Emerging markets drive Estee Lauder's profit growth

The company reported higher revenue and margins despite poor performance in South Korea and south European countries.

By Trefis Feb 7, 2013 9:48AM
logoLipstick Stockbyte PictureQuestNew York beauty company Estee Lauder (EL) reported a sales increase of 7% year-over-year to $2.74 billion for the quarter ended December 2012. Improvement in operating margins drove a 13% growth in net earnings to $448 million. The growth in revenue and margins came despite the company's poor performance in South Korea and south European nations.

Sales in the Americas grew by 6%, even as Asia-Pacific led overall sales growth at 11%, which were in line with our expectations. The company's CEO, Fabrizio Freda, highlighted during the conference call that the affluent consumer is spending freely, resulting in the high end brands performing well. The better than expected performance also led the company to revise upwards its guidance for fiscal year 2013, ending June 30.


Estee Lauder is one of the leading cosmetics and beauty care players globally and competes with Revlon (REV), L'Oreal (LRLCY) and Avon products (AVP).


China set to become second home

Emerging markets continued to deliver the most rapid growth for the company. It reported that continued focus on China, its largest emerging market, paid off with sales growing 28%. It plans to continue to expand its physical presence in the country even as it leverages the popularity of its eCommerce portal. The online store has proved to be the most effective for the company, expanding its reach beyond the largest cities.


We expect the Chinese New Year will provide a boost to Estee Lauder's effort to make China its second home market (read on Trefis). The company has been introducing new products designed to cater to local preferences and in October launched a China specific brand Osiao. The efforts to develop a product portfolio according to local tastes and aggressive promotion in advance of the Chinese New Year should help the company attain its goal. Asia-Pacific led the sales growth in the second quarter, driven by double-digit gains in skin care.


Estee Lauder Stock Break-Up

Market expansion drives sales growth in established markets

The holiday season saw the company register a strong sales growth in North America as the prestige beauty growth outperformed mass brands. The company attributed the growth to healthy sales for several of its smaller and mid-sized brands, especially luxury and specialty ones. Challenging economic situation in Europe, particularly in Spain, Italy and Greece, negatively impacted the overall results in the region. In the United States, skin care sales grew solidly. Skin care accounts for about half of its global sales and has been the driving force behind sales in both, emerging and established markets.


eCommerce becoming the popular distribution channel

The company noted that in North America, the fastest-growing distribution channel was e-commerce. The e-commerce business registered a double-digit growth again this quarter. On Cyber Monday, online sales were up 17% over previous year. The company's online initiative in China has already earned it the top ranking in Digital IQ Index for the China beauty market. The popularity of the online and m-commerce businesses lead us to expect that these will soon become a major distribution channel for the company. In the North America market, m-commerce sales more than doubled in Q2, and we expect the trend to continue in the near term.


We have a price estimate of $66 for Estee Lauder, which is being revised to include latest earnings.


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