Estee Lauder Up 29% In 6 Months: What's Behind The Rally?

With rising consumer confidence, spending on beauty and personal care products in addition to apparel and footwear has increased. Moreover, the rise of e-commerce has driven growth of the beauty segment.

The Estée Lauder Companies Inc (NYSE:EL) , one of the leading manufacturer and marketer of beauty products, has been a favorite pick for investors. Shares of the company have surged 29% in the past six months compared with the industry’s gain of 13.2%. Recently, its shares have hit a new 52-week high of $111.79 during the trading session on Oct 16, eventually closing at $111.28.

Let’s delve into the aspects which have been aiding the company’s impressive performance

E-commerce on the Rise

Estée Lauder has been continuously opening sites across different regions and targeting sustained growth in its e-commerce platform. During the fiscal year 2017, global online sales of the company depicted a 33% growth to reach $1.3 billion. Further, Estée Lauder is implementing new technology and digital experiences including online booking for each store appointment and omni-channel loyalty programs. These initiatives are expected to boost the company’s top line.

Well Planned Acquisitions

Estée Lauder has been widening its portfolio through acquisitions. The buyout of BECCA and Too Faced (during the first quarter of fiscal 2017) have strengthened its fastest-growing prestige portfolio. This, in turn, have contributed about 3.5 percentage points of the reported sales growth during the fiscal fourth quarter and approximately half the reported sales growth in the third quarter of fiscal 2017. The recent investment in DECIEM — a fast-growing multi-brand company — is also expected to aid beauty sales in the forthcoming periods.

Other notable acquisitions of Estée Lauder include By Kilian, RODIN olio lusso, GLAMGLOW and Le Labo. Such acquisitions aid the company to expand its portfolio and maintain the respective loyal customer base.

Strategic Allocation of Resources & Marketing Fuels Sales

Effective promotions help cosmetic and beauty companies to influence consumer sentiments and thereby enhance sales. Estée Lauder emphasizes heavily on marketing, especially through digital media and social networking.

The company continues to reallocate resources and reduce costs under the Leading Beauty Forward initiative, in order to boost its beauty business. After its full implementation, Estée Lauder expects the initiative to yield annual net benefits, primarily in selling, general and administrative expenses of $200-$300 million, before taxes.

Favorable Estimates

Ahead of its first-quarter fiscal 2018 results, the Zacks Consensus Estimate inched up by a penny to reach 97 cents in the past 30 days. Estimated earnings for the forthcoming quarter lie in the upper end of the management’s guidance of 94-97 cents. This marks an increase of 12% to 15% over the prior-year earnings of 84 cents. However, estimated earnings of $3.97 per share for the fiscal year 2018 surpass management’s anticipated range of $3.87-$3.94.

Final Thoughts

Estée Lauder has been struggling with social and political issues in Hong Kong. Though the company is attempting to strengthen its business with local consumers in Hong Kong, we do not anticipate a significant increase in consumption from the region in the near term.

Nevertheless, the company expects to easily offset such challenges based on its strong growth in other emerging regions. The Middle East, North Africa, sub-Saharan Africa and Asia Pacific markets offer extensive untapped potential for the company. Estée Lauder also expects strong growth of its brands in China, and has therefore been expanding steadily in the region.

Moreover, Estée Lauder is strongly positioned in the beauty arena, with its robust brand portfolio and productive growth strategies. The company sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B, indicating its inherent growth potential.

Looking for More? Check These Three Consumer Staple Stocks

Investors interested in the same sector may also consider stocks such as McCormick & Company, Inc (NYSE:MKC) flaunting a Zacks Rank #1 while Constellation Brands, Inc (NYSE:STZ) and The Procter & Gamble Company (NYSE:PG) each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

McCormick delivered an average positive earnings surprise of 4.1% in the trailing four quarters. It has a long-term earnings growth rate of 9.4%.

Constellation Brands pulled off an average positive earnings surprise of 13.6% in the trailing four quarters. It has a long-term earnings growth rate of 14.8%.

Procter & Gamble came up with an average positive earnings surprise of 4.5% in the trailing four quarters. It has a long-term earnings growth rate of 7.4%.

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