Why Is Estee Lauder (EL) Up 11.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Estee Lauder (EL). Shares have added about 11.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Estee Lauder due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Estee Lauder Q3 Earnings Beat Estimates, Sales Down

The Estee Lauder Companies reported third-quarter fiscal 2020 results, with the top line and the bottom line surpassing the respective Zacks Consensus Estimate. Notably, this marked the company’s 23nd and 13th straight quarter of earnings and sales beat, respectively. However, both earnings and sales declined year over year.

Quarter in Detail

The company posted adjusted earnings per share of 85 cents, which beat the Zacks Consensus Estimate of 72 cents. However, the metric declined 45% year over year.

Estee Lauder’s net sales of $3,345 million surpassed the Zacks Consensus Estimate of $3,055 million. However, sales declined 11% year over year (down 9% at cc). The downside was caused by retail store closures due to the coronavirus pandemic. Nevertheless, the decline was partially offset by inclusion revenues from the recently-acquired Have&Be Co. Ltd.

Gross profit came in at $2,509 million, down 14%. Also, gross margin contracted 310 basis points (bps) to 75%. Operating income declined 84% year over year to $109 million. Operating income margin declined significantly to 3.3% from 18% reported in the year-ago quarter’s levels.

Product-Based Segment Results

Skin Care’s sales declined 1% year over year (flat at cc) to $1,723 million, due to reduced sales from Clinique, La Mer and Origins brands.

Makeup revenues were down 22% year over year (down 20% at cc) to $1,146 million, thanks to softness in  brands like Clinique, Bobbi Brown and Tom Ford Beauty to name a few. The downside can be mainly attributed to impacts of the outbreak of coronavirus. Also, persistent softness in color cosmetics sales in most markets was a deterrent.

In the Fragrance category, revenues fell11% year over year (down 10% at cc) to $349 million caused by softness in various designer scents like Jo Malone London mainly due to the coronavirus outbreak. This along with expiration of the Tory Burch license agreement in Dec, 2019 acted as a deterrent.

Hair Care sales totaled $119 million, down 13% year on year (down 12% at cc). This was caused bylower sales from Aveda, and Bumble and bumble owing to the coronavirus outbreak.

Regional Results

Sales in the Americas declined 23% year over year (also at cc) to $892 million, due to reduced sales in brick & mortar stores following retail store closures in March due to the coronavirus outbreak. Nevertheless, growth in online sales during this time offered some respite.

Sales in Europe, the Middle East & Africa region declined 6% (down 5% at cc) to $1,525 million due to the coronavirus outbreak. Nevertheless, gains in the online and travel retail offered some respite.

In the Asia-Pacific region, sales fell 4% (down 1% at cc) to $928 million, thanks to lower sales following store closures due to the pandemic. Nevertheless, online sales increased double-digits during the quarter.

Other Financial Updates

Net cash flow used for operating activities for nine months ended Mar 31, 2020 came in at $1.95 billion. Further, to maintain financial flexibility, the company has decided to suspend its next quarterly dividend which was due to be paid in Jun, 2020.

Guidance

Estee Lauder anticipates majority of its retail stores to remain shut through most of fourth-quarter fiscal 2020. The company expects these store closures to continue impacting the global prestige beauty negatively. Given the uncertainty related to the pandemic, management is not providing any guidance for the fourth quarter and fiscal year 2020.  

During the third quarter, the company undertook various expense-control measures that included suspending non-essential recruits among others. In fact, these measures have resulted in nearly $250 million of savings during the quarter. Moreover, Estee Lauder expects these cost-control measures to deliver increased benefits in the fourth quarter.

On Apr 15, the company took various other measures including salary cuts for senior executives and other management employees along with furloughing workers, among others. These along with other cost-control measures implemented in the third quarter are expected to reduce operating expenses by $500-$600 million in the fourth quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -133.11% due to these changes.

VGM Scores

At this time, Estee Lauder has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Estee Lauder has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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