Beauty is a serious Business

True beauty may be more than skin deep, but millions of women are prepared to pay big bucks for the attractive promises that come in small and exquisite bottles and jars. That’s why Estée Lauder Inc (NYSE: EL) manufactures cosmetics, skincare products, hair care products and fragrances, and sells its many brands in upscale department stores, specialty stores, duty-free outlets and online, in more than 150 countries around the world. The company prefers the word ‘touch’ when referring to such a down-to-earth activity as selling, and claims on its website to ‘touch’ half a billion consumers a year. 

Among its well-known brands, besides the flagship Estée Lauder range, are Aramis, Clinique, Tommy Hilfiger, Bobbi Brown and mote than twenty others. The Americas account for 43% of global sales, but the combined regions of Europe, the Middle East and Africa deliver the largest share of operating income. The lucrative and fast-growing travel retail business (airports, cruise ships, duty-free) is included in this geographic sector. Sales in the Asia Pacific region, led by Japan but with China hot on its heels, are strongly slanted towards skin care, and the new Asia Innovation research center in Shanghai will develop products specifically adapted for the Asian market. 

Headquarters are in Fifth Avenue, naturally, but there are also thirteen factories in the US, Canada and Europe, eight global R & D  facilities and offices in forty countries, employing more than 32,000 people full-time. Beauty is a large, serious and growing business, and Estée Lauder has been pursuing an aggressive acquisition strategy for the last ten years. It considers that four key initiatives give it a competitive edge: creativity, a sales team with a personal touch to foster brand loyalty, local relevance and immersion in the digital world with all its revenue-building possibilities. Estée Lauder brands have 67 Facebook pages with over 5 million fans. More information is available from the company’s corporate strategy page and Fact sheet

The lucrative beauty business is fiercely competitive, as evidenced by the amount of space given over to the department store counters of the various players. You won’t see Avon there, but you will see L’Oréal, Revlon, Elizabeth Arden and the upscale brands of Procter & Gamble.

Estée Lauder’s current focus on the fast-growing travel retail business presents a revenue risk, since movements of people around the globe can suddenly be interrupted for long periods by natural disasters (like the interruption to air travel caused by the volcanic ash cloud from Iceland in 2010) or international catastrophes such as global epidemic diseases or acts of terrorism. The recent earthquake and tsunami in Japan had an impact on Asia Pacific sales, and revenue across the board fell dramatically in the 12 months ended June 2009, when disposable income contracted worldwide. Estée Lauder is keeping a wary eye on current economic conditions.

As  detailed in the 2011 annual report, fiscal achievements in the latest full year, which ended  June 30 2011, included record sales ($8.8 billion), record gross margin (78.1%), record net earnings ($743 million), record EPS ($3.69) and record cash flow from operations (more than $1 billion). Sales have risen for the past two years, after dipping in 2009. Department stores generate 27% of sales in both North America and internationally. International sales have grown to be 62% of the total. Skin care is the largest sales category, while hair care has been operating at a loss for the last two years and could be a target for divestment if it cannot be turned around. Net earnings were 47% higher than in 2010.

Available results for the 2012 year are for the first quarter ended September 30 2011. The earnings news release reported net sales of $2.48 billion for the quarter, up a striking 18% on comparable 2011. Net income grew 46% to $279  million. Double-digit percentage growth was experienced in every geographic region. Based on these figures, the company is raising its 2012 full-year sales forecast to an increase of 8-10%, and EPS guidance to $4.25-$4.45.

President and CEO Fabrizio Freda enlarged on these results during the Q1 earnings conference call held November 03 2011. There were market share gains in the emerging markets of China, where sales expressed in local currency grew 34%, and Korea. Increased operating margins, added to the sales performance, underline the effectiveness of the current business model. It appears that the affluent customer is faring better in tough times than the lower income shopper, since the high end stores Nordstrom, privately-held Neiman Marcus, and Saks showed the fastest growth. Strong increases were also recorded at Macy’s, Estée Lauder’s largest customer.

Estée Lauder is in the business of knowing what affluent women want, wherever they are in the world, whatever their skin type and beauty needs, and giving it to them with a heavy emphasis on glamor combined with personalized service. This has enabled it to tap into the emerging markets in China and Latin America in particular, while spreading its net even more widely with digital resources and social media. The diverse and ever-changing portfolio of brands gives the company an exceptional level of flexibility, which it has leveraged into both dramatic sales growth and improved operating margins.