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Estee Lauder (EL) Posts Upbeat Q1 Earnings, Raises View

Estee Lauder Companies Inc. EL continues to impress investors with better-than-expected earnings for 13 straight quarters now, including the recently reported first quarter of fiscal 2018. The cosmetic giant also raised its outlook for the second quarter and fiscal 2018. Shares rallied more than 8% in the pre-market trading session.

We also note that shares of this Zacks Rank #2 (Buy) company have rallied 27.8% in the past six months, outperforming the industry’s gain of 10.8%.

Quarter in Detail

The company posted adjusted earnings per share of $1.21, beating the Zacks Consensus Estimate of 98 cents. Adjusted earnings surged 42.4% year over year. Excluding currency impact, adjusted earnings were $1.19. Strong top-line results combined with positive impacts of acquisitions benefited the company’s first-quarter fiscal 2018 results.

Estee Lauder’s net sales of $3,274 million surpassed the Zacks Consensus Estimate of $3,164 million. Moreover, sales increased 14% from the prior-year quarter, driven by acquisitions of BECCA and Too Faced, which contributed about 4 percentage points of the reported sales growth. Almost all its geographic regions and product categories, except hair care, reported sales growth in the quarter. Sales were also fueled by growth in several developed and emerging markets, especially in China and Hong Kong. The company also witnessed growth in travel retail and online channels. On a constant currency basis, net sales increased 13% year over year.

Gross profit increased 13% to $2,563 million, but gross margin shrank 90 basis points (bps) to 78.3% as improved revenues were offset by higher cost of sales.

Estee Lauder Companies, Inc. (The) Price, Consensus and EPS Surprise

 

Product Based Segment Results

On the basis of product category, Skin Care reported sales growth of 16% year over year (up 15% on a constant currency basis) to $1,275 million, owing to strong performance of brands like GLAMGLOW, La Mer, Origins and Estée Lauder. These were partially offset by lower sales of Aveda and Clinique brands.

Makeup revenues were up 18% (up 17% on a constant currency basis) to $1,372 million on the back of incremental sales stemming from the acquisitions of BECCA and Too Faced. Tom Ford and MAC brands also generated solid sales. These were partially offset by sluggish retail environment in the United States and weak performance of the company’s Bobbi and Clinique brands.

Fragrance category reported revenue growth of 8% (up 7% on a constant currency basis) to reach $476 million driven by increased sales of luxury brands such as Le Labo, Tom Ford and Jo Malone London, partially offset by declines in certain Estée Lauder and designer fragrances.

Hair Care sales amounted $136 million and remained flat compared with the prior year, owing to moderate growth of Bumble and bumble as Aveda brands. These were countered by lower sales of Origins hair care products.

Regional Results

Sales in the Americas increased 8% (up 7% on a constant currency basis) to $1,329 million, benefiting from the acquisitions of Too Faced and BECCA. The company’s online and specialty-multi channels registered strong growth in the region, including increased sales across a number of brands. These upsides were partially offset by soft retail traffic in few domestic stores as well as adverse weather conditions in the region. Weak sales in Latin America also impacted sales negatively.

Sales in Europe, the Middle East & Africa region improved 20% (up 18% on a constant currency basis) to $1,258 million owing to enhanced retail travel sales and growth across most of the key markets. Foreign currency changes favorably impacted the region’s results, with significant gains in Russia and Italy. Nevertheless, the Middle East region registered lower sales in the quarter owing to macro-economic challenges.

In the Asia/Pacific region sales improved 16% (up 17% on a constant currency basis) to $687 million. The upside was driven by strong performance in Hong Kong and China markets.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $ 1,444 million, long-term debt of $ 3,383 million and total equity of $4,753 million.

Net cash flows from operating activities for the quarter came in at $93 million.

Estée Lauder also increased its quarterly dividend to 38 cents per share. The increase represents a hike of 12% over its previous annualized rate of 34 cents per share. The same is payable on Dec 15, to shareholders of record as of Nov 30.

Fiscal 2018 Guidance

Estée Lauder expects continued growth opportunities in the global prestige beauty industry, which is anticipated to grow 4-5% during the year. Additionally, acquisitions, better-quality products, innovation and improved market reach are expected to positively impact sales during the year. However, economic challenges, social and political issues are affecting consumer behavior in few countries. The company remains cautious regarding weakening market conditions in the United States.                                                                                 

For fiscal 2018, Estée Lauder expects net sales to grow 10-11% from the previous growth expectation of 8-9%. Foreign currency is expected to positively impact sales by 2% during the year. On a constant currency basis, net sales are expected to grow in the range of 8-9%.

The company expects adjusted earnings in the range of $4.04-$4.12 per share for fiscal 2018, compared with the previous view of $3.87-$3.94. The Zacks Consensus Estimate for fiscal 2018 is currently pegged lower at $3.98 per share. On a constant currency basis, adjusted earnings are expected to grow 12-14%.

The company’s acquisitions of Too Faced and BECCA are expected to contribute approximately 2 percentage points to the company’s overall sales growth.

Second-Quarter Fiscal 2018 Guidance    

For the second quarter, Estée Lauder forecasts net sales growth of 13-15% compared with the previous estimate of 9-10%. On a constant currency basis sales are expected to improve 10-11% during the quarter.

The company expects adjusted earnings in the range of $1.38-$1.41 per share for the quarter, compared with the previous range of 94-97 cents. The revised earnings range marks an increase of 13% to 15% over the prior-year earnings. The Zacks Consensus Estimate for the quarter is currently pegged at $1.41 per share. On a constant currency basis, adjusted earnings are expected to improve 8-10%.

Currency is expected to positively impact second-quarter sales by 3-4%. Further, the company’s acquisitions of Too Faced and BECCA are expected to contribute approximately 3 percentage points to the company’s overall sales growth.

Looking For Consumer Staple Stocks? Check These

Investors interested in the same sector may consider stocks such as McCormick & Company, Inc MKC, Constellation Brands, Inc STZ and Inter Parfums Inc IPAR. All these stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

McCormick delivered an average positive earnings surprise of 3.97% in the trailing four quarters. It has a long-term earnings growth rate of 9.4%.

Constellation Brands pulled off an average positive earnings surprise of 13.6% in the trailing four quarters. It has a long-term earnings growth rate of 14.8%.

Inter Parfums delivered an average positive earnings surprise of 18.1% in the trailing four quarters. It has a long-term earnings growth rate of 12.3%.

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