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Today Estee Lauder (EL) reported its second quarter earnings. The earnings release fell short of expectations as the company warned about a revenue slowdown for the second half of its fiscal 2012. Shares opened down 6% but recovered intra-day to end the day down 2.5% in a very bullish market. Despite the fall today the shares remain within reach of their all time high of $60.

Second quarter results
The second quarter, which includes the holiday season, is traditionally the company's strongest quarter. Sales increased 10% to $2.74 billion, net earnings were up 15% to $397 million with earnings per share coming in at $1.00 in line with expectations. Revenues grew 8% in the US, 5% in Europe and 21% in Asia.
Earnings for first half year came in at $1.70, up from $1.34 last year. Traditionally Estee Lauder makes about 80% of its profit in the first half of the year.

Outlook
Estee Lauder expects revenue growth of 4-5% for the third quarter to $2.27 billion. This seems a marked slowdown, but the company announced that the implementation of SAP systems pushed revenues of the third quarter forward to the second quarter.

It now expects earnings per share for the third quarter of $0.27-$0.31 for 2012 vs. $0.31 in 2011. The slightly lower earnings guide is due to $80 million in additional advertising as many new products will be rolled out.
Full-year earnings for 2012 are expected to come in at $2.09-$2.19, up 23% compared to $1.74 in 2011. Full year sales are expected to grow 9-10% to roughly $9.7 billion. Despite a slowdown in revenues for the second half of the year, it continues to outperform the growth in the global beauty industry.

Valuation
Estee Lauder trades at 2.2 times annual revenue and 27 times annual profits for 2012, which is quite a high valuation. However, the company holds a strong portfolio of consumer brands with predictable cash flows and a good competitive position in Asia.

Furthermore, the roll-out of SAP systems is supposed to save costs of about $115-$140 million per year.
The key to justifying this "full" valuation despite high annual revenue growth and continued margin improvements is to close the margin gap of its US business with the other operations. While Europe and Asia report operating margins of 30%, the US business, which comprises 40% of total revenue, comes in at a mere 10%.

If Estee Lauder manages to close the margin gap within a reasonable time period, a target of $75 is attainable.

Source: Estee Lauder's Temporary Setback