Estee Lauder Gains From Sales Channels, Tariff Woes Persist

Yielding buyouts, strong online business and growth across most regions as well as categories are driving The Estee Lauder Companies Inc.’s (NYSE:EL) performance. This major cosmetics player’s shares have inched up 1.4% in the past three months, against the industry’s decline of 3.4%.

On the flip side, tariff impacts in Europe and China along with weakness in the U.K. beauty market are concerns. Let’s take a look into these aspects and see if this Zacks Rank # 3 (Hold) company’s growth endeavors can offset the headwinds.

Buyouts & Other Strategies Aiding Growth

Estee Lauder has made several acquisitions to enhance its portfolio. The acquisitions of BECCA and Too Faced have strengthened the company’s fastest growing prestige portfolio. The investment in DECIEM, a fast-growing multi-brand company, is likely to aid beauty sales.

Apart from skin care, Estee Lauder has also acquired high-end fragrance and lifestyle brands. In fact, management stated that total sales from brands acquired in the past few years advanced considerably during the first quarter of fiscal 2019. The company is focused on making further expansions by entering new markets along with introducing new products and integrating them successfully.

The company also boasts a strong online presence and expects this platform to continue as a major growth driver in the forthcoming periods. The company has successfully expanded its online business footprint to about 40 countries. It plans to continue boosting sales in this channel by adding new sites and expanding retailer distributions. Further, the company is on track with implementing new technology to augment consumer’s online shopping experience.

Travel retail is another sales channel that is aiding Estee Lauder’s growth. The channel is benefitting from a rise in traffic, effective launches, impressive marketing strategies and unique product range. Further, the company expects the travel retail business to gain from rising passenger traffic, favorable fundamentals and higher conversions.

Backed by such upsides along with a solid emerging market presence, Estee Lauder marked its 17th consecutive quarter of earnings beat and maintained positive surprise trend for sales for the seventh straight time in first-quarter fiscal 2019 results. Also, the metrics advanced year over year. While earnings gained from robust sales and efficient cost management backed by the company’s Leading Beauty Forward initiative, revenues were fueled by strength in most geographic regions, brands and product categories.

Can Efforts Cushion Headwinds?

During the first quarter of fiscal 2019, the company witnessed a difficult macro environment due to early tariff impacts in Europe and China. While reporting first-quarter results, management stated that it expects prestige beauty growth to be moderate in China, especially in the second half of the fiscal year.

Further, a weak U.K. beauty market as well as the shutdown of few department stores such as Bon-Ton (in United States) and House of Fraser (in the U.K.) were concerns. Apart from these, the company’s performance is exposed to threats emerging from cheaper product alternatives.

While these factors are worrisome, we expect Estee Lauder to tide over these headwinds on the back of solid fundamentals. Incidentally, management expects continued opportunities in the global prestige beauty industry, which is currently anticipated to grow 5-6% in fiscal 2019.

Also, it is on track with implementation of the Leading Beauty Forward initiative, directed toward efficient management of costs and operations. All these growth drivers along with a confident earnings outlook for fiscal 2019 are expected to further boost the stock.

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