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On Jan 13, we reiterated our Neutral recommendation on cosmetics retailer Estee Lauder Inc. (EL - Analyst Report). While the company has been delivering solid results, the continued slowdown in the European economy remains a concern.

Why Maintained at Neutral?

Estee Lauder posted better-than-expected results in all the last four quarters. Organic sales growth, product innovation and cost savings measures have remained company’s strong points. However, increased input costs and macro-economic headwinds have remained the headwinds.

Moreover on Oct 31, 2013, Estee Lauder raised the lower end of its earnings guidance for fiscal 2014 to a range of $2.80–$2.87, compared to the range of $2.74–$2.87. The company, however, maintained its sales growth guidance of 6%–8% increase in constant currency.

Overall, we are encouraged by Estee Lauder’s booming travel retail business. Rising air traffic is expected to boost sales in the Travel Retail segment in the upcoming quarters. The company has also witnessed a rise in online sales, which is impressive. Moreover, the company’s continuous product innovation helps it to maintain market share amid difficult conditions.

Innovation remains an integral part of the company and helps it to drive profitable growth. In Sep 2013, Estee Lauder rolled out the Modern Muse fragrance brand in selected countries, which became a bestseller at Harrods in the U.K. and was among the top 10 women prestige fragrances in the U.S. Other successful fragrances launched during the quarter include the Michael Kors Collection, Tory Burch and Zegna Uomo, all of which were well received.

However, the difficult consumer spending environment remains a concern. Slow job growth, high interest rates and tightened credit availability continue to hurt costumer discretionary spending. The persistently sluggish European economic conditions also create an overhang.

Moreover, Estee Lauder’s close peers like Elizabeth Arden Inc. (RDEN - Snapshot Report) and Avon Products Inc. (AVP - Analyst Report) make frequent strategic acquisitions and alliances to expand their market. However, we see no such strategic alliances for Estee Lauder.

Estee Lauder holds a Zacks Rank #3 (Hold)

Other Stocks to Consider

A better-ranked stock in the same industry that looks attractive at the current levels is Nu Skin Enterprises Inc. (NUS - Snapshot Report) sporting a Zacks Rank #1 (Strong Buy).

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