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The Estee Lauder Companies (EL) Rides on Robust Skin Care Unit

Strength in the Skin Care category and growing e-commerce business are working well for The Estee Lauder Companies Inc. EL. The leading skincare, makeup, fragrance and hair care product provider’s presence in emerging markets is impressive.

That being said, The Estee Lauder Companies is grappling with higher costs and supply chain-related issues. Let’s discuss this further.

Strength in Skin Care Business

The Estee Lauder Companies boasts a solid Skin Care portfolio, which has been aiding growth. In May 2021, The Estee Lauder Companies expanded its Skin Care business when it concluded the first phase of raising its ownership stake in DECIEM Beauty Group Inc. (DECIEM). In the fourth quarter of fiscal 2022, its skin care category was most impacted by the resurgence of COVID-19 in Asia-Pacific during the back half of fiscal 2022. Keeping this in mind, it delivered solid results as an impressive performance from La Mer, Clinique and Bobbi Brown mitigated pressures from other brands in the division.

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Zacks Investment Research


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What Else is Driving Growth?

The Zacks Rank #3 (Hold) company is benefiting from a strong online business. The company has been implementing new technology and digital experiences, including online booking for each store appointment, omnichannel loyalty programs and high-touch mobile services. These initiatives and its digital-first mindset have been aiding the company’s online sales. For fiscal 2022, the online channel grew mid-single-digits organically, fueled by double-digit growth across Asia-Pacific. DECIEM’s high online penetration boosted sales growth across the channel.

The company has a strong presence in emerging markets, which insulates it from the macroeconomic headwinds in the matured markets. It is investing in catering to consumer demand in China and Asia. EL bought Korea-based skincare brand Dr. Jart in 2019. In its last earnings call, management highlighted that its Shanghai innovation lab is set to open in fiscal 2023. Investing in China will increase its ability to serve Chinese and Asian consumers with locally-relevant innovation. In addition, the center will support the company’s East to West innovation mindset. Also, the company will start limited production in its new production facility near Tokyo during fiscal 2023.

Hurdles on Way

In the fourth quarter of fiscal 2022, The Estee Lauder Companies’ gross margin contracted 370 basis points compared with the fourth quarter of fiscal 2021 levels, mainly due to factors affecting the supply chain. Global transportation delays, port congestion, labor and container shortages and increased costs for ocean and air transport put increased pressure on the cost of goods.

As The Estee Lauder Companies enters fiscal 2023, it witnesses record inflation, supply chain disruptions, unfavorable currency rates and the risk of a slowdown in several markets worldwide. Management expects first-quarter fiscal 2023 sales to be affected by continued COVID restrictions in China and Hainan. For the fiscal first quarter, the company expects net sales to decline 10-8% year over year. The guidance includes adverse impacts from termination of certain license agreements, the adverse impact associated with Russia and Ukraine and unfavorable currency translations. Quarterly adjusted earnings per share (EPS) earnings are anticipated to decline 34-28% at constant currency.

That being said, The Estee Lauder Companies’ upsides are likely to offer respite.

Shares of EL have dropped 11.2% in the past three months compared with the industry’s 14.2% decline.

Some Stocks to Consider

Some top-ranked consumer staple stocks are e.l.f. Beauty ELF, Hershey HSY and The J. M. Smucker SJM.

e.l.f. Beauty, a cosmetic company, currently sports a Zacks Rank #1 (Strong Buy). ELF has a trailing four-quarter earnings surprise of almost 77%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for e.l.f. Beauty’s current financial year sales and EPS suggests growth of 16.9% and almost 6%, respectively, from the year-ago period’s reported figures.

Hershey, the largest chocolate manufacturer in North America as well as a global leader in chocolate and non-chocolate confectionery, presently has a Zacks Rank #2 (Buy). HSY pulled off a trailing four-quarter earnings surprise of 8.7%, on average.

The Zacks Consensus Estimate for Hershey’s sales and EPS for the current financial year suggests respective growth of 13.9% and 14.4% from the year-ago reported figures.

J. M. Smucker, which manufactures and markets branded food and beverage products, carries a Zacks Rank #2. J. M. Smucker delivered a trailing four-quarter earnings surprise of 20.8%, on average.

The Zacks Consensus Estimate for SJM’s current financial year sales suggests growth of 4.4% from the year-ago period’s reported figure.


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