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Estee Lauder (EL) Stock Down Despite Q1 Earnings & Sales Beat

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The Estee Lauder Companies Inc. (EL - Free Report) reported first-quarter fiscal 2020 results, with top and bottom lines improving year over year and beating their respective estimates. Notably, this marked the company’s 21st and 11th straight quarter of earnings and sales beat, respectively.

Strength in the Skin Care category, Estee Lauder brand, travel retail, online channels and emerging markets fueled results. However, management’s cautious guidance seemed to have weighed on investors’ sentiments. Shares of the company were down more than 3% in the pre-market trading session on Oct 31.

For fiscal 2020, adjusted earnings are projected in a band of $5.85-$5.93. The projection is below the Zacks Consensus Estimate of $5.98. At cc, earnings are projected to grow 10-12%. Currency is likely to adversely impact the bottom line by almost 5 cents.

For the second quarter, adjusted earnings are projected in the range of $1.83-$1.86, which stands below the Zacks Consensus Estimate of $1.93. At cc, the company expects earnings to rise 6-7%, bearing the impacts of elevated spending for innovation, holiday season programs and efforts to draw traffic and boost share. Currency is likely to affect the bottom line by nearly 2 cents.

Quarter in Detail

The company posted adjusted earnings per share of $1.67 that increased 19% year over year and beat the Zacks Consensus Estimate of $1.60. Adjusted earnings improved 20% at cc. The upside was driven by a robust top-line performance along with operational excellence.

Estee Lauder’s net sales of $3,895 million surpassed the Zacks Consensus Estimate of $3,847 million. Moreover, sales increased 11% year over year (12% at cc). Results gained from strong international market performance (especially China and other emerging markets); strength in the Skin Care category, and solid sales of Estee Lauder and various other luxury brands. Also, the company’s travel retail and online channels performed well. Further, the company gained from innovation and digital marketing.

Adjusted gross profit came in at $2,989 million, up 10%. However, gross margin contracted 10 basis points (bps) to 76.7%.

Adjusted operating income grew 17% year over year to $804 million. Operating income margin expanded 110 bps to 20.6%.

Product-Based Segment Results

Skin Care reported sales growth of 24% year over year (up 25% at cc) to $1,842 million, backed by strength in Estee Lauder and La Mer brands.

Makeup revenues were up 3% year over year (up 4% at cc) to $1,443 million, courtesy of solid sales of Estee Lauder, Tom Ford Beauty, La Mer and MAC, partly negated by softness in Too Faced, Clinique and BECCA.

In the Fragrance category, revenues slipped 2% year over year (down 1% at cc) to $462 million due to reduced sales of various designer fragrances. This was somewhat compensated by increased sales of Jo Malone London and Tom Ford Beauty.

Hair Care sales totaled $136 million that descended 5% year on year (down 4% at cc). This can be accountable to weak sales of Bumble and bumble (especially in North American salons and specialty-multi channels) along with tough year-over-year comparisons for Aveda.

Regional Results

Sales in the Americas declined 6% year over year (also at cc) to $1,160 million, due to softness in the North America beauty industry stemming from weak color cosmetic sales. Further, the fragrance category was weak and the company continued to struggle with brick-and-mortar challenges in North America.

Sales in Europe, the Middle East & Africa region improved 17% (up 19% at cc) to $1,677 million, backed by strong gains in the online and travel retail channels.

In the Asia-Pacific region, sales rose 24% (up 26% at cc) to $1,058 million, with broad-based growth across most markets.

Other Financial Updates

Net cash flow used for operating activities during the fiscal first quarter was $170 million.

In a separate press release, management announced a 12% dividend hike for Class A and Class B shares, taking it from 43 cents per share to 48 cents. This is payable on Dec 16, 2019, to shareholders of record as of Nov 29.

Guidance

The company expects solid demand for its premium products and anticipates to outperform the industry in fiscal 2020. Well, the global prestige beauty industry is expected to grow 5-6% in fiscal 2020. Moreover, Estee Lauder is on track with the implementation of the Leading Beauty Forward initiative, directed toward efficient management of costs and operations.

However, Estee Lauder is cautious about certain headwinds that might weigh on its performance. In this context, persistent softness in the brick-and-mortar retail space in the United States and the U.K. (especially in makeup) is a concern. Also, costs related to Brexit uncertainty, impacts from trade negotiations with different countries, lingering hurdles in Hong Kong, and moderation of net sales growth in China and travel retail networks are worries.

For fiscal 2020, the company expects net sales to rise 7-8%. Currency fluctuations are likely to have a 1% negative impact on the top line.

For the second quarter of fiscal 2020, the company expects net sales to grow 7-8%. Currency fluctuations are likely to have a 1% negative impact on the top line.  

This Zacks Rank #3 (Hold) stock has gained 14% in the past six months compared with the industry’s growth of 1.1%.

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