Estee Lauder
February 2, 2010
Stock Price:$53.8
Conclusion: Q2 was exceptionnally strong, helped by a turn around in sales coupled with savings and lower advertising spending. However, this is not sustainable in a prestige cosmetics market which remains highly challenging. Management made it clear that it will have to increase marketing support behind key brands in the second half of the year. We view the stock fully priced based on our valuation range of $52-$54 per share.
Q2 results: Sales up 11% to $2.26bn (+6% like for like). Net earnings rose 62% to $256m. H1 sales up 4% ($4.1bn), up 3% like for like. Net earnings in H1 up 90% to $397m. Guidance F10: sales up +3%+5% like for like, EPS including restructuring charges of $2.26$2.53, excluding restructuring charges $2.55$2.73.
Q2 has shown a bounce back in net sales, driven by skin care (+11.8%) and make up (+7.7%), notably in Europe (+11%) and in Asia (+8.8%). EL reported better than expected holiday seasons sales and benefited from a turnaround in its travel retail business. However, both the US market and the flagrance business continued to be weak. Departement stores keep struggling while consumers remain value oriented.
Bottom line benefited from the conjunction of good growth, reductions in cost of sales, savings from restructuring ($160m in H1) and lower marketing spending (down $80m). The second half will see a return to higher marketing expenses (+$150-$175m) which will be funded by additional savings (total saving estimated between $275-300m for the year) . We believe that Estee Lauder is facing major challenges for the medium term, department stores weakness, underexposure to emerging markets (12% of sales), a declining flagrance business and increased competition from the mass market. As a result, we expect EL to retain only a fraction of its savings programme (25-30%) and reinvest the bulk of it to fuel future growth.
Estee Lauder trades at 19xP/E based on 2010 calendar estimates. We feel that the expected improvement in operating margin from 5.7% in F09 to 12-13% by F13 is largely priced in. We think P&G offers better value for the next twelve months.
