Despite Competitive Pressures, Estee Lauder Is Set For Margin Expansion, DA Davidson Says In Upgrade

In spite of the mass beauty industry being continuously threatened by niche, digital native startups, Estee Lauder Companies Inc EL is showing the strongest fundamentals it has in a year. 

The Analyst

D.A. Davidson analyst Linda Bolton Weiser upgraded Estee Lauder from Neutral to Buy and raised the price target from $134 to $167.

The Thesis

With the stock down 11 percent from its June 15 high, now is the time to upgrade Estee Lauder, Bolton Weiser said in the upgrade note. (See the analyst's track record here.) 

The analyst said she has greater confidence in at least 50 basis points of annual organic operating margin expansion due to a $150-million increase in Leading Beauty Forward, the company's multiyear restructuring initiative that is expected to net benefits of $350 million to $450 million by the end of 2021. 

Skin care constant currency sales growth has exceeded makeup growth for the third consecutive quarter and rose 26 percent in the fourth quarter, Bolton Weiser said. The trend is expected to continue and drives a favorable mix effect on gross margin, the analyst said. 

Estee Lauder saw 22-percent growth in fiscal 2018, while Clinique and La Mer sales topped $1 billion for the first time.

China is a notable growth opportunity for the company, Bolton Weiser said. The country now makes up more than 9 percent of Estee Lauder sales, and the company has the ability to expand more brands in the top 118 cities where it already has a presence. By comparison, MAC is sold in just 50-60 of those cities, according to D.A. Davidson. 

“EL’s Tmall sales in China come mostly in cities where EL products are not sold in brick-and-mortar stores, so its Tmall sales are not cannibalizing its sales in stores," Bolton Weiser said, referring to the e-commerce platform owned by Alibaba Group Holding Ltd BABA. 

Estee Lauder’s expansion in high-growth channels in the Americas is now more than offsetting department store declines, prompting management to have confidence in low-single digit growth moving forward despite fierce competition, the analyst said. 

“After several years of decline, with the operating margin hitting 4 percent in FY18, profitability in the Americas is poised to improve, driven by LBF benefits and initiatives to improve door productivity." 

Price Action

Estee Lauder shares were sliding 3.56 percent to $135.45 at the time of publication Tuesday. 

Related Links:

How Changing Trends Resurrected FILA As A Fashion Brand

Nike's Product Line Is Tipping In A Positive Direction, According To Foot Locker