauder’s performance over the first two quarters of its current fiscal year (July 2010 – June 2011) showed considerable improvement in operating margins. But here we’re presented with our biggest concern. Can Estee Lauder sustain the improved operating margins in the face of rising commodity costs?

(Click chart to expand)

With an impressive first half of its current fiscal year, Estee Lauder closed 2010 with an 11.6% growth in sales along with a 174 basis point improvement in operating margins. The skin care segment, which represents almost 41% of total sales, showed substantial top-line revenue growth, up 15% year-over-year. Comparatively, the fragrance segment, which represents 17% of total sales, saw most of its upside on bottom-line profits – fragrances sales recorded almost a 500 basis point improvement in operating margins. The key to these trends will come down to whether they are sustainable going forward.

How can Estee Lauder maintain operating margins? For one, the company could look to pass rising input costs on to consumers in the form of price increases, something we did not see in the last quarter.

Another Trend to Watch – Continuing Momentum in Skin Care

Skin care makes up almost 52% of our $71.65 price estimate for Estee Lauder stock. Skin care appears to be the fastest growing segment within beauty care, largely due to the growing popularity of anti-aging skin care as well as skin care products for men. And Estee Lauder maintains an impressive product lineup within skin care. Its market share in this $90 billion product segment grew from 5.9% in 2009 to 6.6% in 2010, and the company looks primed to continue its gains in the years ahead.

Chart created using Trefis' app

You can drag the trend line in the interactive chart above to see the affect of further market share gains on Estee Lauder’s stock value.

Disclosure: No positions

Source: Estee Lauder Earnings Preview - What We're Watching