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Why Is Estee Lauder (EL) Up 10% Since Last Earnings Report?

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It has been about a month since the last earnings report for Estee Lauder (EL - Free Report) . Shares have added about 10% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Estee Lauder due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Estee Lauder Beats Q1 Earnings Estimates, Hikes Dividend

Estee Lauder reported first-quarter fiscal 2021 adjusted earnings of $1.44 per share, which surpassed the Zacks Consensus Estimate of 90 cents. However, adjusted earnings declined 14% year over year. On a cc basis, adjusted earnings also declined 14%.

Estee Lauder’s net sales of $3,562 million surpassed the Zacks Consensus Estimate of $3,487 million. However, sales declined 9% (also at cc) from $3,895 million reported in the year-ago quarter. The top-line includes nearly 3 percentage point positive impacts from Have&Be Co. Ltd. (“Dr. Jart+”) acquisition. The downside was caused by some temporary retail store closures and reduced traffic in reopened stores amid the coronavirus outbreak. Nevertheless, the decline was partially offset by strong online sales. Also, net sales attributed to travel retail were flat year-over-year.  

Gross profit came in at $2,737 million, down 8%. Nevertheless, gross margin increased to 76.8% from 76.7% reported in the year-ago quarter.

The company reported operating income of $705 million down 9% year over year.

Product-Based Segment Results

Skin Care’s sales were up 10% year over year (also at cc) to $2,035 million. Makeup revenues plunged 32% year over year (also at cc) to $978 million. In the Fragrance category, revenues fell 12% year over year (down 13% at cc) to $406 million. Hair Care sales totaled $136 million, flat year on year (down 1% at cc).

Regional Results

Sales in the Americas declined 25% year over year (down 24% at cc) to $873 million. Revenues in Europe, the Middle East & Africa region declined 8% (down 9% at cc) to $1,540 million. Nevertheless, in the Asia-Pacific region sales increased 9% (up 7% at cc) to $1,149 million.

Other Updates

The company concluded the quarter with cash and cash equivalents of $4,267 million, long-term debt of $4,913 million and total equity of $4,481 million.

Net cash flow providedby operating activities for three-months ended Sep 30, 2020 came in at $358 million.

In a separate press release, the company declared quarterly dividend of 53 cents per share on Class A and Class B shares, up 10% from its previous dividend rate of 48 cents per share. The increased dividend will be payable on Dec 15 to shareholders of record as on Nov 30.

COVID-19 Update

In Asia/Pacific, almost all retail stores that were temporarily shut due to coronavirus-induced restrictions remained open during the quarter. In Europe, the Middle East & Africa and the Americas, nearly 15% and 20% of retail stores were closed in the beginning of July, respectively. At the end of September, almost all stores were reopened in both the regions. However, restrictions on travel due to government orders and consumer health concerns amid COVID-19 continue to hurt consumer traffic in most travel retail locations.

In the wake of the coronavirus outbreak, the company initiated a two year Post-COVID Business Acceleration Program in August. The program aims to reduce Estee Lauder’s retail footprint, along with increasing its investments in the digital space. This program bodes well in the current environment wherein customers are increasingly shopping online. Through this plan, management expects to shut 10-15% of its freestanding stores worldwide along with various low performing department store counters. Apart from this, various retailers have decided to undertake planned reduction of their footprint via door closures amid the pandemic.

Guidance

Given the uncertainty related to the pandemic, management is not providing any guidance for fiscal 2021. Nevertheless, the company is undertaking several efforts to preserve its financial flexibility amid the coronavirus pandemic. These include reduced travel, meeting, lower consulting expenses and temporary salary cuts for certain employees.

For the second quarter of fiscal 2021, the company projects revenues to decline in the band of 5-3% that includes a contribution of nearly 2% from Dr. Jart+ acquisition. Also positive currency impact is expected to be 1% to the sales. Excluding these, management expects net sales to decline 8-6% in the quarter.

Further, adjusted earnings are anticipated between $1.45 and $1.60 per share in the fiscal second quarter. Excluding share dilution related to the acquisition adjusted earnings per share at cc are anticipated to decline 31-24% in the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -6.59% due to these changes.

VGM Scores

Currently, Estee Lauder has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Estee Lauder has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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