Estee Lauder (EL) is a major American manufacturer of cosmetics, skin care, fragrance, and hair care products. With over 30 subsidiaries that conduct business around the globe, Estee Lauder is the “Amazon” of cosmetic brands. Estee Lauder’s operations brought in over $14 billion in earnings for the 2019 fiscal year. While the EL quarterly report issued on May 1, 2020, saw a decline in sales of 11% from 2019 3rd Q, they still had sales of $3.35 billion. This decline was due to retail operations being shuttered due to the pandemic, but Estee Lauder still managed to produce significant revenues due to an increase in their online presence. Since the release of that 3Q report, Estee Lauder has seen its share price rise over 16%, while over the past two years the price has doubled. What has driven such strong growth in this 74 year old company?
Estee Lauder has an exceptional portfolio of brands, including: Clinique, M.A.C., La Mer, Aveda, Jo Malone London, Bumble and Bumble, Smashbox and Tommy Hilfiger. Under the direction of Chairman and CEO, Fabrizio Freda, Estee Lauder has expanded its marketplace from retail showrooms to the digital space. The traditional way to shop for cosmetics and similar products is to go to a retailer (such as Macy’s) and buy these products from a retail in-house cosmetician. After that, the retailer (in this case, Macy’s) then promotes the specific brand through various sales to encourage repeat business. Estee Lauder has tweaked this norm by using the retailer as a way to attract your initial business, before converting you to purchase directly from Estee Lauder through targeted coupons on their website. For example, when you buy an Estee Lauder product at a Macy’s, their software will gather your information and create a sale that is specifically targeted to you. In order to take advantage of the sale, you must buy directly from an Estee Lauder e-tailer. In this way, Estee Lauder is able to cut out the middleman on repeat business, which means they can lower your cost of purchase and still make a sizable profit. Since Estee Lauder is a publicly traded company, Fabrizio Freda works for the shareholders. By utilizing this creative strategy, Estee Lauder is able to thrive in a down market. For his efforts, Mr. Freda is compensated almost $50 million annually in both salary and company stock. It’s in his best interests to make sure that Estee Lauder remains an innovative leader in the field of cosmetics.
I recommend Estee Lauder stock as a strong buy and easily see it doubling in the next five years.
