Estee Lauder (EL) Stock Up On Solid Q2 Earnings, View Raised

Estee Lauder Companies Inc. (NYSE:EL) reported second-quarter fiscal 2018 results, wherein both top and bottom lines grew year over year and came ahead of the Zacks Consensus Estimate. Notably, this marked the company’s 14th and 4th straight quarter of earnings and sales beat, respectively. The superb quarter also encouraged management to perk up its outlook for fiscal 2018.

Needless to say, the splendid results and outlook were a treat to investors as evident from a 2.8% rise in Estee Lauder’s shares in the pre-market trading session. In fact, the cosmetics giant’s past record has kept investors bullish for quite some time. Evidently, this Zacks Rank #3 (Hold) stock soared 64.4% in a year, outperforming the industry’s gain of 34%.

Quarter in Detail

The company posted adjusted earnings per share of $1.52 that surged 25% year over year and beat the Zacks Consensus Estimate of $1.44. On a currency-neutral basis earnings grew 23% on the back of robust sales, solid cost savings and progress with the Leading Beauty Forward initiatives.

On including certain one-time items like restructuring costs associated with Leading Beauty Forward initiative and charges related to the U.S. Tax Cuts and Jobs Act (“TCJA”), earnings came in at 33 cents, down significantly from $1.15 reported in the year-ago period.

Estee Lauder’s net sales of $3,744 million surpassed the Zacks Consensus Estimate of $3,673 million. Moreover, sales increased 17% from the prior-year quarter, driven by acquisitions of BECCA and Too Faced, which contributed about 2 percentage points of the reported sales growth. Further, sales advanced 14% on a constant currency basis, courtesy of exceptional growth in travel retail, Asia and the company’s global online sales. Further, several regions in Europe and most product categories delivered double-digit sales growth. Also, the brands delivered stellar e-commerce results in the holiday season, with customizable gift choices being major contributors.

Gross profit increased 16% to $2,991 million but gross margin shrank 20 basis points (bps) to 78.3% as improved revenues were offset by higher cost of sales.

Product Based Segment Results

On the basis of product category, Skin Care reported sales growth of 20% year over year (up 17% on a constant currency basis) to $1,494 million, owing to double-digit improvements in brands including GLAMGLOW, La Mer, Origins and Estée Lauder. Clinique brand also depicted solid growth. However, skincare sales were partly hindered by soft Aveda sales.

Makeup revenues were up 16% (up 13% on a constant currency basis) to $1,515 million on the back of incremental sales stemming from the acquisitions of BECCA and Too Faced. Tom Ford, Estée Lauder sand MAC brands also generated robust sales.

Fragrance category reported revenue growth of 14% (up 10% on a constant currency basis) to reach $565 million driven by increased sales of luxury brands and Estée Lauder fragrances.

Hair Care sales amounted $144 million that advanced 5% (4% on a constant currency basis), driven by higher sales of Bumble and bumble and Aveda brands. While Aveda gained from solid online performance, Bumble and bumble sales were backed by its launch in Ulta Beauty (NASDAQ:ULTA) . These were somewhat countered by lower salon sales.

Regional Results

Sales in the Americas increased 5% (on a constant currency basis as well) to $1,308 million, with North American sales benefiting from the acquisitions of Too Faced and BECCA and improvements in many other brands. This in turn was backed by higher holiday season demand. 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. All these upsides were partially offset by soft retail traffic in few U.S. brick-and-mortar stores.

Sales in Europe, the Middle East & Africa region improved 20% (up 15% on a constant currency basis) to $1,562 million owing to double-digit sales growth in retail travel sales and in regions like Italy, Benelux and India. Moreover, emerging markets like Russia and Turkey contributed to sales growth. Foreign currency changes also favorably impacted the region’s results, with UK and Italy being the main contributors. However, the Middle East region registered lower sales owing to macroeconomic challenges.

In the Asia/Pacific region sales soared 33% (up 30% on a constant currency basis) to $874 million. The upside was driven by spectacular performance in Hong Kong, Thailand and China, while Taiwan and Japan also posted handsome gains.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $ 2,105 million, long-term debt of $3,374 million and total equity of $4,589 million.

Net cash flows from operating activities for the first half of fiscal 2018 came in at $1,450 million, while the company incurred capital expenditures of $263 million.

Estée Lauder also announced a quarterly dividend of 38 cents per share, which is payable on Mar 15, to shareholders of record as of Feb 28.

Fiscal 2018 Guidance

Estée Lauder expects continued growth opportunities in the global prestige beauty industry, which is expected to grow 5% in fiscal 2018. Additionally, acquisitions, better-quality products, innovation and improved market reach are expected to positively impact sales during the year. 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, a solid first half and expected gains from the recently enacted tax reforms keeps management encouraged about continuing with its above-industry improvement — in the second half and fiscal 2018. That said, management raised its sales and earnings outlook for fiscal 2018, alongside providing a favorable view for the third quarter.

For fiscal 2018, Estée Lauder now expects net sales to grow 12.5-13.5%, from the previous expectation of 10-11%. Foreign currency is expected to positively impact sales by 2.5% during the year. On a constant currency basis, net sales are now expected to jump 10-11%, up from 8-9% forecasted earlier. 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 $4.27-$4.32, compared with the previously expected range of $4.04-$4.12. The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $4.21 per share. On a constant currency basis, adjusted earnings are now expected to grow 19%-20%, up from the prior forecast of 12-14%.

Q3 Guidance

For the third quarter, Estée Lauder forecasts net sales growth of 12-13%. Foreign currency is expected to positively impact sales by 3%. On a constant currency basis, sales are expected to improve 9-10% during the quarter.

The company expects adjusted earnings in the range of $1.02-$1.04 per share for the quarter. The Zacks Consensus Estimate for the quarter is currently pegged at $1.01 per share. On a constant currency basis, adjusted earnings are expected to improve 7-9%.

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