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Estee Lauder (EL) Down 4.4% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Estee Lauder (EL). Shares have lost about 4.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

The Estee Lauder Companies Beats on Earnings in Q1

The Estee Lauder Companies reported impressive first-quarter fiscal 2022 results. The company posted adjusted earnings of $1.89 per share, which surpassed the Zacks Consensus Estimate of $1.67 cents. The bottom line surged 31% year over year. On a constant-currency (cc) basis, adjusted earnings increased 29%.

Net sales of $4,392 million surpassed the Zacks Consensus Estimate of $4,235.9 million. The metric increased 23% (up 21% at cc) from $3,562 million reported in the year-ago quarter. Management highlighted that net sales improved across all regions and product category, on the back of a rebound in brick-and-mortar retail stores, mainly in western markets. Further, organic net sales increased 18%.

Gross profit came in at $3,335 million, up 22% year over year. Gross margin declined to 75.9% from 76.8% reported in the year-ago quarter.

The company reported an operating income of $935 million, up from $705 million reported in the year-ago quarter.

Product-Based Segment Results

Skin Care’s sales were up 20% year over year (up 18% at cc) to $2,449 million. Makeup revenues jumped 20% year over year (up 18% at cc) to $1,174 million. In the Fragrance category, revenues surged 50% year over year (up 48% at cc) to $609 million. Hair Care sales totaled $148 million, up 9% (up 8% at cc).

Regional Results

Sales in the Americas surged 37% year over year (up 36% at cc) to $1,194 million. Revenues in Europe, the Middle East & Africa region increased 22% (up 21% at cc) to $1,873 million. Lastly, in the Asia-Pacific region sales increased 15% (up 11% at cc) to $1,326 million.

Other Updates

The company exited the quarter with cash and cash equivalents of $3,995 million, long-term debt of $5,267 million and total equity of $6,115 million. Net cash flow used by operating activities for three months ended Sep 30, 2021, came in at $81 million. The company returned $749 million in cash to shareholders through dividend payouts and share repurchases during this time.

COVID-19 Update

While most brick-and-mortar retail stores that sell The Estee Lauder Companies’ products (company and customer operated) remained operational during much of the first quarter, there were intermittent shutdowns in the rest of the world.

Many retail stores were temporarily shut at some point in the quarter across Continental Europe, much of Latin America and most of the Asia/Pacific region owing to resurgence of COVID-19 cases. In places where stores were open globally, traffic was lower than pre-pandemic levels.

The company notified that international passenger traffic remained restricted worldwide. Passenger traffic in Europe, the Middle East & Africa and The Americas improved, although it was significantly below the pre-pandemic pandemic levels. Spike in coronavirus cases in Asia/Pacific led to increased travel restrictions through most of the first quarter.

The company has been facing adverse impacts stemming from pandemic-led global transportation delays owing to port congestion, labor and container shortages as well as shipment delays. These have been leading to higher level of transportation and logistics costs, which are likely to negatively impact cost of sales and operating expenses for the rest of the fiscal 2022. That said, management is on track to counter such headwinds via strategic price rise, product mix, timing of shipments and use of air freight among other efforts.

The company’s online business remained solid driven by growth in areas where pandemic-induced restrictions were in place. Online sales were approximately double compared with pre-COVID level of first quarter fiscal 2020. While the demand for makeup improved significantly year over year, it continues to remain below per-pandemic levels owing to reduced makeup usage occasions and ongoing mask wearing. The company’s skin care, fragrance and hair care categories have improved from pre-pandemic levels.

Guidance

For fiscal 2022, the company now projects reported net sales to increase in the band of 12-15% year over year. Earlier, the metric was expected to grow in the band of 13-16% year over year. Organic net sales are still anticipated to grow between 9% and 12% for fiscal 2022. Adjusted earnings are now anticipated in the band of $7.23 to $7.38 per share, reflecting an increaseof 11-14% at cc in fiscal 2022. Earlier, the metric was projected to increase 9-12% at cc. For second-quarter fiscal 2022, the company projects reported net sales to increase in the band of 11-13% year over year. Organic net sales are anticipated to grow between 8% and 10% in the quarter. Adjusted earnings are anticipated in the range of $2.51-$2.61 per share, indicating flat to down 4% on cc basis.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -6.9% due to these changes.

VGM Scores

At this time, Estee Lauder has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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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