Is Elizabeth Arden Likely to Outperform Estee Lauder?

What do these celebrities have in common: Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift, Justin Bieber, Nicki Minaj, and Usher? There are many ways you can answer that question, but the answer you might not expect is that all of these individuals have fragrances through Elizabeth Arden (NASDAQ: RDEN  ) .

The genius here is that if you take a look at those names, fans of those individuals cover a wide spectrum of consumers. Yet at the same time they're all mainstream names, which increases the likelihood of high demand. You can point to the quality of these fragrances as the key driver, but it's really about the names.

All of this being said, Celebrity Fragrances only represent a portion of what Elizabeth Arden has to offer. The company has an extensive portfolio of prestige fragrances, skin care, and cosmetic brands. Because of recent leveling out on its top-line, Elizabeth Arden has announced a strategy to help refuel growth. We'll take a look at this strategy as well as whether Elizabeth Arden presents a better investment opportunity than Coty (NYSE: COTY  )  or Estee Lauder (NYSE: EL  ) .

The game plan
Elizabeth Arden plans to re-position its Elizabeth Arden brand on a global basis while increasing the market penetration of its prestige fragrance portfolio in international markets. In regard to the latter, the focus will be on Europe, Russia, and Brazil. However, North America won't be neglected, as Elizabeth Arden aims to expand its prestige fragrance category at mass retailers.

Elizabeth Arden feels it can increase net sales and expand margins via organic growth, licensing and acquisition opportunities, and innovation. In regards to acquisitions, it hasn't been shy, acquiring Ed Hardy, True Religion, and BCBHMAXAZRIA fragrance brands from New Wave Fragrances in 2012. It also acquired global licenses and certain assets from Justin Bieber and Nicki Minaj. Look beyond the facts here for a moment. Think about 2012 and how in-trend Justin Bieber and Nicki Minaj were at the time. This indicates that Elizabeth Arden has a strong pulse on current trends, which increases the likelihood of the company making strategic moves in the future.

Based on acquisitions and global repositioning, Elizabeth Arden expects gross margin improvement in the second half of its fiscal year.

Other strategic points for Elizabeth Arden: improve supply chain efficiency, revise product assortment, redesign packaging and counters, improve product formulations, present new advertising and marketing, enhance beauty advisor support.

Now let's see how Elizabeth Arden compares to its peers.

Elizabeth Arden vs. Coty and Estee Lauder
While initiatives can lead to improvement, Foolish investors would be wise not to buy-in until they see actual results. Investing isn't a game, and relying on hope and potential aren't recommended. It's always a good idea to stick with market leaders and companies that have already proven they can accomplish their goals and continue to grow. 

Elizabeth Arden's top line has slowed. While potential exists, Estee Lauder doesn't require potential, as it continuously grows its top line:

RDEN Revenue (TTM) Chart

RDEN Revenue (TTM) data by YCharts

In the company's first quarter, Estee Lauder saw net sales increase 5%, in-line with its expectations. Earnings per share came in flat at $0.76, but this beat expectations. These results are based on brand strength, which stems from marketing and innovation. Estee Lauder has been performing well in luxury brands, online, travel retail, and in emerging markets. Continued marketing and innovations are expected to drive the top line. Full-year sales are expected to grow 6%-8% in local currency, and EPS is expected to come in between $2.80 and $2.87.

You might have noticed that Coty hasn't performed well on the top line over the past year. Coty's first-quarter net sales declined 2.6% on a comps basis, and EPS came in at $0.28 versus $0.30 in the year-ago quarter. Coty cited a significant slowdown in fragrance and nail categories, especially in the United States. Looking ahead, Coty aims for growth in the prestige channel and in emerging markets. It expects to return to top-line growth in the second half of its fiscal year. Even if that's the case, Coty isn't likely to offer consistent top-line growth like Estee Lauder.

Now consider some key metric comparisons:

 

Forward P/E

Profit Margin

Dividend Yield

Debt-to-Equity Ratio

Elizabeth Arden

15

2.99%

N/A

0.93

Coty

17

3.79%

1.30%

1.55

Estee Lauder

23

9.91%

1.10%

0.37

Estee Lauder might be the most expensive, but deservedly so. Not only does Estee Lauder offer consistent top-line growth, but its profit margin dwarfs that of its peers, it has the best debt management, and it yields 1.10%.

The bottom line
Elizabeth Arden and Coty have the potential to return to top-line growth. However, why go with potential when you can invest in actual results? Thanks to brand strength, successful innovations, effective marketing, consistent top-line growth, and superior key metrics, Estee Lauder looks to offer the most potential in this group. However, as always, please do your own due diligence prior to making any investment decisions. 

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