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The Estee Lauder Companies (EL) Up More than 25% YTD: Will it Stay?

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Focus on growing Skin Care category and e-commerce business is working well for The Estee Lauder Companies Inc. (EL - Free Report) . It is on track with effective cost-saving efforts. These trends were reflected in its fourth-quarter fiscal 2021 results, with earnings and net sales rising year over year as well as beating the Zacks Consensus Estimate.

For fiscal 2022, the company projects reported net sales to increase in the band of 13-16% year over year. Adjusted earnings per share (EPS) are anticipated to increase 9-12% at constant currency (cc) in fiscal 2022. For the fiscal first quarter, the company projects reported net sales to increase in the band of 17-19% year over year. Adjusted EPS are anticipated to increase 4-11% at cc during the quarter.

The Estee Lauder Companies’ stock has surged 29.3% so far this year compared with the industry’s rally of 23.2%.

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What’s Driving the Company’s Growth?

The Estee Lauder Companies’ Skin Care portfolio has been performing well for a while now. During fourth-quarter fiscal 2021, Skin Care category’s sales were up 47% year over year. The company expects to keep witnessing solid growth in the Skin Care category during fiscal 2022. Management, in its last earnings call, stated that it is optimistic about three recently-launched Skin Care innovations —  Estee Lauder new Advanced Night Repair Eye Matrix, La Mer The Hydrating Infused Emulsion and Clinique Smart Clinical Repair Wrinkle Correcting Serum. 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. ("DECIEM").

The Estee Lauder Companies, which shares space with Coty Inc. (COTY - Free Report) , has a strong online business and the company expects it to be a major growth engine for the upcoming few years. The company has been implementing new technology and digital experiences including online booking for each store appointment, omni-channel loyalty programs and high touch mobile services. These initiatives and the company’s digital-first mindset have been aiding the company’s online sale. During fiscal 2021, sales of the company’s products via all online channels rallied 34%, representing 28% of overall sales.

Apart from these, uncertainties related to COVID-19 led The Estee Lauder Companies to implement stringent cost-curtailment practices. The company has been benefiting from cost-saving initiatives like Leading Beauty Forward as well as the post-COVID business acceleration program. During the fiscal fourth quarter, the company’s gross profit came in at $2,950 million, up 77%. Gross margin increased to 74.9% from 68.4% reported in the year-ago quarter. The company reported operating income of $234 million against an operating loss of $543 million reported in the year-ago quarter.

Hurdles on the way

While most brick-and-mortar retail stores that sell The Estee Lauder Companies’ products (company and customer operated) remained operational — especially in China and the United States — during much of the fiscal fourth quarter, 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., Continental Europe, Canada, most of Latin America and the Asia/Pacific region (except China) due to resurgence of COVID-19 infections. In places where stores were open, traffic was lower than pre-pandemic levels.

Additionally, 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. The company continues to see soft demand for makeup products compared with pre-pandemic levels, thanks to lesser makeup usage occasions and mask-wearing mandates.

Nevertheless, we believe that the abovementioned upsides are likely to help this Zacks Rank #3 (Hold) company sustain its growth.

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