Like many beauty companies, Estee Lauder (EL 2.76%) suffered from the impact of coronavirus. In the company's fiscal fourth-quarter, which ended June 30, revenue fell 31% as stores carrying its products temporarily closed due to mandated shutdowns.
Makeup sales have been hurt as large numbers of people began working from home and social distancing due to COVID-19. In a survey by research group NPD, 71% of women in the U.S. who wear makeup said they do so less often because of COVID-driven changes. This has been a major challenge for beauty companies.
However, Estee Lauder is better positioned among its beauty company peers to recover after the COVID-19 pandemic subsides. Here's why this consumer discretionary company will survive the pandemic and is a good long-term investment.
Estee Lauder has a strong global skincare segment
The global beauty giant's robust skincare business will be an important driver of future revenue growth. During the fourth quarter, skincare sales increased by 3%, even as makeup sales decreased by 61%. Makeup sales comprised 34% of total sales, while skincare was 52% of the total in fiscal 2020.
Estee Lauder's skincare group performed soundly for the fiscal year, driven by luxury brands La Mer, Tom Ford, and Origins. Detailing the strength of skincare, CEO Fabrizio Freda said on the earnings call, "We delivered excellent performance across subcategories, owing to strong repeat purchase rates, data analytics driven marketing, new social selling strategies developed during COVID-19, and highly desirable innovation."
Asia's consumer spending rebound is driving revenue growth
The market in China has experienced a quick rebound since the COVID-19-driven trough in March. After turning positive in April, revenue has been continually increasing. Online sales in China were markedly strong, up 60% in the fourth quarter. Mainland China returned to previous levels of robust double-digit growth after stores reopened, driven by demand for skincare and fragrance products.
The consumer discretionary company plans to keep the strength in China going by making it a major area of investment. Management announced it would reallocate resources to "greatest opportunities" for growth, including the market in China.
Estee Lauder's digital business will drive future growth
The global beauty company's online business reached "nearly triple digit organic sales growth in the fourth quarter," Freda said, attributing the success to Estee Lauder's brand boutiques and platforms, such as Tmall and retailer.com, as well as brand sites. According to NPD, online makeup purchasing is up 8% compared to 2018.
Estee Lauder's investments in the online segment have paid off. The company is expanding virtual try-ons and live streams of tutorials led by makeup artists and brand ambassadors. These strategies are leading to greater consumer engagement and conversion. "Clinique's live streaming series designed to both entertain and educate led consumers to return more frequently, spend four times longer on site, and convert at far higher levels," Freda said.
Another innovation driving online sales is Estee Lauder's introduction of ingredient glossaries for some of its popular brands. Aveda.com is the first brand to offer an online ingredient glossary, leading to consumers spending three times longer on Aveda.com than on average. Given their popularity, the company plans to roll out more glossaries to Clinique, La Mer, and Origins in fiscal 2021.
Estee Lauder's ongoing investments in long-term growth areas of skincare, regions like China, and segments like e-commerce will drive a recovery in its business beyond the COVID-19 pandemic. With its well-recognized global brands and digital strength, the company is likely to be a survivor.