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Can Estee Lauder Continue to Surge Ahead of Industry in 2018?

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The Cosmetics industry has been performing favorably, driven by consumers’ increased spending on personal care and beauty products. Evidently, shares of the industry gained 24.3% on a year-to-date basis, compared with the S&P 500 index’s rally of 22.8%.



The Estee Lauder Companies Inc (EL - Free Report) has emerged as one of the preferred picks for investors with its 69.3% surge this year, crushing the industry’s performance. Notably, other cosmetic industry firms such as Avon products declined 53.4%. However, Helen of Troy (HELE - Free Report) and Coty (COTY - Free Report) gained 11.4% and 9.3%, respectively.



Let’s look into the factors that have backed Estee Lauder’s bull-run and help the Zacks Rank #2 (Buy) company sustain the solid trend in 2018 as well. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Acquisitions: Vital Growth Driver

Estee Lauder has made several strategic acquisitions to enhance portfolio. The acquisitions of BECCA and Too Faced (during the first quarter fiscal 2017) has strengthened its rapidly growing prestige portfolio and contributed to the reported sales growth in first-quarter fiscal 2018. Also, management expects these brands to contribute roughly 2 percentage points to the company’s overall sales growth in fiscal 2018. The investment in DECIEM — a fast-growing multi-brand company is likely to drive beauty sales in the forthcoming quarters.

Progress in e-commerce

Estee Lauder is focused on widening global online presence by adding new sites and expanding retailer distributions. Evidently, the company launched more than 100 sites in first-quarter of 2018. Online sales during the said period improved 33%, driven by increased traffic, order size and conversions. Owing to technological advancement and the growing popularity of social media, mobile sales constituted about 70% of the company’s online traffic. 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 in the forthcoming periods.

Sturdy Growth in Emerging Markets

The company derives a significant amount of revenues from the emerging markets. Brazil is one of Estee Lauder’s fastest-growing markets, driven largely by M-A-C, DKNY and Tommy Hilfiger brands. The Middle East, North Africa, sub-Saharan Africa and Asia Pacific markets also offer extensive untapped potential for the company. Notably, the company has bright prospects in China, wherein sales soared nearly 50% in the first quarter. The company’s Chinese operations have been gaining from rising demand from millennials. Management envisions persistent strength in luxury products in China, which keeps it encouraged about making incremental investments in the region.

The aforementioned factors also enabled Estee Lauder to retain solid surprise history in first-quarter fiscal 2018. This marked the company’s 13th consecutive quarter of earnings beat, while sales kept its positive surprise trend alive for the third straight time.

Positive on the Road Ahead

Estee Lauder projects continued growth opportunities in the global prestige beauty industry, which is anticipated to grow 4-5% during the year. Additionally, acquisitions, better-quality products, innovation and improved market reach are likely to bolster sales during the year.

Driven by such upsides, management expects net sales to grow in the range of 10-11% in fiscal 2018, compared with the previous expectation of 8-9%. The company also expects adjusted earnings in the range of $4.04-$4.12 per share for fiscal 2018, compared with the previous view of $3.87-$3.94.

Consequently, the Zacks Consensus Estimate for fiscal 2018 has risen from $4.14 to $4.16, respectively, over the past 30 days.

Clearly, the strong fundamentals combined with the company’s encouraging outlook makes this cosmetics giant a favorable pick for investors in 2018.

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