Estée Lauder buoyed by significant exposure to fast-growing markets such as China
The company’s products are sold in more than 150 countries and territories under the brands Estée Lauder, Aramis, Clinique, Tommy Hilfiger, MAC, Donna Karan New York (DKNY) and Michael Kors.
Estée Lauder has an estimated 15percent market share of global prestige beauty. It benefits from significant exposure to fast-growing markets such as China, as well as more sophisticated fashion and beauty preferences, fuelled by social media.
The high pricing power of Estée Lauder is evident in its high gross margin of about 80percent. This is indicative of strong brand equity and resilient high-end consumer spending.
Nearly a third of its gross profit is spent on advertising, merchandising, sampling, promotions and product development. The company generates a reliable 10percent net profit margin year after year.
What distinguishes it from most beauty conglomerates is its ability to sustain revenue growth by investing in its leading brands. It enjoys continued consumer loyalty as it successfully innovates around its core products and brands. The brands of Estée Lauder, Clinique and MAC, as a group, regularly record double-digit growth. This is remarkable, given that some of these flagship brands have been around for decades.
Estée Lauder recently reported impressive third quarter results. Organic sales growth increased 12percent and earnings per share soared 33percent. Most product segments and geographies registered double-digit growth, with the exception of sales in the Americas, which fell 6percent due to a decline in the make-up category. Asia Pacific remained the key growth driver, increasing sales by 27percent.
Estée Lauder’s online business in China has doubled in the past year. Its brand already has a physical presence in 170 of the higher-traffic cities in China, but there are hundreds more that they can access online and use that data to determine where to establish a physical presence.
China also has the highest proportion of female participation in the workforce at 61percent.
A growing population of financially independent women translates into a significant opportunity for Estée Lauder as prestige beauty only has a 26percent penetration rate in China.
Product innovation, expanding distribution in to e-commerce in emerging markets and higher pricing may enhance Estée Lauder’s competitive position and drive revenue growth over the next few years.
Over the past five years the share price has returned 17percent per annum.
Frants Preis is a portfolio manager at Vega Asset Management based in Pretoria. Estée Lauder shares are owned on behalf of clients.