Why Is Estee Lauder (EL) Down 5.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Estee Lauder (EL). Shares have lost about 5.4% in that time frame, underperforming the S&P 500.

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

Estee Lauder Q4 Earnings & Sales Top Estimates

Estee Lauder reported fourth-quarter fiscal 2019 results. The company posted adjusted earnings per share of 64 cents that increased nearly 5% year over year. Adjusted earnings improved almost 15% to 70 cents at constant currency (cc) and after adjusting for the new revenue recognition accounting standard. Markedly, the bottom line came ahead of the Zacks Consensus Estimate of 53 cents. The upside was mainly driven by a robust top-line performance

Estee Lauder’s net sales of $3,590 million surpassed the Zacks Consensus Estimate of $3,527 million. Moreover, sales increased approximately 9% year over year and advanced 11% at cc. Excluding the impact of the new revenue recognition standard, net sales rose 12% at cc. The quarterly results continued to depict growth across most brands, product categories and sales channels. Also, the company’s travel retail and online channel performed well. Moreover, China and other emerging regions continued to perform well.

Gross profit during the quarter came in at $2,755 million, up 6%. However, gross margin contracted 210 basis points (bps) to 76.7%.

Operating income declined 22% year over year to $216 million.  Operating income margin contracted 240 bps to 6%.

Product-Based Segment Results

Skin Care reported sales growth of 15% year over year (up 18% at cc) to $1,589 million. Makeup revenues were up 6% year over year (up 8% at cc) to $1,433 million. In the Fragrance category, revenues inched up 0.5% year over year (up 2% at cc) to $401 million. Hair Care sales amounted $151 million that were flat year on year (up 1% at cc).

Regional Results

Sales in the Americas declined 5% (also at cc) to $1,132 million. Sales in Europe, the Middle East & Africa region improved 16% (up 19% at cc) to $1,627 million. In the Asia-Pacific region, sales rallied 18% (up 23% at cc) to $832 million.

Other Financial Updates

Net cash flows generated from operating activities during 2019 were $2,517 million compared with $2,562 million in 2018.

In a separate press release, management announced a quarterly dividend of 43 cents per share on its Class A and Class B shares, which is payable on Sep 16, 2019 to shareholders on record as on Aug 30.

Guidance

The company expects solid demand for its premium products and anticipates to outperform the industry in fiscal 2020. Well, the global prestige beauty industry is expected to grow 6-7% in fiscal 2020. Moreover, Estee Lauder is on track with the implementation of the Leading Beauty Forward initiative, directed toward efficient management of costs and operations. Further, it is on track to stabilize operations in North America.

However, Estee Lauder is cautious about certain headwinds that might weigh on performance. In this context, persistent softness in the brick-and-mortar retail space in the United States and the U.K. (especially in makeup) is a concern. Also, costs related to Brexit, tariff impacts in China, as well as moderation of net sales growth in China and travel retail network are worries.

Nevertheless, Estee Lauder’s strong brands as well as growth across most categories, backed by prudent business strategies are likely to cushion these headwinds. That said, management provided an optimistic view for fiscal 2020 and for the first quarter.

For fiscal 2020, the company expects net sales to rise in the range of 7-8%. Currency fluctuations are likely to have negligible impacts on the top line. The projection is at the high end of the long-term sales growth target of 6-8%.

Further, adjusted earnings are projected in the band of $5.90-$5.98. This reflects an improvement of 10-12% from $5.34 delivered in fiscal 2019. At cc, earnings are projected in the band of $5.85-$5.93, indicating an increase of 9-11%.  Currency is likely to adversely impact the bottom line by almost 5 cents.

Moving on, for the first quarter of fiscal 2020, net sales are likely to improve 9-10%. Adjusted earnings are projected in the range of $1.56-$1.59. This indicates an improvement of 11-13% from $1.41 reported in the prior-year quarter. At cc, the company expects adjusted earnings in the range of $1.55-$1.58 that indicates a rise of 10-12%. Currency is likely to affect the bottom line by a penny.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Estee Lauder has a great Growth Score of A, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Estee Lauder has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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