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Estee Lauder (EL) Beats on Q4 Earnings, Sales Lag on Fx

Estee Lauder Companies Inc.’s EL earnings beat the Zacks Consensus Estimate in the fourth-quarter of fiscal 2015, while revenues missed the consensus mark.

Earnings of 40 cents per share declined 39.4% from 66 cents earned in the prior-year quarter due to a decline in revenues. Earnings however exceeded the Zacks Consensus Estimate of 34 cents by 17.6%. Excluding currency impact and accelerated orders, earnings increased 4% in the fourth quarter.

 

The Estee Lauder Companies Inc. - Earnings Surprise | FindTheBest

 

Revenues and Margin

Net sales of $2.52 billion lagged the Zacks Consensus Estimate of $2.56 billion by 1.6% and plummeted 7.7% from the prior-year quarter due to currency headwinds and difficult year-over-year comparison on accelerated sales orders in the prior year. In the fourth quarter of fiscal 2014, some retailers had accelerated sales orders of approximately $178 million in view of the company’s Jul 2014 implementation of its Strategic Modernization Initiative (SMI) in some of its largest remaining locations. Those orders would have otherwise come in the company’s first quarter fiscal 2015.

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Excluding currency and accelerated orders, net sales increased 7% year over year, in line with the company’s expectation. Sales grew in each of the company’s geographic regions, particularly emerging and developed markets. All the product categories, except skin care, posted growth.

Gross profit declined 7% from the prior year to $2.04 billion. Gross margin expanded 30 basis points (bps) to 80.7% due to lower cost of sales. Operating income decreased 40% to $228.3 million. Operating margin contracted 490 bps to 9.1%.

Segment Results

By Geography

Americas: Sales in Americas rose 2% year over year on a constant currency basis. Sales in Canada were flat due to the impact of accelerated orders, while sales grew strongly in Latin America, primarily from higher sales in Venezuela and Brazil.

Operating income in the region declined 31% on a constant currency basis due to lower sales, higher general and administrative costs and acquisition-related expenses. This decrease was partially offset by lower advertising, merchandising and sampling spending by heritage brands.

Europe, the Middle East & Africa: Sales increased 1% year over year on a constant currency basis, led by double-digit gains in the United Kingdom, Benelux, the Balkans, and a number of emerging markets, including Russia, the Middle East, Turkey and South Africa.

Operating income increased 13% with better operating results in the United Kingdom, the Middle East, France, Russia, India and Switzerland. Operating results of travel retail failed to impress due to accelerated orders.

Asia/Pacific: Sales in the region increased 1% from the year-ago quarter on a local currency basis, backed by strong growth in China, Korea, Thailand and Taiwan. Operating income increased 16% in the region led by better results in China, Korea and Australia. Japan, Hong Kong and Singapore posted disappointing results.

Fiscal 2015 Results

Earnings of $2.82 per share declined 7.8% from $3.06 in the prior year due to a decline in revenues. Earnings however exceeded the Zacks Consensus Estimate of $2.78 by 1.4%. Excluding currency impact and accelerated orders, earnings increased 12% in the fiscal.

Net sales of $10.78 billion lagged the Zacks Consensus Estimate of $10.83 billion by 0.5% and declined 2% from last year due to currency headwinds and difficult year-over-year comparison on accelerated sales orders in the prior year. Excluding currency and accelerated orders, net sales increased 6% year over year, well above the company’s growth projection of 3% and 4%.

Fiscal 2016 Guidance

Though the company expects growth opportunities in product categories, channels and countries in fiscal 2016, economic challenges will continue to persist.

The company is cautious of slower retail growth in Hong Kong and China, a decline in spending by Russian and Brazilian travelers, the impact of the MERS virus on its travel retail business in Korea and unfavorable currency.

For fiscal 2016, net sales are expected to increase 8% to 10% on a constant currency basis. Net sales adjusting for the effect of accelerated retailer orders are forecast to grow in the range of 6% to 8% in constant currency. The recent acquisitions are expected to contribute approximately 50 bps to the company’s overall sales growth.

The company also expects earnings in the range of $3.10 to $3.17 per share in fiscal 2016, including the negative impact from foreign currency and acquisitions. Acquisitions are estimated to dilute earnings per share by approximately 5 cents, while currency is expected to adversely impact earnings by 18 cents.

On a constant currency basis, earnings are expected in the range of $3.28 to $3.35 per share. On a constant currency basis and adjusting for the effect of accelerated retailer orders, earnings per share are expected to grow 8% to 10%.

First Quarter Fiscal 2016 Outlook

On a constant currency basis, net sales are expected to increase between 13% and 14%. Net sales adjusting for the effect of accelerated retailer orders are forecast to grow between 6% and 7% in constant currency. The acquisitions made in the second quarter of fiscal 2015 are expected to contribute approximately 90 bps to the company’s overall sales growth in the first quarter.

The company also expects earnings in the range of 66 cents to 69 cents per share in the quarter, including the negative impact from foreign currency and acquisitions. Acquisitions are estimated to dilute earnings per share by approximately 1 cent, while currency is expected to adversely impact earnings by 9 cents.

On a constant currency basis, earnings are expected in the range of 75 cents to 78 cents per share. On a constant currency basis and adjusting for the effect of accelerated retailer orders, earnings per share are expected to decrease 3% to 6%.

Estee Lauder has a Zacks Rank #3 (Hold).

Stocks to Consider

A better-ranked stock in the cosmetics sector is Coty, Inc. COTY, carrying a Zacks Rank #2 (Buy). Stocks worth considering in the consumer staples sector include Cal-Maine Foods, Inc. CALM and Post Holdings, Inc. POST, both sporting a Zacks Rank #1 (Strong Buy).

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ESTEE LAUDER (EL): Free Stock Analysis Report
 
CAL-MAINE FOODS (CALM): Free Stock Analysis Report
 
COTY INC-A (COTY): Free Stock Analysis Report
 
POST HOLDINGS (POST): Free Stock Analysis Report
 
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