Will Skin Care, Makeup Fuel Estee Lauder In Q2 Earnings?

The Estee Lauder Companies Inc. EL is slated to release second-quarter fiscal 2018 results on Feb 2. We note that this cosmetics giant has delivered positive earnings and sales surprise for 13 and three consecutive quarters, respectively. The company has been gaining from focus on strategic acquisitions, sturdy foothold in the beauty space and robust online and travel retail network. Let's see if Estee Lauder can keep its spectacular surprise streak alive this time too.

Factors at Play

Estee Lauder has been witnessing year-over year top-line growth for more than two years now, while its bottom line depicted growth in the past three quarters. The cosmetics big-wig's splendid past record and investors' confidence in its prospects is well reflected by the 69.1% surge in its shares over a year. This also crushed the industry's rally of 38%.



 

Focus on Buyouts, Online & Travel Retail to Drive Q2 Results

We expect Estee Lauder to continue gaining from its robust brand portfolio across most categories, benefits from acquisitions and solid presence in emerging markets. Notably, the buyouts of BECCA and Too Faced (during first-quarter fiscal 2017) have strengthened Estee Lauder's fastest growing prestige portfolio and contributed significantly to sales growth in first-quarter fiscal 2018. Also, management expects these brands to contribute roughly 3 percentage points to the company's overall sales growth in the second quarter. Also, the investment in DECIEM — a fast-growing multi-brand company is likely to aid beauty sales.

Estee Lauder also has a strong online business and the company expects it to be a major growth engine for the upcoming years. Thanks to technological advancement and the growing popularity of social media, mobile sales constituted about 70% of the company's online traffic in the last quarter and remains a major growth driver. Estee Lauder is also growing its sales in China through T-mall, the largest digital platform run by Chinese e-commerce giant, Alibaba. Estee Lauder remains focused on widening its global online presence by adding new sites and expanding retailer distributions.

Prospects from China Bode Well

While Estee Lauder has a solid presence in emerging markets, solid prospects from China appear bright, as sales in this region soared nearly 50% in the first quarter. This was driven by double-digit growth in all brands, with MAC, Tom Ford and Lab Series businesses nearly doubling year over year. Also, management stated that its makeup business doubled for the second straight quarter, whereas performance of its skin care and luxury fragrance business also remained favorable in the quarter. The company's operations in China have been gaining from rising demand from millennials. Management thus envisions continued strength in luxury products in China, which keeps it encouraged about making incremental investments in the region. Notably, the Zacks Consensus Estimate for sales from Asia/Pacific region is pegged at $763 million, depicting year-over-year growth of 15.8%.

Skin Care & Makeup Categories Remain Major Drivers

All these factors, along with growth in travel retail have been spurring growth at Estee Lauder and are most likely to sustain this trend in the quarter to be reported. Among all categories, Estee Lauder's skin care and makeup categories have been performing particularly well for nearly a year. In the last quarter, skin care and makeup sales advanced 16% and 18% year over year, respectively. We expect these categories to remain major drivers in the second quarter as well.

Turning to estimates for the second quarter, the Zacks Consensus Estimate for skincare and makeup sales is currently pegged at $1,434 million and $1,515 million, reflecting year-over-year growth of about 15% and 16%, respectively. Further, the consensus mark for fragrance and hair care sales is $553 million and $147 million, compared with the year-ago period sales of $497 million and $137 million, respectively.

Q2 Expectations as a Whole

Clearly, Estee Lauder is expected to continue with its top and bottom-line growth trend in the second quarter. Incidentally, management forecasts net sales growth of 13-15% in the quarter. On a constant currency basis, sales are expected to improve 10-11%. Currency is expected to positively impact second-quarter sales by 3-4%.

Further, the company envisions adjusted earnings in the range of $1.38-$1.41 per share for the second quarter. The earnings range marks an increase of 13% to 15% over the prior-year earnings. On a constant currency basis, adjusted earnings are expected to improve 8-10%.

Encouragingly, the Zacks Consensus Estimate for second-quarter earnings witnessed an uptrend in the past 30 days, and is now pegged at $1.43, which represents more than 17% growth from the year-ago period. Moreover, analysts polled by Zacks expect revenues of $3,673 million, up 14.5% from the year-ago reported figure.