Some Key Decisions In 2015 That Might Impact Estee Lauder’s Future Growth

Estee Lauder‘s (NYSE:EL) fiscal 2015 ended on a lackluster note (fiscal year ends in June). The biggest dampener was the lukewarm performance of its travel retail sector on account of financial and natural crises in some of its crucial regions. Also, the company’s biggest brands, Clinique and Estee Lauder, faced waning demand. To exacerbate the situation, weak international currencies provided additional headwinds to the company’s financial performance. ^[1] Estee Lauder’s sales for fiscal 2015 witnessed a 2% year-on-year decline and stood at $10.78 billion. ^[2] Estee Lauder planned to tide over its roadblocks in fiscal 2016 and as per its Q1 FY2016 performance, it had been successful to a great extent. The company delivered 8% adjusted constant currency growth in net sales, to $2.83 billion, and its net earnings increased 36% to $309.3 million. Though the resilient performance of the global prestige beauty industry in the face of economic travails did help in Estee Lauder’s recovery, the company’s products, especially prestige make-up had been doing well all over the world. Some of the brands that demonstrated notable performance were Jo Malone London, Tom Ford, and La Mer in the luxury category, and M-A-C and Smashbox in the makeup category. The company successfully overcame the problems in Asia and Latin America to demonstrate an impressive performance in Q1 FY2016. ^{[3] [4]}

Our price estimate of $84 for Estee Lauder is slightly below the current market price.

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Flagship Brands Get Focus

Estee Lauder had been focusing on its flagship brands to revive growth. The company’s smaller brands are growing by double digits, but the larger brands like Estee Lauder and Clinique had been suffering on account of the setback in the travel retail channel, and through the Asian markets (where skincare generates around 70% of beauty sales) as well as the saturated demand in key regions like North America. The company started promoting the brands with renewed vigor through new product launches, advertisements, and a stronger digital influence.

As a result of these initiatives, in Q1 FY2016 Estee Lauder grew in several geographies and also gained market shares in EMEA. Estee Lauder’s new launches, New Dimension serum and Pure Color Envy Liquid Lip Potion, received a successful reception. Clinique’s Face Forward campaign had increased its appeal to the younger customers. Clinique also launched a digital lifestyle magazine called The Wink which includes upcoming beauty trends, global influencers, and articles on wellness, travel, and beauty. The platform is expected to strengthen Clinique’s relationship with its existent users and attract newer users to the brand. The revival of its largest brands were important for Estee Lauder, and its efforts seem to be in the right direction.

New Product Lineup In Travel Retail Can Revive Growth Through The Channel

In the fiscal year 2014, travel retail contributed to 13% of Estee Lauder’s product distribution and was one of the highest growth channels for the company. However, over the last few quarters the company had been lagging behind in sales through this channel, primarily due to a slowdown of travel owing to economic crises across the globe, as well as natural calamities like the MERS virus attack in Korea. According to the Global Airport retailing information, by 2016, airport retail spending will be $23.2 billion for Asia Pacific, whereas for the Americas and Europe the figures will be $10.1 billion and $12.4 billion, respectively. ^[5]

Estee Lauder is striving to reinstate its dominance in the travel retail channel. In October, Estee Lauder launched a pipeline of products to be sold through its travel retail channels under some of its brands including Clinique, Tom Ford, M-A-C, Bobbi Brown, and Jo Malone. The products include face contouring, eye makeup, lipstick, serums, treatment creams, and fragrances. ^[6]

Travel retail is one of the primary growth drivers for Estee Lauder, and Estee Lauder’s management previously spoke about how the problems slowing down this channel were temporary, and that the company is gearing up for further growth through this sector. The new launches are a step towards this direction.

Strategic Alliance With Dr Jart+ Might Lead To A Stronger Foothold In Asia

Estee Lauder announced the purchase of a stake in Have & Be Co. Ltd., a South Korean skincare company, in October 2015. Have & Be Co. owns brands like Dr. Jart+ (a manufacturer of innovative skincare products and the brand which helped popularize the BB creams internationally) and Do The Right Thing ( a men’s skincare brand that is popular for fusing Korean innovation with New York’s style). Since Korea is one of the global hubs for innovative beauty products, the partnership can boost Estee Lauder’s own product range with fresher innovations. Also, the premium beauty giant can gain a stronger hold in Asia, and overcome its recent slowdown in the region, through the collaboration with a Korean company. China and Korea are Estee Lauder’s most important sales regions in Asia.

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1. Q4 Fiscal 2015 Earnings Conference Call, Estee Lauder, August 17, 2015 [↩]
2. The Estée Lauder Companies Reports Strong Adjusted Constant Currency Sales and Earnings Growth in Fiscal 2015 Fourth Quarter and Full Year, Estee Lauder News Release, August 17, 2015 [↩]
3. The Estée Lauder Companies Delivers Strong Sales and Earnings Growth in Fiscal 2016 First Quarter, Estee Lauder Press Release, November 2, 2015 [↩]
4. Estee Lauder Q1 FY2016 earnings Transcript, Seeking Alpha, November 2, 2015 [↩]
5. Travel Retail Taps Travelers Beyond Traditional Corridors, Business of Fashion, July 2014 [↩]
6. The Estée Lauder Companies prepares for key launches at Cannes, The Moodie Report, September 3, 2015 [↩]