Analyst Note| Rebecca Scheuneman, CFA |
Wide-moat Estee Lauder reported third-quarter sales of $3.9 billion, relatively in line with our $3.8 billion estimate but well short of the $4.4 billion FactSet consensus, driven by shortfalls in the Americas and Asia-Pacific. Sales grew 16% year over year and 3% on a two-year basis. While makeup (39% of prepandemic sales) remains weak (down 30% over the past two years), we think the business will recover when mask mandates are relaxed, with no permanent impairment. In fact, makeup sales have already exceeded prepandemic levels in some markets where COVID-19 is widely contained (China, Australia, and Israel). Skincare (44% of sales) and fragrance (12%) remain robust, with two-year growth of 30% and 16%, respectively. We are impressed with the resiliency of Estee’s revenue, particularly as many retail stores are closed across Europe, South America, Japan, and Canada, and as international travel (23% of prepandemic sales) is largely curtailed. We acknowledge that we have underestimated the economic durability of Estee’s products, and as the firm is aggressively repositioning itself toward higher growth channels, we plan to increase our 10-year average annual sales forecast to 8.1% from 7.5%. Estee is currently reallocating its resources from brick-and-mortar (by closing 10%-15% of freestanding stores and unproductive department store counters) and is using these savings to bolster its e-commerce and omnichannel capabilities. This revision results in a low-double-digit increase in our $217 fair value estimate. But even with the stock’s 8% drop on the report, shares trade well above our revised valuation and we suggest investors await a more attractive risk-reward.