EL Sustains Growth in 1QFY14

Despite investor fears, over the past month, of slowing momentum in the prestige beauty category, The Estée Lauder Companies produced a strong set of 1QFY14 results and reiterating its outlook for the fiscal year ending June.

 

Summary: EL continues to invest in growth and we continue to view the company as a category leader over the coming quarters. Ahead of earnings season, we highlighted the underperformance of EL as an opportunity for investors on the long side as peer weakness, and investor concerns that the stock had outgrown the company’s fundamentals, weighed on performance. We continue to have confidence in the long-term benefits of the SMI as the company focuses on cost savings supported by strong and sustainable organic sales growth as a driver of earnings.

What We Liked In EL 1QFY14 earnings:

  • EPS beat: $0.76 Adjusted EPS vs $0.73 consensus
  • Gross margin expanded 81 bps vs 4QFY13 22 bps decline
  • Mgmt reiterating top line guidance of 6-8% and a raised low end of EPS range
  • Organic sales growth of 6% erased fears of a more dramatic slowdown that some were expecting following NPD data as well as peer company commentary
  • Sales in EM picking up slack in core markets: 1Q Asia Pacific LC sales grew 11% while EMEA LC sales grew 7%
  • New product innovation resonating with consumers
  • High margin luxury brands achieving double digit growth
  • Dividend raised 11%

What We Didn’t Like In EL 1QFY14 earnings:

  • Only 2% organic sales in the Americas segment despite new brand launches
  • FY14 FX impact expected to be 1-2% vs 1% 1QFY14
  • “Temporary softness in U.S.” from 4QFY13 has continued into FY14 – becoming less temporary?
  • Inventory days moved sharply higher, increasing risk if future sales don’t materialize

Other Noteworthy Points:

  • Operating income declined, yoy, as the company increased investment spending behind recent major product launches
  • 2QFY14 guidance of $0.99-1.04 falls below the Street at $1.21 but, according to mgmt, this is due to the lapping of a favorable timing shift in 2QFY13.

 

Quantitative View:

Our macro team’s quantitative view of the stock is dictated by the intermediate-term TREND line of $69.19.

EL Sustains Growth in 1QFY14 - el levels 1031

Rory Green

Senior Analyst