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WIKI ANALYSIS
The Estee Lauder Companies manufactures and sells skin care, makeup, fragrance, and hair care products in 140 countries. EL distributes its products through a variety of different channels, including large department store retailers, smaller boutique retailers, beauty salons and spas, and direct-selling through company-owned stores, online websites, and TV informercials. [1] Its most important distribution relationship is with the department store retailer Macy's, which accounted for 12% of its net sales around the world in FY2008.
In FY2009, EL's sales figures were affected by a poor global retail environment, which resulted in fewer sales of its heritage products as well as adverse currency exchange rates. EL posted decreases in sales throughout all of its product segments seeing its net income drop over 50% in the 2009 FY. [2] Notably, FY2009 saw a strong increase in its Asian markets, with sales increasing 10% from the 2008FY.[2]
However, as EL continues to acquire more brands, especially in its fragrance division, its products face the risk of cannibalization by competing with each other for clients from the same market segment. Competition in the mid to low-end markets also continues to be a challenge for EL.
Business Overview
The Estee Lauder Companies is a manufacturer and retailer of skin care, makeup, fragrance, and hair care products worldwide. EL distributes its products through various channels appropriate for the market position and audience of its different products. These channels include department stores such as Macy's, beauty retailers such as Sephora, perfumeries and pharmacies, beauty salons and spas, and direct-selling through company stores, online websites and TV infomercials. [1]
Business and Financial Metrics
- Core Brands: EL owns more than 20 skin care and makeup brands as well as a variety of fragrance brands. Its core cosmetics brands include Estee Lauder, Clinique, Prescriptives, Origins, MAC, Bobbi Brown, Darphin, La Mer, and Tom Ford. EL also owns global licenses to market fragrances under brand names such as Tommy Hilfiger, Donna Karan Cosmetics, Sean John Cosmetics, and Aramis. [1]
- EL markets its products in 140 countries around the world. Its largest markets are the Americas and Europe, which constituted 82.3% in total revenues in FY2009. [2]
- Skin Care and Makeup products continued to be strongest in sales, together making up 78% of total revenues in FY2009 a 2% increase from the previous fiscal year. [2]
- In FY2009, net sales decreased 7.4% to $7,323.8 million, and net earnings fell 54% to $218.4 million. [2]
- EL saw sales in all its product categories fall between 3-20%, with fragrance falling 19.6% from FY2008 due to the poor retail climate and decreased sales of its heritage brands. EL believes this to be temporary and that this trend will reverse itself as the retail climate picks up and it introduces newer brands. [2]
- Sales in Asia/Pacific grew by 10% from FY2008 to FY2009, bolstered by sales in China, Japan, and Hong Kong as well as favorable exchange rates with the Japanese Yen. Sales growth in Europe, Middle East, and Africa fell by 11/5%, due to decreased retail traffic in the region as well as unfavorable exchange rates due to a stronger US dollar. [2]
- High-end brands such as La Mer and Darphin have very limited distribution channels and are sold only in upscale boutique or department stores, while BeautyBank brands are marketed at more budget-conscious retailers such as Kohl's. [1]
- EL distributes its various brands through limited channels and places high priority on maintaining its most important retailer relationships. In fact, in FY 2006, 2007, and 2008, EL's primary retailer Macy's accounted for 16%, 14%, and 12% of net sales, respectively. [1] Despite the recession America faces in 2009, the department store sector has not deteriorated much since the beginning of the year. EL gets 29% of its revenue from department store sales and has also seen increased market share in its Clinique brand. The company has also increased Internet and Home Shopping Network sales. However, there is some weakness in the company's travel retail business, which accounts for 20% of profits. Revenue from that segment decreased in the second quarter of fiscal 2009 due to lower international travel.[4]
- EL maintains the distinct global images of its makeup brands through its advertising spending, which in FY 2009 was $1.88 billion.[2] However, this was significantly lower than that of EL's main competitor, L'oreal (LRLCY), which spent $6.29 billion in FY2007 on marketing campaigns. [5] (L'oreal (LRLCY) and EL are similar in the market segments they target as well as total revenue).
FY Q1 2010 Results (ended September 30, 2009)
- Net Income were $141 million ($0.75 EPS). Compared to Q1 FY09, EL profit increased 275%, as the firm had a $42.3 million restructuring charge in that quarter. [6] Even taking into account the restructuring charge, the company's EPS beat Wall Street estimates, inline with the better-than-expected earnings of its competitors, Elizabeth Arden (RDEN) and Avon Products (AVP).
- Net sales decreased % from the year before, however, to $1.83 billion.[6]
- Operating margins improved from 4.8% during the previous-year-quarter to 12% during Q1 2010. [6]
FY Q2 2010 Results (ended January 20, 2010)
- Net Income was $256.21 million ($1.28 EPS), an increase of 62% compared to Q2 FY2009. [7] This exceeded the expectations of analysts, who expected $2.24 billion ($1.21 EPS) in income for the period. [7]
- Net sales increased 11% from the year before, however, to $2.26 billion.[7]
| Metric | FY2009 | Chg from FY2008 | FY2008 | Chg from FY2007 | FY2007 |
|---|---|---|---|---|---|
| Net Sales | $7,323.8 | (7%) | $7,911 | 12.4% | $7,037.5 |
| ----Sales Breakdown by Products | |||||
| ------Skin Care | $2,886.3 | (3.7%) | $2997 | 15% | $2601 |
| ------Make Up | $2,830.9 | (5.65%) | $3000 | 11% | $2713 |
| ----Fragrance | $1,150.9 | (19.63%) | $1432 | 9% | $1309 |
| ------Hair Care | $402.4 | (5.78%) | $427 | 13% | $377.1 |
| ----Sales Breakdown by Regions | |||||
| ------The Americas | $3,421.2 | (7.82%) | $3712 | 4% | $3561 |
| ------Europe, Middle East & Africa | $2,661.2 | (11.48%) | $3007 | 21% | $2493 |
| ------Asia/Pacific | $1,299.4 | 8.95% | $1193 | 21% | $983 |
| Net Earnings | $218.4 | (54%) | $473.8 | 5.5% | $449.2 |
Trends and Forces
Diverse Brand Names Target Different Market Niches
EL's primary strength lies in the variety of brands that it has acquired in the last two decades, since each brand has its own market niche, brand image, as well as regional appeal. Skin care brands Clinique and Origins appeal to customers that want products with organic, natural, and allergen-free ingredients. Makeup lines M.A.C. and Bobbi Brown target fashion-conscious customers who prefer professional-grade makeup products and tools. In the high-end market, La Mer and Darphin have substantial brand recognition as prestige skin care and makeup brands, while the newly acquired brand BeautyBank, with makeup brands and products such as AmericanBeauty and Flirt, targets more low-end consumers. The popularity of its professional-grade makeup brands and high-end products have helped to offset the hit from the global economic downturn. [1]
Spending on Discretionary Items Decreases During Economic Downturns
In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007.[8] The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S., a poor sign heading into the holiday shopping season.[9]
During economic downturns, consumer confidence is lowered and spending becomes more limited on necessary items rather than discretionary items such as cosmetics and luxury personal care items. EL's sales will be negatively affected by the challenging global macroeconomic environment that retail faces, as seen in the growth of only 4% in its US market in FY2008. The US market consists almost half of EL's total revenues and is a key market for its core brands such as Clinique, Origins, and various fragrance lines. [10]
Large Presence in Global Market Exposes EL to Currency Fluctuation Risks
Since 53% of EL's sales revenues come from markets outside of the United States, exchange rates play a major role in EL's sales performance. As the company doesn't engage in any significant hedging activity against exchange rate risk, the final amount of its sales and profits are greatly exposed to fluctuations in the value of the U.S. dollar . weakening of the dollar against foreign currencies would allow AVP products to become more competitively priced in global markets, thus positively affecting sales revenue from foreign markets; however, a weak dollar would also mean higher costs for products manufactured overseas. For example, in FY2008, net dollar sales grew in Europe, Middle East & Africa by 21% in local currency, but when calculated in terms of local currencies, growth was only 12%. [11]
This was a major positive for EL in FY2007 and FY2008, as the dollar has been fallen in value since late 2007 and a domestic recession would keep exchange rates in favor of companies with foreign sales. This can have an opposite effect also, however, as seen in the 2009 fiscal year where a strengthening dollar in respect to the Euro caused EL to see a decrease in income from its European sales. [2]
Competition
EL's brands face substantial competition in the cosmetics industry. Although its professional makeup brands such as M.A.C and Bobbi Brown face little competition due to the specialized clientele that it targets, its all-natural brands face competition from Bare Escentuals, and its most popular mid-end brands such as Estee Lauder face competition from the myriad of products of Revlon, Avon, and Elizabeth Arden. In addition, the cosmetics industry faces challenges from small, private companies with specialized offerings that can also fight for market share. [12]
Major Competitors
| Company | Sales Revenue | Sales Growth from FY2007 | Net Profit Margin | Operating Margin | Net Earnings | % of Sales from Overseas |
|---|---|---|---|---|---|---|
| L'oreal (LRLCY) [13] | £17,541.80 | 2.8% | 11.12% | 14.64% | £1,948.30 | 74% |
| Avon Products (AVP) [14] | $10,558.9 | 7.6% | 8.19% | 12.53% | $875.30 | 78% |
| Estee Lauder Companies (EL) [1] | $7910.80 | 12.4% | 6.12% | 10.25% | $473.80 | 53% |
| Revlon (REV) [15] | $1346.8 | (1.5%) | 0.97% | 11.51% | $57.90 | 43% |
| Elizabeth Arden (RDEN) [16] | $1141.08 | 1.2% | 1.74% | 4.30% | $19.90 | 40% |
| Bare Escentuals (BARE) [17] | $556.16 | 8.8% | 17.61% | 31.51% | $97.96 | 3.5% |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 EL 2008 SEC Filing 10-K
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Estee Lauder 2009 Annual Report
- ↑
- ↑ "Analyst touts Estee Lauder's execs, business model" Forbes.com
- ↑ L'Oreal Shifts Ad Spending to Web
- ↑ 6.0 6.1 6.2 EL Q1 2010 Profit Surges
- ↑ 7.0 7.1 7.2 Estee Lauder Q2 Profit Rises
- ↑ Recession is Official in December 2007
- ↑ WSJ.com, Retail Sales November 2008
- ↑ A Look at Discretionary Spending
- ↑ EL Cuts Earnings Views on Dollar
- ↑ Estee Lauder's Competitive Landscape
- ↑ L'Oreal Annual Report, 2007
- ↑ AVP SEC Filing 2008 10-K, Pg. 24
- ↑ REV Company Profile, Google Finance
- ↑ RDEN Financials, Google Finance
- ↑ BARE Company Profile, Morningstar.com
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