Estee Lauder Stock Rebounds 15% In Q1 On Earnings Improvement

A return to earnings growth at Estee Lauder following five consecutive quarters of declines helped the company's stock to rebound 15% in the first quarter to close at 30.36.

News that Lauder's earnings would be up 21.6% excluding accounting changes to $109.6 mil. in the fiscal second quarter (ended Dec. 31) was well received on Wall Street. The Jan. 30 announcement sparked a stock run up, with the issue gaining 13% to reach 29.89 that day.

While Lauder's stock gained ground in the first quarter, it has yet to rebound fully to the 2002 high of 38.39 it reached April 11. The company's stock was negatively impacted throughout the remainder of 2002 when Lauder's fiscal year earnings declined 37.4% and first quarter results fell 24.4%.

Despite its recent track record, Lauder has maintained it can deliver a 12%-15% earnings per share increase over the next five years led by supply chain improvements and expense savings. Sales are expected to grow at an average cumulative rate of 6%-7% during the same period, according to the firm.

Investors have shied away from the prestige marketer in the wake of Sept. 11, as the company's reliance on department store distribution has proven to be a liability in the difficult economic environment.

Lauder has responded by assuring Wall Street that distribution diversification is key to the company's future business development. Department stores will remain Lauder's primary retail channel, especially for brands like Estee Lauder , Clinique and Prescriptives , but expansion through free-standing stores, salons, travel retail outlets and the Internet also is planned.

By 2007, the company expects to reduce the amount of sales generated in North American department stores by 6%; 46% of sales were generated in the channel in 2002.

Lauder currently operates 345 free-standing stores for brands like MAC , Origins and Stila , and has targeted operation of a total of 400-500 such outlets. The company projects 8% of sales to be generated from retail stores by 2007.

The company also has faced challenges modernizing its namesake Estee Lauder brand, which has dropped from the number one position in department stores to number two behind Clinique.

Initiatives to freshen the brand's image have included the appointment of a new spokesmodel, Carolyn Murphy, to represent the brand in ads, and the rollout of a new makeup counter. The open-sell counter design, which debuted in Bloomingdale's in New York City in September, is slated to roll out to 250-300 department store doors within two to three years.

Additionally, Lauder recently signed another spokesmodel, Ethiopian model Liya Kebede, who will begin appearing in ads for the brand this fall.

Analysts, however, remain cautious on the stock given the weakness of the U.S. economy and difficult department store retail environment.

"Although Estee Lauder has been a frustrating story for us to watch unfold over the last two years, we are hopeful that the tide has begun to turn for the company," Solomon Smith Barney analysts Wendy Nicholson, Catherine Imm and Elissa Klein state in a Jan. 30 report.

"We believe that Estee Lauder is a company whose underlying brand equities remain very strong and whose growth prospects are brighter today than they have been in recent years," the analysts add.

Of the seven analysts who cover Estee Lauder, two gave the stock a "strong buy" rating as of April 1, while four issued a "hold" rating and one a "strong sell," according to Zack's Investment Research.

Estee Lauder was one of only two companies that registered an increase on "The Rose Sheet" index of cosmetics stocks in the first quarter (see chart: " ¹ 'The Rose Sheet' Index of Toiletries, Fragrances and Skin Care Stocks: 2003 First Quarter Performance "). Boosted by Lauder and heavily-weighted Avon, the cosmetics group increased 4.2% against a generally weak market.

Avon's sales expansion and cost-control measures continued to gain favor on the Street. The company's stock added 5.9% to close at 57.05 for the quarter.

Consistent sales and earnings growth, coupled with CEO Andrea Jung's savvy management style, has been applauded by investors. Of the analysts who cover Avon, five gave the stock a "strong buy" designation as of April 1, while three issued a "hold" and one a "moderate sell," according to Zack's.

Jung has continued to court investors by unveiling an aggressive plan for long-term growth at the firm on March 28. She outlined a blueprint designed for building the firm into an $8.5 bil. beauty company by 2007 (see ² (Also see "Avon $8.5 Bil. Sales Target Established For 2007" - HBW Insight, 7 Apr, 2003.) ).

One of the company's biggest initiatives in the upcoming year will be the introduction of the mark teen line, which will debut through a separate catalog in August.

Procter & Gamble was among a handful of Diversified issues that ended the quarter on a positive note, recording a 3.6% gain to close at 89.05. The stock gain followed an announcement March 18 that P&G is planning another big beauty acquisition, this time German hair care manufacturer Wella.

With a purchase price of $5.74 bil., the Wella deal marks P&G's largest purchase to date and will provide the consumer products giant with a stronghold in the European hair care market and a leadership position in salon hair care.

The proposed acquisition was received positively by analysts, who view Wella as a good fit with Procter & Gamble.

"From a strategic point of view, we believe this transaction enhances the company's position, primarily in the hair care business," Credit Suisse First Boston analysts Filippe Goossens and Ileana Balboa state in a March 19 report.

Salomon Smith Barney analysts Nicholson, Klien and Packman agreed in a March 18 report, noting, "given that it was likely in our view that P&G would pursue an acquisition, we are relieved to see that the target be Wella, as the company is an attractive candidate."

Of the analysts who cover P&G, seven gave the stock a "strong buy" rating as of April 1, while two issued a "moderate buy" rating and one a "hold," according to Zack's.

The overall diversified group tracked by "The Rose Sheet" increased a slight 1.2% in the first quarter as Colgate-Palmolive rose 3.8% to 54.44, Johnson & Johnson gained 7.7% to 57.87 and Gillette improved 1.9% to 30.94. Nevertheless, the group fared better than the general market: the Dow fell 4.2%, while the S&P 500 declined 2.4%.