Estee Lauder (EL) Raises View on Solid Q3 Earnings & Sales
The Estee Lauder Companies Inc. EL reported third-quarter fiscal 2018 results, with the top and the bottom line improving year over year and beating the Zacks Consensus Estimate. Notably, this marked the company’s 15th straight quarter of earnings beat and sales surpassed the same for the fifth consecutive period. The impressive quarterly performance encouraged management to raise guidance for fiscal 2018.
Needless to say, the splendid performance of this cosmetics giant has kept investors bullish for quite some time. Evidently, this Zacks Rank #3 (Hold) stock soared 65.7% in a year, outperforming the industry’s rally of 35%.
Quarter in Detail
The company posted adjusted earnings per share of $1.17 that surged 30% year over year and beat the Zacks Consensus Estimate of $1.07. On a currency-neutral basis, earnings improved 17%.
The Estee Lauder Companies Inc. Price, Consensus and EPS Surprise
After including certain one-time items, earnings came in at 99 cents, up from 80 cents reported in the year-ago quarter.
Estee Lauder’s net sales of $ 3,370 million surpassed the Zacks Consensus Estimate of $3,234 million. Moreover, sales increased 18% from the prior-year quarter. Further, sales advanced 13% on a constant-currency (cc) basis.
Performance during the quarter was mainly driven by sturdy travel retail and online businesses along with strong brand growth in the Asian markets. Further, robust global demand in majority of the company’s brands also fueled results.
Gross profit increased 18.6% to $2,687 million and gross margin expanded 40 basis points (bps) to 79.7% on the back of improved revenues.
Adjusted operating income came in at $588 million, surging 21% year over year, while adjusted operating margin improved 40 bps.
Product Based Segment Results
On the basis of product category, Skin Care reported sales growth of 31% year over year (up 25% at cc) to $1,447 million, owing to double-digit improvements in brands including GLAMGLOW, La Mer, Origins and Estee Lauder. The segments’ top line also gained from sturdy business progress in Asia, driven by innovations, benefits from hero products and deamnd surge among younger consumers.
Makeup revenues were up 9% (up 5% at cc) to $ 1,388 million on the back of robust performance of brands such as Tom Ford, Estée Lauder, Clinique and MAC. These were partially offset by reduced sales of makeup products in the United States, stemming from lower store traffic.
Fragrance category reported revenue growth of 14% (up 7% at cc) to reach $382 million driven by increased sales of luxury brands such as Jo Malone London, Tom and Ford reflect amongst many others. These upsides were partially countered by declines in few of Estee Lauder fragrances.
Hair Care sales amounted $139 million that advanced 10% (7% at cc), driven by higher sales of Aveda as well as Bumble and bumble brands. Aveda brand gained from solid travel retail and online performance along with of contributions from new product launches. Bumble and bumble brand sales were backed by its launch in Ulta Beauty (ULTA). These were somewhat countered by lower salon sales in North America.
Sales in the Americas increased 1% at cc to $1,181 million. North American sales benefitted from growth across brands such as La Mer and certain other luxury brands. The company’s online and specialty-multi channels also registered strong growth in the region. Sales in Latin America and Canada also witnessed noteworthy improvements. These were partially offset by soft retail traffic in few U.S. brick-and-mortar stores.
Sales in Europe, the Middle East & Africa region improved 26% (up 17% at cc) to $1,416 million. On a constant-currency basis, the segments sales growth mainly stems from improved retail travel sales and strong performance witnessed in Italy. Moreover, emerging markets like Russia, India and Turkey contributed to sales growth. However, the Middle East region registered lower sales owing to macroeconomic challenges.
In the Asia/Pacific region sales soared 38% (up 30% at cc) to $773 million. The upside was driven by spectacular performance in Hong Kong, China, Taiwan and the Philippine
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $ 2,140 million, long-term debt of $3,363 million and total equity of $4,737 million.
Net cash flows from operating activities for the first nine months of fiscal 2018 came in at $1,931 million, while the company incurred capital expenditures of $368 million.
Estee Lauder announced a quarterly dividend of 38 cents per share, which is payable on Jun 15, 2018 to shareholders of record as of May 31, 2018.
Fiscal 2018 Guidance
Estee Lauder expects continued growth opportunities in the global prestige beauty industry, which is expected to grow 6-7% in fiscal 2018, from the previous guidance of 5%. Additionally, acquisitions, better-quality products, innovation and improved market reach are expected to positively impact sales during the year. Moreover, the company expects to continue reaping benefits from its digital-first approach as well as its emphasis on high growth potency markets and brands. However, economic challenges, social and political issues affecting consumer behavior in certain countries keeps management somewhat cautious. The company also remains watchful regarding soft store traffic in the United States.
Nevertheless, the growth drivers, solid performance in the first three quarters and expected gain from the recently enacted tax reforms keeps management encouraged about continuing with its above-industry improvement — in fiscal 2018. That said, management raised its sales and earnings outlook for fiscal 2018.
For fiscal 2018, Estée Lauder now expects net sales to grow 15-16%, from the previous expectation of 12.5-13.5%. Foreign currency is expected to positively impact sales by 4% during the year. On a constant currency basis, net sales are now expected to jump 11-12%, up from previous guidance of 10-11%. The company’s acquisitions of Too Faced and BECCA are expected to contribute approximately 2 percentage points to the company’s overall sales growth.
The company now envisions fiscal 2018 adjusted earnings in a range of $4.38-4.42, compared with the previously expected range of $4.27-$4.32. The revised earnings view reflects a growth of 26-27% from the prior-year figure. The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $4.38 per share. On a constant-currency basis, adjusted earnings are now expected to grow 20-21%, up from the previous forecast of 19-20%.
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