The Beauty Company That's Acting Like a Growth Stock

On The Motley Fool's Industry Focus: Consumer Goods podcast, we continue our 2018 theme of covering tickers that don't get the attention they deserve. In the following excerpt from a recent episode, we introduce prestige beauty house Estee Lauder (EL 2.08%), whose shares are up over 80% in the last 12 months. Click below to get acquainted with this intriguing play on the multibillion-dollar beauty industry.

A full transcript follows the video.

This video was recorded on April 10, 2018.

Vincent Shen: This popped up on my radar after doing a screen looking at what companies, at least in terms of their stock performance, have been really leading the pack in the past year. Obviously, when you have companies that are gaining over 50%, if not triple digits, usually small entities, but in this case, you have this $50 billion company that's seen an 80% gain in the past year. And honestly, the timing of this discussion has been pretty appropriate. My wife has actually been encouraging me recently to adopt a more comprehensive skin care regimen, and then boom, just like that, Estee Lauder pops up on our radar. I thought that was kind of funny.

Estee Lauder Company, ticker EL, they manufacture and sell a large variety of skin care products, makeup, fragrances and hair care products. In the trailing 12-month period, the company generated about $13 billion dollars in total sales across its very large brand portfolio. That includes brands that it personally owns and operates, and then also some designer labels that it licenses with. Asit, if you're looking to give someone new to Estee Lauder a 10,000-foot view of the company, what do people need to know about the business?

Asit Sharma: One of the most important things to know about this business, Vince, is that it was founded by Estee and Joseph Lauder in 1946. This is so important to the company because the personality of Estee Lauder has permeated the rest of the history the company, and we'll talk about that as we go on. It sells in basically five categories. Skin Care is the second biggest category, that made up about 30% of revenue in the last year. Makeup, which was about 43% of revenue. Fragrance at 14%. Hair Care at 5%, and Other at 1%.

This company conceives of and it markets itself as a prestige beauty house. That means that most of its products are going to tend toward that higher-end of the spectrum, toward the luxury brands designation. But it does offer a good number of entry-level or mass-market products. I'm going to read listeners some of the brands that Estee Lauder manufacturers. These include its eponymous brand, Estee Lauder; Aveda; Bobbi Brown; La Mer; RODIN; Origins; Clinique; Aramis; and many other names that you would recognize. But the company also licenses fragrances and some cosmetics for, again, extremely well-known names such as Tommy Hilfiger, Donna Karan DKNY, Michael Kors and Tom Ford. So, we see that the company has its fingers across this spectrum of brands in skin care, makeup and fragrance primarily.

The marketing philosophy follows Estee Lauder's original idea of personalized high-touch interactions with customers. Estee Lauder used to travel tirelessly to sell her product, and she herself would apply makeup to customers coming into department stores. She really was a shoe leather marketer from the very beginning. And the company has maintained this aspect of marketing even through technology today, it has interactive ways to show applications of its products, usage demonstrations, etc. So, this is something very important about the company. When you buy their product, you have a pretty good chance of having encountered it through a human being, either in a department store, perhaps in an airport, in a duty-free shop. They're really high on this one-to-one marking strategy.

Shen: If you'll just let me jump in really quick there, I think it's hard to overstate how important that touch, that one-touch, and that prestige element, is for the company. Across retail right now, given how much the competitive environment is changing, and barring a major economic downturn, which we'll talk about in terms of risks later on, these luxury companies are generally outperforming. You see this in high-end shopping malls and how aspirational brands have often managed to stand out. I think with skin care and cosmetics, it's really no different. These prestige brands are outgrowing the mass market ones, and they've been doing so pretty consistently for a few years now.

Estee Lauder has employed this prestige first strategy for almost a decade. Last month at a retail industry conference, the CEO, Fabrizio Freda, he actually went into detail, I think it's really interesting here, about why the high-end business is outperforming. The way he describes it specifically for skin care is that No. 1, the differentiator, as obviously as it may seem, is product quality, because that tends to lead to customer loyalty, and the idea that customers will only go back and buy a second time the products that they enjoy using and that they find to be effective in terms of their skin care and their cosmetics. And then No. 2, another differentiator is innovation, because in this industry, meeting people's needs is already kind of a given. So, there's not as much that's fresh in meeting people's needs, but if you're able to surprise your customers with unique products, that's much more likely to win them over. Then, No. 3, the prestige world offers a more compelling overall experience. You mentioned some of these aspects, Asit.

Between the product quality, the product innovation that I just mentioned, but then, the education element for customers who go into some of the brick and mortar stores, for example, that Estee Lauder manages through its various brands, and then also department stores, for example, having that experience, interacting with the brands at a makeup counter and in stores, is very powerful. And the interesting thing is, he gave that all in the context of more developed markets like the United States and Europe. But then, he ties that to emerging markets, too, because these three principles are still in play. But then, prestige also has the additional benefit in developing markets of being aspirational, and that's very relevant, obviously, when you have a growing middle class with consumers in very fast-growing regions like Asia.