Global makeup, skin care, fragrance, and hair care brand powerhouse Estee Lauder (NYSE:EL) presented its fiscal fourth-quarter 2019 results to shareholders on Monday before markets opened. The beauty conglomerate scored a near-double-digit year-over-year revenue advance during the quarter, and management issued an ambitious growth outlook for fiscal 2020 that resonated with investors: Shares were up more than 9% at midday. Below, let's review key details from the quarter and quantify management's expectations for the coming year.
Estee Lauder: The raw numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$3.6 billion||$3.3 billion||9%|
|Net income||$157 million||$186 million||(15.6%)|
|Diluted earnings per share||$0.43||$0.49||(12.2%)|
What happened this quarter?
Estee Lauder reported the following changes in revenue by segment for the fourth quarter:
|Segment||Q4 2019||Q4 2018||Change|
The company didn't provide a breakdown of factors affecting segment performance. Rather, management stated that results followed year-long trends in each business line. To provide context, I've briefly recapped full-year 2019 performance against the prior year as follows:
- Skin care sales jumped 17% to $6.5 billion, led by the Estee Lauder and La Mer brands, which both achieved double-digit revenue growth across all geographic regions.
- The company's second-largest segment, makeup, improved sales by 4% to $5.9 billion. Makeup sales were paced by Estee Lauder, Tom Ford Beauty, MzAzC, and La Mer, while the Smashbox and Clinique brands experienced net sales declines.
- Fragrance sales decreased by 1% to $1.8 billion, while hair care sales inched up 2% to $584 million.
- Sales in the Americas declined by 5% to $4.7 billion, as the North American brick-and-mortar retail environment remained challenging. The company did observe that online sales continued to show growth, although it didn't quantify sales or the rate of expansion for fiscal 2019. In Latin America, net sales growth in Brazil, Columbia, and Peru was negated by sales declines in other countries.
- The Europe, Middle East, and Africa (EMEA) segment enjoyed a 15% sales advance to $6.5 billion, as growth in Turkey, Russia, and India (which is included in Estee Lauder's EMEA segment rather than Asia/Pacific) offset lower sales in Western European markets.
- Asia/Pacific posted impressive growth, expanding its top line by 21% to $3.7 billion. Premium beauty product sales in China have anchored Asia/Pacific sales for several quarters, but the company noted that growth was broad based in fiscal 2019 and that Hong Kong and emerging markets in Southeast Asia provided excellent net sales growth during the year.
Other important details:
- Gross margin declined by 210 basis points in the fourth quarter against the prior-year quarter, to 76.7%, while operating margin dipped by 240 basis points, to 6%. Both gross margin and operating margin were partially impacted by charges taken as part of the company's multiyear cost-cutting and productivity initiative, Leading Beauty Forward.
- Management revised its estimate of cumulative restructuring and other charges related to Leading Beauty Forward from between $900 million and $950 million to between $950 million and $990 million. The company also boosted its estimated annual cost savings and other benefits from the program (which will be substantially complete by fiscal 2021) from between $350 million and $450 million to between $425 million and $475 million.
What management had to say
In Estee Lauder's earnings press release, CEO Fabrizio Freda highlighted numerous factors undergirding the company's successful fiscal year, in which sales increased by 9% while operating income rose by 13%:
Many engines drove our growth. They included: nearly every market in the Asia/Pacific region and many other important emerging markets around the world; our skin care category in every region; the travel retail and online channels globally; and compelling innovations and high-quality products, which drove strong repeat purchases. Globally, three of our four largest brands grew strongly as did many of our small and mid-sized brands.
Freda also commented on the organization's high-end cosmetics sales in Asia/Pacific, which proved its biggest performance catalyst this year:
Prestige beauty continues to be one of the most desirable consumer sectors. As the best diversified pure play in the industry, we are uniquely positioned to capture global share. In fiscal 2020, we plan to continue to invest in the most compelling opportunities, including those in emerging markets beyond China. We expect another year of strong net sales growth, margin improvement and a double-digit increase in earnings per share.
Looking ahead to the next reporting period, for the first quarter of fiscal 2020, Estee Lauder is expecting sales growth of 9% to 10% against the first quarter of 2019. Management anticipates that diluted earnings per share (EPS) will land between $1.48 and $1.52, representing growth of 12% at the midpoint of the range.
For the full fiscal 2020 year, management foresees revenue expansion of 7% to 8% versus fiscal 2019, which falls at the high end of the organization's long-term growth target of 6% to 8%. As for full-year earnings, Estee Lauder is targeting diluted EPS of between $5.62 and $5.74, which, if achieved, will generate growth of 18% against the $4.82 earned in fiscal 2019.