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Estee Lauder (EL) Up 15.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Estee Lauder (EL - Free Report) . Shares have added about 15.7% 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 its most recent earnings report in order to get a better handle on the important drivers.

Estee Lauder Q2 Earnings Beat Estimates, Sales Up Y/Y

Estee Lauder reported robust second-quarter fiscal 2021 results, with the top and the bottom line beating the Zacks Consensus Estimate. Also, sales and earnings increased year over year.

Quarter in Detail

The company posted adjusted earnings of $2.61 per share, which surpassed the Zacks Consensus Estimate of $1.67. Also, adjusted earnings increased 24% year over year. On a constant-currency (cc) basis, adjusted earnings also rose 21%.

Estee Lauder’s net sales of $4,853 million surpassed the Zacks Consensus Estimate of $4,484.8 million. The metric increased 5% (up 3% at cc) from $4,624 million reported in the year-ago quarter. The top line includes nearly 3 percentage point positive impact from Have&Be Co. Ltd. (“Dr. Jart+”) acquisition. The upside in sales can be attributed to Asia/Pacific region, travel retail and global digital net sales growth. These were somewhat offset by reduced foot traffic in open stores as well as some temporary retail store closures owing to the coronavirus outbreak.

Gross profit came in at $3,769 million, up 5%. Also, gross margin increased to 77.7% from 77.5% reported in the year-ago quarter. The company reported operating income of $1,063 million, up from $261 million reported in the year-ago quarter.

Product-Based Segment Results

Skin Care’s sales were up 28% year over year (up 25% at cc) to $2,819 million. Makeup revenues plunged 25% year over year (down 26% at cc) to $1,247 million. In the Fragrance category, revenues increased 6% year over year (up 5% at cc) to $618 million. Hair Care sales totaled $154 million, down 5% (down 6% at cc).

Regional Results

Sales in the Americas declined 15% year over year (down 13% at cc) to $1,048 million. Revenues in Europe, the Middle East & Africa region declined 2% (down 3% at cc) to $2,030 million. Nevertheless, in the Asia-Pacific region sales increased 35% (up 27% at cc) to $1,775 million.

Other Updates

The company exited the quarter with cash and cash equivalents of $5,545 million, long-term debt of $4,913 million and total equity of $5,456 million. Net cash flow provided by operating activities for six-months ended Dec 31, 2020 came in at $1,978 million.

COVID-19 Update

During the second quarter, most brick-and-mortar retail stores worldwide that sell Estee Lauder’s products; (both company and customer operated) remained open. However, store traffic was significantly lower compared with the year-ago quarter’s levels. Also, some retail stores were temporarily shut owing to the resurgence of coronavirus infections. Apart from these, international travel has been majorly restricted worldwide thanks to government regulations and consumer health concerns. Such restrictions have been negatively impacting consumer traffic in most travel retail locations.

In the wake of the pandemic, the company is on track to undertake stringent cost-control measures. These expenses include costs related to advertising and promotion activities, travel, meetings, consulting and certain employee costs.

Guidance

In fiscal 2021, the company is committed to various long-term strategic initiatives like rationalizing unproductive brick-and-mortar stores, expanding manufacturing capabilities, enhancing the fulfillment capabilities of its digital operations among others.

For the third quarter of fiscal 2021, the company projects net sales to increase in the band of 13-14%. Removing the impact of currency, management expects net sales to improve 10-11% in the quarter. Further, adjusted earnings are anticipated to increase in the range of 26-38% on a cc basis in the quarter.

Given the uncertainty related to the pandemic and re-emergence of COVID-19 infections, management is not providing any specific guidance for fiscal 2021. Although the company is undertaking cost-control measures amid the crisis, it expects some expenses to return in the coming months. Also, Estee Lauder will continue to invest in areas like advertising, supply chain and digital platform to drive growth.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -14.68% due to these changes.

VGM Scores

Currently, Estee Lauder has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile 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 #2 (Buy). We expect an above average return from the stock in the next few months.


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