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Estee Lauder (EL) Gains Despite Headwinds: Time to Hold?

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Cosmetics giant, Estee Lauder Companies Inc. (EL - Free Report) has been in troubled waters lately. Lackluster retail growth in Hong Kong and China, lower tourist rates in New York and Florida, declining footfall at the company’s mid-tier department stores and high promotional environment in the cosmetic sector are the main reasons plaguing the company at the moment. However, these troubles are transitory in nature and the stock is expected to turn around thus making it a good choice for the year ahead.

The company has shown an uptrend in terms of earnings. Further, it has shown decent performance in the past one year, posting positive surprises in all the four trailing quarters with an average positive surprise of 11.9%. The stock has an expected earnings growth of 11% in the next five years.  The solid fundamental of the stock is visible in the share price movement. The stock price has gained 3.3% in the last one month, outperforming the Zacks categorized Cosmetics and Toiletries industry which declined 7.6% during the same period.

Strategic Acquisitions

Further, Estee Lauder is undertaking several strategic acquisitions to expand in the makeup category. The company took over prestige makeup brand, BECCA's in Nov 2016, which specializes in foundations and complexion products. The brand’s strong presence in fast growing North America specialty multi-retailers and a loyal customer base is likely to be beneficial for the company. Further, it acquired makeup brand Too Faced  in Dec 2016 as an attempt to bolster its presence in the cosmetics category. Specialty-multi and online brand, Too Faced is anticipated to strengthen Estee Lauder’s reach in the specialty-multi channel.

Initiatives to Boost Sales

In order to combat lackluster retail growth and tough competitive environment in the retail sector, Estee Lauder consistently undertakes product innovation in order to enrich its portfolio of globally recognized flagship brands, which includes the likes of Estee Lauder, M-A-C, Jo Malone London, Smashbox, Bobbi Brown or Tom Ford. Recently, the company introduced products like anti-ageing skincare and foundation which were well received by the ageing population of the U.S. Products like The Estee Edit and Advanced Night Repair PowerFoil Mask is expected to help the company bolster its market share in the makeup category.

However, Estee Lauder has been facing lower sales in America. Declining footfall in the mid-tier department stores is primarily responsible for the soft top-line results. Additionally, fewer numbers of tourists visiting the country is leading to slow growth in the travel retail sector. Tourist-driven freestanding stores are reporting lower sales in the past few quarters. In order to negate the difficulty, the company is resorting to eCommerce, which is the buzz of the day, as more and more customers are resorting to online buying. It operates 13 m-Commerce sites, including three in China for Clinique, La Mer and Origins.

Further, Estee Lauder is implementing new technology and digital experiences including online booking for each store appointment, omni-channel loyalty programs and high touch mobile services. These initiatives are expected to boost the company’s top-line.

Aggressive Marketing

In a bid to keep up with the highly promotional cosmetics category, Estee Lauder emphasizes heavily on marketing. The company is investing a lot in advertising, especially in TV and digital media. Moreover, it reaches out to customers through social networking sites like Facebook, where its brands cover more than 100 pages. Further, the company is working to target the millennial customers who form major part of the market.

However, Estee Lauder is witnessing stock market volatility in China. Moreover, continued political unrest in Hong Kong has caused a sharp drop in Chinese tourists traveling to other countries.

Although headwinds remain, the Zacks Rank #3 (Hold) company might overcome these difficulties with organic sales growth and product innovation. Although the earnings are expected to decline 4.5% in the current quarter, analysts expect earnings to register a growth of 6% in the fiscal year 2017. Hence, we believe it will be a prudent decision to hold onto the stock for 2017.

Stocks that Warrant a Look

Some better-ranked stocks in the broader consumer staples sector include Con Agra Foods Inc. (CAG - Free Report) , Campbell Soup Company (CPB - Free Report) and Pinnacle Foods Inc. , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods has an expected earnings growth of 8%. Campbell Soup has an expected earnings growth rate of 5.6%, while Pinnacle Foods has a long-term growth rate of 6.5%.

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