A month has gone by since the last earnings report for Estee Lauder (EL). Shares have lost about 2.7% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Estee Lauder due for a breakout? 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.
Estee Lauder Q3 Earnings & Sales Beat, Outlook Raised
Estee Lauder reported third-quarter fiscal 2019 results, wherein both top and bottom lines improved year over year and surpassed estimates. Notably, this marked the company’s 19th and ninth straight quarter of earnings and sales beat, respectively. Additionally, the company raised its sales and earnings view for fiscal 2019.
Management now envisions adjusted earnings for fiscal 2019 to be $5.15-$5.19 per share, up from the earlier projection of $4.92-$5.00.
Further, earnings are expected to increase 18-19% year over year on a constant-currency (cc) basis, and before various adjustments and the impact of ASC 606. Earnings are likely to benefit from solid investments in the second half of fiscal 2019, mainly in product innovation plans.
Quarter in Detail
The company posted adjusted earnings per share (EPS) of $1.55 that surged 32.4% year over year. Adjusted earnings improved 17% to $1.37 per share at cc and on adjusting for the new accounting standard. The bottom line came ahead of the Zacks Consensus Estimate of $1.30. The year-over-year upside was mainly driven by a robust top-line performance and gains from the Leading Beauty Forward initiative.
Estee Lauder’s net sales of $3,744 million surpassed the Zacks Consensus Estimate of $3,575 million. Moreover, sales increased approximately 11% year over year, while it advanced 15% at cc. Excluding the impact of the new revenue recognition standard, net sales rose 12% at cc. The quarterly results continued to depict growth across most product categories and sales channels.
Management remained particularly impressed with its skin care category, the Asia-Pacific region, travel retail, online channels, and performance of Estee Lauder, La Mer and Tom Ford Beauty brands, among others.
Adjusted operating income increased 14% year over year on the back of improved sales and stringent cost management.
Product-Based Segment Results
Skin Care reported sales growth of 21% year over year (up 25% at cc) to $1,744 million, owing to improvements in most regions. From a brand perspective, contributions from Estee Lauder, La Mer and Clinique were quite significant.
Makeup revenues were up 5% (up 10% at cc) to $1,461 million on the back of robust performance of brands such as Estee Lauder, MAC, Tom Ford Beauty and La Mer. These were partially offset by declines in Smashbox and Clinique.
In the Fragrance category, revenues rose 3% (7% at cc) to $392 million, owing to strength in Estee Lauder brand as well as premium brands like Jo Malone London, Le Labo, By Kilian and Tom Ford Beauty.
Hair Care sales amounted $136 million that dipped 2% (up 1% at cc) year over year, driven by soft Bumble and Bumble sales, particularly in the salons in North America.
Sales in the Americas declined 2% (also at cc) to $1,155 million. We note that retail sales in the total prestige beauty industry decelerated across the United States on account of weakness in the makeup category in particular. Also, the brick-and-mortar business remained somewhat challenged, whereas online sales were sturdy across brand.com and retailer.com.
Sales in Europe, the Middle East & Africa region improved 15% (up 22% at cc) to $1,625 million. This was mainly driven by a double-digit sales increase in travel retail along with strength in Italy, India and Russia. These upsides were somewhat offset by lower sales in various Western European regions and the United Kingdom.
In the Asia-Pacific region, sales rallied 25% (up 31% at cc) to $966 million. The upside was driven by broad-based growth.
Other Financial Updates
Net cash flows generated from operating activities during the nine months ended Mar 31, 2019, were $1.76 billion.
In a separate press release, management announced a quarterly dividend of 43 cents per share on its Class An and Class B shares, which is payable on Jun 17, 2019.
Management is encouraged by its quarterly performance, which was fueled by growth in most brands. The company expects solid demand for its premium products and also anticipates to grow considerably ahead of the industry in fiscal 2019. Well, the global prestige beauty industry is expected to grow 7% in fiscal 2019, with favorable demographic trends making it an attractive space.
Moreover, Estee Lauder is on track with the implementation of the Leading Beauty Forward initiative, directed toward efficient management of costs and operations.
However, Estee Lauder is cautious about certain factors like tariff impacts in China, costs related to Brexit, and slow moderation of net sales growth in China and travel retail network. Also, softness in the brick-and-mortar retail space in the United States and the United Kingdom (especially in makeup) is a concern. Nonetheless, the company intends to make further investments in the United States in the fourth quarter to aid growth.
Also, Estee Lauder is focused on innovations, enhancement of premium products, efficient commercial execution and well-chalked advertising strategy. That said, management raised its fiscal 2019 outlook.
The company now expects net sales growth of 7%, including a negative impact of 3% from currency fluctuations and no impact from the new accounting standard. Excluding these impacts, net sales are expected to rise 10-11%. Earlier, net sales were projected to grow 5-6% and adjusted net sales were expected to increase 8-9%.
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 -17.8% due to these changes.
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 C. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #2 (Buy). We expect an above average return from the stock in the next few months.
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