Summary
- Estée Lauder does not bring the brand innovation that international brands are bringing to the table.
- With a P/E ratio of 116, future sales growth numbers at this time cannot justify the price point.
- Despite having a gross margin of 75%, one of the highest in the industry, the future growth proposition is simply not stable enough.
Investment Thesis
Estée Lauder (EL) has a reputable portfolio of brands, but this manifests as both an advantage and disadvantage. While being a traditional company gives you a steady consumer base, it also opens you up to newer, fresher competitors and leaves you looking lackluster. With the onslaught of international beauty entering the U.S. market, particularly Korean beauty, Estée Lauder is up for attack. Especially since these newer products are cheaper, highly consumer rated, and are more innovative. They did deliver strong results in the first half of the fiscal year (pre-pandemic), but it may be time for Estée Lauder to diversify its portfolio. Even though they just acquired Dr. Jart+, a skincare brand, it still follows the same pattern of brands that Estée Lauder already owns. Dr. Jart+ follows the consistent blueprint of having relatively expensive goods with a steady consumer base. Moreover, if Estée Lauder wants to make a splash, they could diversify their holdings to include items that attract new consumer bases. The stock is not doing badly by any means plus the company has a 75% gross margin, one of the highest in the industry. But the need for innovation in Estée Lauder is overwhelming, which is why I believe the stock is not worth investing in right now.
The Rise of International Beauty
While Estée Lauder has a portfolio of iconic brands, many companies have been facing increased competition from international skincare and makeup brands with notable categories such as Korean beauty rising to the forefront. The argument for international beauty winning in America has been they offer better formulas and results for cheaper price points. As big corporations such as Unilever (NYSE:UL) invest in international beauty with the acquisition of Tatcha, a Japanese inspired beauty brand, it shows that people are taking notice. While Tatcha is certainly not inexpensive, online retailers such as YesStyle and Stylevana that peddle Asian beauty products at inexpensive prices are rising to get consumer attention. Deciem created the skincare company The Ordinary that sells specific high-power ingredients at low price points instead of creating formulations. This poses a problem to Estée Lauder as they market themselves as the ever traditional brand with timeless products, when the trend may be moving towards cheaper more innovative formulations.
Margins
Estée Lauder has one of the highest margins in the cosmetics and skincare industry by far. At 75.2%, this gross margin gives Estée Lauder an immense advantage, and despite the 220 basis point decrease in gross margin, they are leaps and bounds ahead of competitors. La Mer offers the largest contribution to the margin as they sell incredibly high priced products, with a low manufacturing cost. Especially considering La Mer is one of their top brands and has seen even more growth with the new focus on skincare during the pandemic. Even discounting La Mer, Estée Lauder does not dabble in lower-priced brands with their brand name company Estée Lauder being relatively high-end. As well as Aveda with their high-end hair care products and while Clinique is not the most expensive brand it doesn't fall into the drugstore category, and so on. In terms of makeup, they also sell to the high-end crowd with MAC Cosmetics, Bobbi Brown, and Estée Lauder makeup. Estée Lauder is a high-end company, but their ability to create an impressively high margin is a huge advantage, especially in these pandemic times where every dollar matters.
