Estee Lauder (EL) Up 2.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Estee Lauder (EL). Shares have added about 2.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Estee Lauder due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Strong Brands & Regions Aid Estee Lauder in Q4 Earnings

Estee Lauder reported fourth-quarter fiscal 2018 results, with both the top and the bottom lines improving year over year and beating the Zacks Consensus Estimate. The quarter continued to witness stellar regional and brand performances. Additionally, the company also provided view for fiscal 2019. Notably, with the fourth-quarter results, the company marked its 16th straight quarter of earnings beat, while sales surpassed the same for the sixth consecutive period.

Quarter in Detail

The company posted adjusted earnings per share (EPS) of 61 cents that improved almost 20% year over year and beat the Zacks Consensus Estimate of 56 cents. The upside was mainly driven by a robust top-line performance. On a currency-neutral basis, earnings improved 11%.

Estee Lauder’s net sales of $3,295 million surpassed the Zacks Consensus Estimate of $3,254 million. Moreover, sales increased approximately 14% from the prior-year quarter’s tally.

The quarter continued to depict growth across most brands, geographic regions and product categories. Performance across travel retail, specialty-multi and online channels also remained robust in the quarter. Further, sales advanced 12% on a constant-currency (cc) basis during the quarter.

Gross profit increased nearly 14% to $ 2,598 million, while gross margin remained flat at 78.8%. On an adjusted basis, gross profit rose 14.4% to $2,615 million, while gross margin improved 20 basis points (bps).         
Adjusted operating income came in at $290 million, rising 3.2% year over year. However, adjusted operating margin declined 90 bps due to higher operating expenses.

Product Based Segment Results

Skin Care reported sales growth of 29% year over year (up 26% at cc) to $1,379 million owing to double-digit improvements in almost all regions, particularly in Europe, the Middle East & Africa and China. Travel retail also remained strong in the region. From a brand perspective, Clinique, La Mer and Estee Lauder accounted for the largest contributions.

Makeup revenues were up 4% (up 2% at cc) to $ 1,358 million on the back of robust performance of brands like Tom Ford, Estée Lauder, BECCA and Too Faced. These were partially offset by declines in MAC and Clinique.

Fragrance category reported revenue growth of 11% (up 9% at cc) to reach $403 million, driven by growth across all regions. Moreover, brands like Jo Malone London, Le Labo and Tom Ford depicted double-digit growth.

Hair Care sales amounted $151 million that advanced 8% (6% at cc), driven by higher sales of the Aveda brand.

Regional Results

Sales in The Americas increased 2% at cc to $1,197 million. Sales in Latin America and Canada witnessed noteworthy improvements alongside slight improvement in the United States. However, operating income in the region fell 26% to $211 million owing to lower results from MAC, higher social media and digital investments as well as increased general and admirative expenses.

Sales in Europe, the Middle East & Africa region improved 19% (up 16% at cc) to $1,398 million. This was driven by increases in India and Balkans as well as robust gains from travel retail. These upsides were partially countered by decline in the U.K. as well as stock adjustments in the Middle East. The region’s operating income improved 27% to $1,523 million, supported by strong travel retail, which was partially offset by declines in the Middle East and brand related stock adjustments.

In the Asia-Pacific region, sales soared 29% (up 24% at cc) to $708 million. The upside was driven by spectacular performance in Hong Kong and China. Growth in Hong Kong also propelled operating profit to increase 38% to reach $575 million. This was partially offset by increased advertising expenses.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $ 2,181 million, long-term debt of $3,361 million and total equity of $4,710 million.

Net cash flows from operating activities in fiscal 2018 came in at $2,573 million, while the company incurred capital expenditures of $629 million.

In a separate release, Estee Lauder announced a quarterly dividend of 38 cents per share, payable on Sep 17, 2018 to shareholders of record as of Aug 31, 2018.

Guidance

Management is impressed with its performance in fiscal 2018 as a whole, fueled by growth in most of the segments and brands. These also aided the company to boost its market share. Further, the company expects continued growth opportunities in the global prestige beauty industry, which is expected to grow 5-6% in fiscal 2019.

Also, the company is on track with the implementation of the Leading Beauty Forward initiative, directed toward better management of costs and operations. In fact, after the full implementation of this initiative, management expects annual benefits in the range of $350-$450 million.

That said, management provided sales and earnings outlook for fiscal 2019. The company expects net sales to grow 4-5% including negative impacts of 2% from currency fluctuations and 1% from the adoption of new accounting standard.

Excluding these impacts, net sales are expected to rise 7-8%. Further, the company envisions adjusted earnings for fiscal 2019 in the range of $4.62-$4.71. At cc, the bottom line is projected to grow in the range of 9-11%. The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $4.99.

Management also provided view for the first quarter of fiscal 2019. Net sales for the first quarter are expected to rise in the range of 5-6%. Further, adjusted EPS for the quarter is projected in the range of $1.18-$1.22. At cc, the bottom line is expected to rise in the range of 7-10%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.8% due to these changes.

VGM Scores

At this time, Estee Lauder has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Estee Lauder has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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