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Why Is Estee Lauder (EL) Down 0.3% 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 lost about 0.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Estee Lauder due for a breakout? 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 Q1 Earnings Beat Estimates, Outlook Raised

Estee Lauder reported first-quarter fiscal 2019 results. The company posted adjusted earnings per share (EPS) of $1.41 that improved almost 16.5% year over year and beat the Zacks Consensus Estimate of $1.22. The upside was mainly driven by a robust top-line performance. Earnings improved 24% on a currency-neutral basis as well as excluding the impact of new revenue accounting standard.

Estee Lauder’s net sales of $3,524 million surpassed the Zacks Consensus Estimate of $3,477 million. Moreover, sales increased approximately 8% from the prior-year quarter’s tally. The quarterly results continued to depict growth across most brands, geographic regions and product categories. Performance across travel retail, specialty-multi and online channels also remained strong. Further, sales advanced 9% on a constant-currency (cc) basis during the quarter.

Gross profit increased nearly 5% to $2,701 million. However, gross margin declined 170 basis points (bps) to 76.6%. On an adjusted basis, gross profit rose 5.5% to $2,707 million, while gross margin declined 160 bps to 76.8%.

Adjusted operating income came in at $688    million, rising 13.2% year over year. Also, adjusted operating margin improved 90 bps.
 
Product-Based Segment Results

Skin Care reported sales growth of 17% year over year (up 18% at cc) to $1,486 million, owing to improvements in almost all regions, particularly in Asia China. Travel retail and online sales also remained strong. From a brand perspective, contributions from La Mer and Estee Lauder were quite significant.

Makeup revenues were up 2% (up 5% at cc) to $1,406 million on the back of robust performance of brands such as Tom Ford Beauty, Estée Lauder, and MAC. These were partially offset by declines in Smashbox and Clinique.

In the Fragrance category, revenues inched down of 1% (flat at cc) to reach $472 million driven by lower sales of certain designer fragrances. This was somewhat compensated by growth in brands like Jo Malone London, Le Labo, By Kilian and Tom Ford Beauty.

Hair Care sales amounted $143 million that advanced 5% (6% at cc), driven by higher sales of the Aveda brand.

Regional Results

Sales in The Americas declined 7% (down 6% at cc) to $1,236 million. Performance of the region was negatively impacted by the adoption of new accounting standard. Nevertheless, sales improved in online, North American specialty-multi and department store businesses. Further, operating income in the region fell 67% to $133 million, owing to changes in accounting, lower sales and strategic investments.

Sales in Europe, the Middle East & Africa region improved 14% (up 16% at cc) to $1,433 million. This was driven by growth in emerging markets, particularly India and Middle East, as well as in travel retail. These upsides were somewhat offset by lower sales in the U.K. Operating income in the region improved 32% to $458 million, supported by strong travel retail and performance of certain nations, partially offset by declines in the U.K.

In the Asia/Pacific region sales rallied 24% (up 26% at cc) to $855 million. The upside was driven by spectacular performance in most markets, especially Hong Kong and China. Further, higher sales and cost benefits propelled operating profit to increase 30% to reach $208 million.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $1,443 million, long-term debt of $3,361 million and total equity of $4,430 million.

Net cash flows used in operating activities during the first quarter were $119 million, while the company incurred capital expenditures of $128 million.

In a separate release, Estee Lauder announced an increase in quarterly dividends from 38 cents to 43 cents, up 13%. The revised dividend is payable on Dec 17, 2018 to shareholders of record as of Nov 30, 2018.
Further, management also increased share repurchase authorization by $40 million. As a result, the company’s total share repurchase authorization is at 256 million shares, of which 212 million shares have already been repurchased.  

Guidance

Management is encouraged with performance in the fiscal first quarter, which was fueled by growth in most of the segments and brands. Further, this Zacks Rank #3 (Hold) company expects continued growth opportunities in the global prestige beauty industry, which is expected to grow 5-6% in fiscal 2019. Also, the company is on track with the implementation of the Leading Beauty Forward initiative, directed toward efficient management of costs and operations. In fact, after the full implementation of this initiative, management expects annual benefits in the range of $350-$450 million.

That said, management reiterated sales outlook for fiscal 2019. The company continues to expect net sales growth in the range of 4-5%, including negative impacts of 2% from currency fluctuations and 1% from the adoption of new accounting standard. Excluding these impacts, net sales are expected to rise 7-8%.

Further, the company raised earnings projections. Currently, it envisions adjusted earnings for fiscal 2019 in the range of $4.73-$4.82, up from the earlier projection of $4.62-$4.71. The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $4.73.

Management also provided view for the second quarter of fiscal 2019. Net sales for the quarter are expected to rise in the range of 4-5%. Further, adjusted EPS for the quarter is projected in the range of $1.47-1.50.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.11% due to these changes.

VGM Scores

Currently, Estee Lauder has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. 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 F. 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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