Estee Lauder Beats Q1 Earnings, Revenues, Lowers FY View

Estee Lauder Companies Inc. (EL) posted first-quarter fiscal 2015 earnings of 80 cents per share (excluding restructuring charges) which surpassed the prior-year results by 5.3%. Earnings also surpassed the Zacks Consensus Estimate of 55 cents by 60%.

Results excluded the impact of acceleration of orders during fourth-quarter fiscal 2014. Including the effect of the remeasurement and acceleration of orders, Estee Lauder reported earnings per share of 59 cents.

Revenues and Margin

Including the impact of one-time activities, shift of sales orders from fiscal 2015 to 2014, net sales slipped 1% to $2.63 billion on the back of higher sales in most of the geographic regions and major product categories. Excluding the one-time effect, net sales increased 5% year over year. Quarterly net sales beat the Zacks Consensus Estimate of $2.6 billion.

Gross margin deflated 10 basis points (bps) to 79.6% in the quarter due to higher cost of sales. Higher operating expenses resulted in operating income margin contraction of 360 bps to 13.2%.

Segment Results

By Category

In fiscal 2014, the Skincare category reported 1% year-over-year growth benefiting from strong growth from the company’s recently launched products. The Fragrance product line and Makeup category reported year-over-year growth of 9% each backed by strong sales of makeup artist brands and luxury fragrance brands like Tom Ford and Joe Malone. Hair Care reported 4% growth year over year backed by strong sales of the brand Aveda. Other products, contributing less than 1% to the total revenue, registered maximum growth of 19%.

By Geography

Americas: Excluding the effect of shift of orders, sales in Americas rose 1% year over year on a constant currency basis to $84 million. Sales increased on the back of growth in the company's makeup artist, luxury and certain heritage brands. Excluding the effect of shift of orders, operating income slipped 29% year over year to $53 million backed by increased sales and tight spending.

Europe, the Middle East & Africa: Double-digit growth in travel retail drove overall sales in this segment. Sales grew 12% year over year on a constant currency basis to $68 billion. Operating income increased 23% year on year to $53 million on the back of higher results from the company’s travel retail business and the United Kingdom.

Asia/Pacific: Sales in the region improved 3% year over year on a local currency basis to $26 billion, backed by double-digit sales growth in China, Japan, Hong Kong, Australia and Singapore. Operating income increased 25% year over year to $21 million, led by Korea, Japan and Hong Kong.

Other Financial Update

On Nov 3, 2014, Estee Lauder completed the takeover of high-end fragrance and lifestyle brand Le Labo (The Lab) to strengthen its fragrance category. Last week, the company also acquired RODIN olio lusso, a luxury skin care brand founded by the iconic New York stylist, Linda Rodin.

Fiscal 2015 Guidance Lowered

Management expects the business momentum to continue in the upcoming year backed by 3–4% growth in the global prestige beauty sector.

However, due to acceleration in sales orders in connection with the company’s rollout of its last major wave of Strategic Modern Initiative in Jul 2014, fiscal 2015 results are likely to be hurt.

Second-Quarter Outlook: Estee Lauder expects net sales excluding the effect of the accelerated retailer orders to grow 3% to 4% in constant currency. Earnings per share, excluding the effect of the accelerated retailer orders, are projected between $1.01 and $1.05.

Fiscal 2015 Outlook: Management lowered the fiscal outlook. For fiscal 2015, net sales, excluding the effect of the accelerated retailer orders, are projected to grow between 5% and 6% in local instead of 6% and 7%. Earnings per share, excluding the effect of the accelerated retailer orders, are expected within $3.03 to $3.11 instead of a range of $3.10 and $3.20.

Estee Lauder expects growth to be fueled by success in high-growth channels and the emerging markets.

Stocks to Consider

Headquartered in New York, Estee Lauder engages in the manufacture and sale of skin care, makeup, fragrance and hair care products, and currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the cosmetics sector is Helen of Troy (HELE) carrying a Zacks Rank #2 (Buy).

Other well-performing stocks in the consumer staple sector are ConAgra Foods, Inc. (CAG) and Hain Celestial Inc. (HAIN). Both the stocks have the same Zacks Rank as Helen of Troy.

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