Summary:
Estee Lauder has been posting better-than-expected results over the past several
quarters backed by organic sales growth, product innovation and cost savings
measures. The company expects to invest in new products as well as services to
make buying easier for customers. Though Estee Lauder expects growth opportunities
in product categories like beauty sector, channels and countries in fiscal 2016,
economic challenges will persist. The company is cautious of slower retail growth in
Hong Kong and China, a decline in spending by Russian and Brazilian travelers, the
impact of the MERS virus on its travel retail business in Korea and unfavorable
currency.
Reasons To Buy:
Strong Foothold in Cosmetics: Estee Lauder is one of the world's leading players in the
cosmetics industry. Furthermore, a formidable portfolio of globally recognized flagship brands,
which includes the likes of Estee Lauder, M-A-C, Jo Malone London, Smashbox, Bobbi Brown
or Tom Ford provides a competitive advantage and bolsters the company’s well-established
market position.
Moreover, Estee Lauder puts great thrust on innovation. Well-defined and focused innovation
ensures constant revenue growth. The introduction of products like anti-ageing skincare and
foundation were well received by the ageing population of U.S. The company has been
focusing on catering to younger customers by offering brands such as Jo Malone and Bobbi
Brown, as heritage brands Estee Lauder and Clinique are losing some shine in North America,
its biggest market. The company is geared to expand its mid-tier brands, like Aveda and La
Mer, as well as its fragrance brands.
A special collection of makeup and skin care – The Estee Edit – was launched under the Estée
Lauder brand in Mar 2016. The collection primarily targets the North AmericanSephora stores
and the premium consumers who visit these stores in the U.S. and Canada as well as
sephora.com – its online platform.
Estée Lauder Advanced Night Repair PowerFoil Mask launched during the third quarter fiscal 2016was well received, particularly in
Asia, and boosted the brand's important Advanced Night Repair franchise.
Clinique Pep-Start Eye Cream, debuted exclusively in Sephora in the U.S, and they became very popular.
Fast Penetration in Emerging Markets: Estee Lauder has strong international presence which insulates it from the
macroeconomic headwinds in the matured markets. The company derives a significant amount of its revenues from the emerging
markets. Brazil is Estee Lauder’s fastest-growing market, driven largely by M-A-C, DKNY and Tommy Hilfiger brands. The Middle
East, North Africa, sub-Saharan Africa and Asia Pacific markets offer extensive untapped potential for the company.
Moreover, Estee Lauder has bright prospects in China, as management believes that the region is under penetrated. Furthermore, it
is expanding into smaller Chinese cities. Skin care, particularly, has a bright future as it is used by a large majority of Chinese
women. Increasing demand for make-up is fuelling sales in China region. The company is accelerating expansion of its makeup
brands such as M.A.C. and Tom Ford to leverage this market trend.
Additionally, in May 2014, Estee Lauder took a big leap in e-Commerce with its debut on T-mall, the largest digital platform run by
Chinese e-Commerce giant, Alibaba Group Holding Ltd. Tmall continues to be a strong contributor to the online sales. Tmall now
sells five brands, the latest being Bobby Brown launched on the platform in September.
Catering to Locally-Relevant Needs: Estee Lauder designs its products according to the local needs making the brands highly
popular in its served markets. Estee Lauder’s Revitalizing Supreme skin cream, developed specifically for European woman, is the
most popular premium moisturizer in the EMEA market. Advanced Night Repair in Europe, Oud fragrance brand in the Middle East,
are other popular locally-relevant products of the company. The company has also developed relevant shade assortments in
makeup for diverse geographies and ethnicities and promoted them through local campaigns such as Shades of Africa and Shades
of Arabia from Clinique.
Strategic Acquisitions Helping Expand Portfolio: Estee Lauder has made several strategic acquisitions to enhance its portfolio.
In Mar 2016, the company acquired sophisticated Paris-based brand – By Kilian. The deal is expected to further strengthen the
company’s leadership in fast-growing luxury fragrances. In Dec 2015, the company completed its investment in the novelty Korea
skin care company behind the brands Dr. Jart and Do The Right Thing. This investment will give the company an opportunity to
support Dr. Jart's development and continued success around the world.
In the past, the company had announced two buyouts, one in Oct 2014 and another in Dec 2014. It took over two key prestige skin
care brands — RODIN olio lusso and GLAMGLOW in Oct 2014 to boost Estee Lauder’s skin care portfolio as well as increase its
international presence.
Apart from skin care, Estee Lauder has acquired high-end fragrance and lifestyle brand, Le Labo (The Lab) and high-end fragrance
brand Editions de Parfums Frédéric Malle in Oct 2014 and Jan 2015, respectively. Such acquisitions help the company to expand its
portfolio apart from helping it attain the respective loyal customer base.
The recent acquisitions are expected to contribute approximately 50 bps to the company’s overall sales growth in fiscal 2016.
Aggressive Marketing Strategy and Strategic Resource Allocation Helps Boost Topline: Estee Lauder emphasizes heavily on
marketing. The company is investing a lot in advertising, especially in TV and digital media. It also reaches out to its customers
through social networking sites like Facebook, where its brands cover more than 100 pages.
Social media is helping the company drive makeup sales with how-to-do videos, tips from consumers and visuals of makeup
transformations. M•A•C Instagram, for example, features photos submitted by its global artists, illustrating their creativity and
talents tied to products and trends. This kind of social media interaction creates an ongoing dialog between the brand and itsconsumers and in turn, helps drive sales.
The company has a very strong and aggressive sales force which provide ‘High Touch service’ (service with a lot of personal
contact) to its customers. The company tailors its services depending on the channel where the store is operating. These initiatives
have improved customer service leading to higher ordering.
The company’s product team directly collaborates with top designers, celebrities, artists and experts to create new products and
add celebrity power to the brands. M-A-C's Rihanna collections and Tory Burch's fragrances are examples of such products.
The company also adds celebrity power to its products in order to increase its acceptance in the market. For example, notable
fashion and television personality Kendall Jenner is expected to promote Estee Lauder’s new fragrance MODERN MUSE LE
ROUGE in digital, print and TV advertising in Fall 2016.Popular actress, Eva Mendes,will promote the company’s upcoming product
– New Dimension –in digital, TV and print advertising. M•A•C is designing a makeup collection inspired by singer Selena. Further,
Estée Lauder is teaming up with fashion designer Victoria Beckham for a full cosmetic collection. This collaboration brings great vast
to the company’s brand, especially on social media, and is expected to draw new consumers. The company notes that celebrity
power increases the demand for the products mostly among teenagers.
Moreover, strategic resource allocation and Estee Lauder’s promptness in reacting to unexpected events maximize its
opportunities. For example, the company reduced investment in Hong Kong which continued to decline and stepped up support in
Canada, the U.K. and other fast growth markets. Witnessing growing demand in direct-to-consumer business, the company
accelerated development of e-Commerce sites and freestanding stores in several markets. This dynamism helps the company
maintain its share in the cosmetics market and even maintain buoyancy in a volatile economy.
Strong e-commerce Business: Estee Lauder also has a strong e-Commerce business which has doubled over the last four years.
The company expects it to be a major growth engine for the upcoming few years as well. Estee lauder was the first global prestige
beauty company that went online with the Clinique brand in the U.S. in 1996. The company attracts almost 325 million online visitors
each year. Moreover, Estee Lauder launched nine e-Commerce sites around the world in fiscal 2014 including M-A-C in Brazil which
is performing beyond expectations and is already positioned to be one of the company’s top MAC doors in the coming years. It also
operates 13 m-Commerce sites, including three in China for Clinique, La Mer and Origins.
Risks:
Near Term Headwinds to Hinder Growth: The company is cautious of slower retail growth in Hong Kong and China, a decline in
spending by Russian and Brazilian travelers, the impact of the MERS virus on its travel retail business in Korea and unfavorable
currency.. Though Estee Lauder is strategically focusing on expanding in Asia and expects long-term growth in the region, a soft
macroeconomic condition in Greater China and Korea is slowing the company’s growth in Asia. The company is also witnessing
stock market volatility in China. Hong Kong also continues to be affected by sharp declines in Chinese travelers and weak local
consumption. Though the company is making efforts to strengthen its business with local consumers in Hong Kong, they do not
anticipate a significant pickup in consumption in the near term.
Negative Currency Translation: Negative currency translation is a concern for Estee Lauder. The U.S. dollar traded at multiyear
highs against a basket of currencies for most of 2014 and remained the same in 2015. Moreover, currency is expected to
hurt fiscal 2016 earnings by $0.24 per share. Thus, with significant amount of revenue coming from international operations,
Estee Lauder’s earnings remain highly vulnerable to negative currency translation.
Soft Consumer Spending Environment: Despite moderate improvement in economic growth, consumers are increasing their
spending only modestly as an increase in jobs in 2014 is yet to translate into significantly higher wages. High interest rates, higher
health care costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S. As a result,
Americans and Europeans are unwilling to increase discretionary spending.
