Estee Lauder is on a solid growth path that should continue for several years, thanks to international expansion, growth in the digital business and small acquisitions. Valuation multiples are rich but deserved in the current conditions.
Estee Lauder was able to deliver outstanding results despite some economic and geopolitical volatility, terrorism and the challenging environment in the US department stores market, which pulled down the company's performance in the region. Sales in North America rose 5% thanks to the addition of recently acquired brands Too Faced and BECCA. Excluding the acquisitions, North American sales declined 3% due to the weak environment in department stores and, to a lesser extent, freestanding stores. Management admitted that the "biggest challenge has been in some US brick and mortar department stores." The shift in shopping preferences to digital segments accelerated in the recent past, which resulted in declining traffic in some department stores. Fortunately, the company derives only 17% of total sales from department stores in the US, and managed to more than offset the weakness in the segment through a solid expansion in other markets.
The exceptional results in Q4 were largely a result of the terrific strength in China, travel retail and online, as well as from some new brands. The company continues to grow at above -average rates, expanding its market share despite the fears of increased competition. In 2017, sales increased 7% against an industry growth of 5%. The e-commerce business accelerated, growing 33% YoY, with strong global growth, especially in Asia.
If we exclude North America, the company's performance was strong in every region. Asia-Pacific led total sales growth this quarter, with sales up 18% in constant currency, driven primarily by accelerated momentum in China, which grew more than 40% in the fourth quarter and 90% for the year. Hong Kong continued its rebound with high single-digit growth and other important Asian markets such as Japan, Korea and Indonesia delivered solid growth rates too.
Estee Lauder is strongly positioned in an extremely strong position in the changing and challenging retail environment today. Not only does the company own a huge and growing portfolio of valuable brands that guarantee a high diversification of revenue, it also manages an extremely valuable online business. A great source of strength is in the strong margins that the company reports in its online business. This is a very important factor to consider- Estee Lauder's online business is margin-accretive. The online business has been the most important growth vehicle in recent times. It's clear that Estee Lauder is able to grow in spite of the challenging situation in North America, and at very healthy rates. The company's growth strategy is clear and is based on the implementation of the following plan:
- continue to boost growth in fast growing markets such as china and other Asian countries, exploiting both established brands and smaller brands with untapped potential. Although the recent performance is not replicable, the company expects China to continue to grow at double digit rates for many years, and expects other emerging markets to deliver similar growth rates.
There will be a big push in the digital business, as the online segment is an excellent growth vehicle in many regions. In 2017, online growth was fueled by both direct-to-consumer and retailer sites, which account for approximately 60% and 40% of the online business, respectively.