Estée Lauder

  1. Cosmetics giant Estée Lauder reported a   glowing set of third quarter results, compared to the same quarter in the   previous year, with sales up in every region. The stock did fall though as   sales were slightly lower than was expected. For those of you not familiar   with the cosmetics counter at your local beauty parlor, or the exotic   perfumes at airport duty free, the company specializes in skin care, makeup,   fragrance and hair care products. It owns brands such as Tommy Hilfiger,   Donna Karan New York (DKNY), MAC, Lab Series, Michael Kors, Clinique, La Mer,   Aramis, Editions de Parfums Frédéric Malle and many others (which are equally   as difficult to pronounce). But all jokes aside, this is a $100 billion   business, with a geographic footprint spanning 150 countries and territories.

  2. Net Sales for the   quarter were up 16% year-over-year (13% in constant currency) to $3.86 bn.   Gross margins rose 70 basis points to an impressive 75.7%. Operating income   jumped 465% to $616 million with margins improving to 15.9% from 3.3% in the   year-ago quarter. Net earnings came in $456 million, compared with a net loss   of $6 million in the prior-year period. Diluted earnings per share came in at   $1.24, compared with a $0.02 loss last year. The company did announce asset,   goodwill and intangible asset impairments amounting to $379 million dollars,   as well as restructuring costs amounting to $168 million. It ended the period   with cash and cash equivalents of $6.4 bn, up 28% year-over-year. In March,   the company also resumed share buybacks to the tune of $316 million as of   March 31, 2021.

  3. Geographically, sales   were led by Asia Pacific which saw double digit growth (35% on a reported   basis and 26% on a constant currency basis) to $1.25bn, with luxury brands   outperforming in Mainland China. Europe, the Middle East and Africa grew 12%   (10% in constant currency) to $1.7bn, and the America’s contributed $916   million, growing 3% (4% in constant currency).

  4. While most   brick-and-mortar retail stores that sell the company’s products, were open   during the third quarter of fiscal 2021, most notably in China and the United   States, there were intermittent closures throughout the rest of the world   like Europe, Brazil, Canada and Mexico. In areas where stores were open,   consumer traffic was significantly reduced when compared to pre-covid times.   And whilst domestic travel in China and some other Asian corridors were open,   global international travel was still largely curtailed.

  5. Skincare was the top   performing division with sales up 31% (28% in constant currency) to $2.26 bn.   Fragrance sales jumped 30% (27% in constant currency) to $454 million.   Haircare bounced 8% (6% in constant currency) to $128 million and Makeup   sales dropped 11% (13% in constant currency) to $1bn. (Rival L’Oreal posted   lackluster makeup sales last quarter)

  6. The impact of lockdowns   on consumer habits has been notable. It seems that big nights out (Makeup)   were swopped for big nights in (self-care routines). Fresh-faces have   replaced seductively caked-ones, and eye serum is the new eye liner. Makeup   sales fell across all brands, hitting foundation and lip products hardest.   Skincare sales were more than double makeup sales this quarter. In 2018,   skincare and makeup were equals (in term of sales). Even with economic   re-openings and rebounding travel, Estée is finding that makeup is still   lagging because some covid habits are hard to break (eg: eCommerce at Amazon   is still growing and people are still buying Crocs for comfort). This   explains why Estée Lauder added to their winning investment DECIEM (and will   take full ownership in 3 years), as demand for The Ordinary’s skincare range   soared.

  7. Consumers generally mix   and match products in their beauty routines from a variety of brands, at a   range of price points. They buy them because of their utility and are often   referred to as “Hero Products”. Hero products like Advanced Night Repair   Synchronized Multi-Recovery Complex (say that five times fast) and Créme de   la Mer drove the most demand for Estée Lauder in the period. Others like   Origins Mega-Mushroom Treatment Lotion and Bumble and Bumble’s Hairdresser’s   Invisible Oil, help recruit new customers and have high rates of repeat   purchases, up to 50-60% according the company. Hero products have been key to   Estée Lauders acquisition strategy. The prestige of Hero products has also   expanded to include more accessibly priced brands. The reason for this is   competition from lower priced competitors. This is actually a huge advantage.   Rather than taking the shine off of Estée’s perceived high quality, it means   its products are sold at drug stores (next to mouth wash and loo roll) as   well high-end fashion outlets (next to handbags and leftover lattes), giving   it a massive consumer reach.

  8. What is most impressive   about Estée Lauder is that it generated Free Cash Flows (FCF) of $2.4 bn, and   it also has low debt levels. This business has generated returns on invested   capital in the 20% range for an extended period and in the process created   tremendous shareholder value. The company also has a staff compliment where   84% of staff are female of which 55% are in VP positions and above. The   company expects revenues for full year fiscal 2021 to grow between 11% and   12%, and it sees adjusted diluted earnings per share increasing between 45%   and 47% on a constant currency basis.

  9. Despite the undoubted   quality of the business, the stock is on the pricey side, and we simply   cannot justify owning this superb business at these levels. The FCF yield is   2%, and it is on a historic PE multiple of 80x. Estée Lauder’s own earnings forecasts   put it on 54x earnings which is still too excessive in our view. However,   Lauren Templeton, the great niece of the investing legend Sir John Templeton   taught me to make a list of stocks to buy, to leave in my bottom drawer, for   when an economic disaster strikes and markets crash. I’m adding Estée Lauder   to my list because I think it’s a beauty – and in this case beauty is in the   eye of the shareholder.

Estée Lauder