Estee Lauder Stock Up Over 50% in a Year: Can Growth Sustain?
The Estee Lauder Companies Inc. EL keeps the glow on, courtesy of its splendid past record, which has been backed by its various strategic initiatives. Notably, these factors have helped shares of this Zacks Rank #3 (Hold) company surge 53.3% in a year, outdoing the industry’s growth of 25.3%. Though the cosmetics behemoth continues to battle soft U.S. traffic, let’s see if its robust strategies can help it maintain the stellar show.
Travel Retail to Drive Sales Further
Estee Lauder has been strongly focused on enhancing its travel retail business, which remains a major sales driver for the company. This is quite evident from its past record, as exceptional growth in this category largely fueled third-quarter fiscal 2018 sales. Travel retail sales growth in the quarter was mainly backed by Asia, along with double-digit increases in eight of its biggest brands in the travel retail network. Management stated that results were fueled by the company’s continued investments in key local markets, with fragrances category being the main driver. Well, the company remains committed toward undertaking more efforts to enhance conversions through strategic initiatives. Management expects continued growth in the travel retail channel, especially in China.
Focus on Buyouts – Solid Growth Mantra
Estee Lauder has made several strategic acquisitions to enhance its portfolio. The acquisitions of BECCA and Too Faced (during first-quarter fiscal 2017) has strengthened its fastest growing prestige portfolio. Investment in DECIEM — a fast-growing multi-brand company is also likely to aid beauty sales. The company’s previous moves in this regard include the buyout of sophisticated Paris-based brand — By Kilian and the takeover of key prestige skin care brands — RODIN olio lusso and GLAMGLOW. 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. Such acquisitions help the company expand its portfolio apart from helping it attain the respective loyal customer base.
Q3 Retains Superb Record
Backed by these initiatives, along with a strong online business, Estee Lauder marked its 15th consecutive quarter of earnings beat, while sales kept its positive surprise trend alive for the fifth straight time in third-quarter fiscal 2018. Also, both top and bottom lines advanced year over year. While earnings gained from robust sales and strategies like Leading Beauty Forward initiatives, revenues were fueled by strength across most geographic regions (especially Asia Pacific) and product categories (with skin care standing out). Further, exceptional growth in travel retail and online channels drove Estee Lauder’s performance.
Will Soft U.S. Retail Traffic Impede Growth?
Unfortunately, Estee Lauder has been facing headwinds in North America due to a decline in retail traffic in the U.S. brick-and-mortar stores. Management remains cautious about a difficult brick-and-mortar retail environment in UK and North America. Also, Bon-Ton’s liquidation could impact Estee Lauder’s performance to an extent. Apart from this social, economic and political issues that could affect consumer spending in few countries remain concerns.
Nevertheless, management expects continued growth opportunities in the global prestige beauty industry, which is now anticipated to grow 6-7% in fiscal 2018, up from 5% projected earlier. Additionally, acquisitions, better-quality products, innovation and improved market reach are expected to boost 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. All these growth drivers, along with expected gains from tax reforms keeps management encouraged about continuing with its above-industry improvement in the fiscal. That said, management raised its sales and earnings outlook for fiscal 2018, which has also led to an uptrend in the Zacks Consensus Estimate.
Clearly, Estee Lauder is most likely to continue with its impressive growth story.
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United Natural Foods UNFI with a long-term earnings per share growth rate of 8.2%, carries a Zacks Rank #2 (Buy).
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