Estee Lauder: Skin Care vs. Makeup Businesses

Estee Lauder (NYSE:EL) makes premium beauty care products such as skin creams, lipsticks, fragrances and hair colors and competes with other leading beauty care players such as L’Oreal (PINK:LRLCY), Revlon (NYSE:REV) and Avon (NYSE:AVP). Consistent with its premium image, Estee Lauder sells its products through department stores, upscale perfumeries, prestige salons, spas, free standing company stores and duty free shops at airports. We value Estee Lauder with a $71.65 Trefis price estimate for its stock, which is close to a 24% discount to its current market price.

Skin care and makeup are the leading product segments at Estee Lauder with comparable revenue contributions. In 2010, skin care brought in $3.5 billion in revenues, only marginally higher than makeup with $3.1 billion. However, we estimate that skin care makes up for almost 52% while makeup contributes less than 39% to Estee Lauder’s stock. Here we explore how skin care and makeup product segments have comparable revenue contributions yet markedly different valuations.

How Skin Care and Makeup Compare

We estimate that Estee Lauder’s skin care products have 6.5% market share of the $94 billion skin care market compare to 12% share of the $46 billion market for makeup products. So Estee Lauder’s skin care segment has close to half of its market share in the makeup segment – but the skin care market is almost double the size of the makeup market. Profit margins are similar for the two as we estimate the skin care market segment had an EBITDA margin of close to 18.5%, which is not markedly different from the makeup segment at 17.3% in 2010.

Why is Skin Care over 50% of Estee Lauder’s Value?

Skin care market is perhaps the fastest growing segment of beauty and personal care industry.

1. New niche segments within skin care: Backed by the anti-aging skin care range and the relatively new skin care range focused on men, skin care market is expected to grow at close to 6%, while the mature makeup segment’s growth rates are expected to hover around 3%, largely in line with the increase in the number of users (~2%) along with marginal increase in prices reflecting rising costs.
2. Increasing demand for premium skin care in emerging markets: What is also driving skin care market is the increasing affluence in emerging markets in Asia such as China ^[1] and India. With rising disposable income and standards of living, the consumers in these markets are increasingly substituting local products with premium international skin care brands.
3. Much scope for price-ups in skin care: Skin care market is not only growing in volume but also on account of healthy year-on-year price-ups. Unlike other beauty care segments, skin care thrives on high end product innovation and patented technology to counter the effect of aging, and sun and pollution damage. All players spend a significant portion of their R&D budget on skin care, which then validates premium pricing.

You can see a detailed analysis of our $71.65 Trefis price estimate of Estee Lauder’s stock here.

1. China, the Next Engine of Growth For Estee Lauder, Trefis, January 7′ 2011 [↩]