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Solid Skin Care & Online Sales Aid The Estee Lauder Companies (EL)

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The Estee Lauder Companies Inc. (EL - Free Report) looks well-positioned, courtesy of strength in its Skin Care business. Also, the company’s impressive online operations along with a solid presence in emerging markets are yielding results. Moreover, it is on track with effective cost-saving efforts. However, some pandemic-led intermittent shutdowns are roadblocks for the company.

Let’s delve deeper.

Skin Care Business Holds Promise

The Estee Lauder Companies’ Skin Care portfolio has been performing well for a while now. During the third quarter of fiscal 2021, brands like Estee Lauder, Clinique and La Mer witnessed significant growth in the Skin Care category. Moreover, the category is benefiting from Origins as well as the acquisition of Dr. Jart (concluded in 2019). During the quarter, the Skin Care category’s sales increased 31% year over year. In May 2021, The Estee Lauder Companies took another step to expand its Skin Care business when it concluded the first phase of raising its ownership stake in DECIEM Beauty Group Inc.

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Online Sales Aiding Growth

The Estee Lauder Companies has a strong online business and management expects it to be a major growth engine in the upcoming years. In this regard, the company has been implementing new technologies and digital experiences, including online booking for each store appointment, omnichannel loyalty programs and high-touch mobile services. These initiatives and the company’s digital-first mindset have been boosting online sales. During the fiscal third quarter, online sales continued to drive the company’s top-line growth. In its last earnings call, management highlighted that its online channel has almost doubled over the past two years. The company is on track to undertake high-touch innovation on digital platforms. Apart from these, management has been on track with expanding brand presence across various third-party sites, rolling out new digital payment technologies and enhancing its loyalty programs as it continues to widen market reach.

Solid Emerging Market Presence

The Estee Lauder Companies, which shares space with Coty Inc. (COTY - Free Report) , has a strong presence in emerging markets that insulates it from the macroeconomic headwinds in matured markets. The company derives significant revenues from emerging markets, which keeps it encouraged about making distributional, digital and marketing investments in such markets. Notably, in the Asia-Pacific region, sales increased 35% in the fiscal third quarter. Well, China is a major area of focus for The Estee Lauder Companies. In this regard, management is making investments to cater to consumers’ demands in China and Asia.

Pandemic-Led Hurdles

Most brick-and-mortar retail stores that sell The Estee Lauder Companies’ products (both company and customer operated) remained mostly open, especially in China and the United States, during the fiscal third quarter. However, there were intermittent shutdowns in the rest of the world. Many retail stores were temporarily shut at some point in the quarter across the U.K., Japan, Canada, Italy, Spain, France, Mexico and Brazil due to the resurgence of coronavirus infections. Moreover, store traffic was significantly lower compared with pre-pandemic levels globally. Apart from these, international travel has been majorly restricted worldwide due to government regulations and consumer health concerns. Such restrictions have been negatively impacting consumer traffic in most travel retail locations.

Moreover, the company is on track with its two-year Post-COVID Business Acceleration Program that was introduced in August 2020. Through this plan, management expected shutting 10-15% of its freestanding stores worldwide along with various low-performing department store counters.

Nevertheless, we believe that the aforementioned growth endeavors together with cost-saving efforts are likely to help this Zacks Rank #3 (Hold) company stay afloat amid such hurdles. Notably, uncertainties related to COVID-19 compelled management to implement stringent cost-curtailment practices. These include costs related to advertising and promotion activities, travel, meetings, consulting and certain employee expenses. During the fiscal third quarter, operating expenses, as a percentage of sales, declined significantly to 59.8% from 71.7% reported in the year-ago quarter.

Shares of The Estee Lauder Companies have surged 53.8% in the past year compared with the industry’s 47.8% growth.

Solid Cosmetics Picks

Inter Parfums, Inc. (IPAR - Free Report) , with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 27.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nu Skin Enterprises, Inc. (NUS - Free Report) , with a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 18.8%, on average.

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