Estee Lauder (NYSE:EL) delivered beautiful Q4 earnings August 15 on a day when the Dow lost 225 points due to Wal-Mart's (NYSE:WMT) mediocre results. The world's largest retailer believes the U.S. economy is heading into the tank. Can Estee Lauder continue to produce good results given the obvious slowdown? Should you own its stock? Read on and I'll tell you my answer. 
 
Financial Milestones
Estée Lauder finished fiscal 2013 in style. Revenues were over $10 billion for the first time ever and net earnings exceeded $1 billion, also a record. Its gross margin in fiscal 2013 was 80.1%, 60 basis points higher than in 2012. For comparison, its gross margin five years ago was 74.8%. Its operating margin this past year was 15.2%, 150 basis points higher than a year earlier. Its margins are higher than they've ever been. 

SEE: A Look At Corporate Profit Margins
 
With net sales increasing 5% year-over-year to $10.2 billion combined with an increase in its operating margin, it's no wonder earnings per share improved 16% to $2.64. This is a company executing at a fairly high level of efficiency. 
 
The Future
CEO Fabrizio Freda has completely transformed the company since joining Estee Lauder after 20 years working at Procter & Gamble (NYSE:PG) including the last 10 in its beauty care division. In four years as CEO, Freda's improved its operating margins by 820 basis points or more than double what they were (7%) in 2009. Within the next three fiscal years Freda intends to have its operating margin up another 130 basis points to 16.5%. 
 
Although much of the heavy lifting has already been completed including laying off 6% off its workforce in 2009, I don't doubt his commitment to wring even greater efficiencies out of its business; one that was once terribly inefficient and wasteful. If Procter & Gamble were smart they'd try to woo him back. 
 
All four of its segments—skin care, makeup, fragrance and hair care—as well as its three geographic regions achieved revenue and operating profit growth in 2013. Its skin care and make up segments, which generate 84% of its revenue and 91% of operating profit, both had near double-digit increasings on the top- and bottom-line. 
 
Vitally important to its success this past year and moving forward is its Americas segment, which saw operating income increase by 47% in 2013 to $423.2 million. If it could ever get the Americas operating margin anywhere close to those of its Europe, Middle East and Africa segment (almost double), its share price would really take off. 
 
Valuation
Last August I wrote about the merits of Estee Lauder's transformation. At the time I said its stock wasn't cheap but was a good buy nonetheless. Since then, despite delivering record results in 2013, its stock is up just 9.9% compared to 17.4% for the S&P 500. Investors seem worried about top-line growth. At 5% annually it's definitely not a growth stock—yet. 
 
Freda stated in its press release that it expects sales growth of 6% to 8% in 2014. It intends to achieve this growth by continuing to launch new products, capturing greater market share in emerging markets (Brazil in particular), expand its distribution in the fast-growing prestige channel and revitalizing its fragrance category, which was the worst performing segment in 2013. Estee Lauder's going to do just fine in 2014 and beyond combining reasonable growth with above-average profitability. It's a beautiful recipe for success. 
 
Estee Lauder receives a much higher valuation compared to smaller peers Revlon (NYSE:REV) and Elizabeth Arden (Nasdaq:RDEN) because it's a better company. When compared to larger rival L'Oreal (OTCBB:LRLCY) whose enterprise value is almost four times as large, it's considerably cheaper. Investors aren't giving Estee Lauder enough credit for the work it's done over the past four years to transform its business. 

SEE: 3 Secrets Of Successful Companies
 
Bottom Line
Is there work left to do at Estee Lauder? Absolutely. However, the difficult tasks have long since been completed. Now it's all about remaining vigilant about its costs while pursuing a better future. 
 
Should you own its stock? I think so. You're buying growth at a reasonable price. As long as Fabrizio Freda's at the controls, your investment's in good hands. 

Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.

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