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Tickers in this Article: EL, CL, REV
Estee Lauder Companies (NYSE:EL) reported revenue of $2.01 billion and diluted earnings per share of 61 cents in its fiscal fourth quarter. Although the solid results were underpinned by strong international sales and demand, it is unclear if this performance can continue into fiscal 2009 as Europe starts to slide into an economic slowdown, and the dollar starts its comeback.

The company has made strong predictions for 2009, but there could be trouble ahead if the dollar continues to climb versus the euro.

Guidance Increase
Despite these concerns management at the company is optimistic that Estee Lauder can continue the strong performance next fiscal year and increased guidance accordingly.

For first quarter fiscal 2009, the company expects revenue to increase 9-11% in constant currency, with a 1% currency benefit. Diluted earnings per share are expected to come in at 18-25 cents. For fiscal 2009 Estee Lauder expects revenue to increase 6-8% in constant currency, with no currency impact. Earnings are expected to be $2.57-2.72 per diluted share. (Dig deeper into company projections in Earnings Forecasts: A Primer)

A Standout Year
Estee Lauder results stand out in a year when other consumer stocks felt the brunt of the economic down turn as Americans cut spending or traded down to lower priced goods. The company reported $7.91 billion in revenue for fiscal 2008, up 12% from the prior year. Earnings also grew 11% to $2.40 per share compared with the $2.16 reported in the prior year.

The good year at Estee Lauder was due partly to the impact of the weaker dollar, as more than half of its sales are denominated in non-U.S. currencies. When the company's results were translated into its reportable currency, it increased sales by 420 basis points to 12.4% for the full year from 8.2% (Figure 1).

Figure 1: Unaudited Results of Annual Net Sales By Region
(millions excluding percentages)
Region
2008
2007
Change Reported Basis
Change Local Currency
The Americas
$3,711.50
$3,560.90
4.2%
3.5%
Europe, the Middle East
& Africa
$3,006.70
$2,493.40
20.6%
12.3%
Asia/Pacific
$1,192.60
$983.20
21.3%
14.6%
-
-
-
-
-
Total
$7,910.80
$7,037.50
12.4%
8.2%
The currency impact for the fourth quarter was even more pronounced with an increase in sales of 490 basis points, or 4.9%, from a percentage change in local currency of 9.3% to a percentage change on a reported basis of 14.2%.

Europe's Turn for a Slowdown
On August 14, 2008, the European Union (EU) reported that gross domestic product (GDP) in the euro zone contracted 0.2% in the second quarter, which equals a 0.8% annual rate of decline. This was the first time since the early 1990s that GDP contracted in the EU.

Aside from Europeans having less money to spend on Estee Lauder's products, the company also has to deal with a resurgent U.S. dollar, which has rallied strongly versus the euro and other currencies. This makes its products more expensive overseas, which may lead to a situation where the currency impact will hurt rather than help Estee Lauder.

Other companies with a large percentage of sales overseas that benefited from a weaker dollar over the last year include Revlon (NYSE:REV) and Colgate Palmolive (NYSE:CL). Revlon saw an increase of 10.3% to $160 million in international operations net sales for its second quarter of 2008 (including currency fluctuations). Colgate announced on July 29, 2008, that worldwide sales grew 16.5% to $3,965 million for Q2. (For more, check out Earnings Quality: Measuring Accruals.)

Bottom Line
Estee Lauder had an impressive year, but a weaker economy in Europe and other countries, combined with a stronger dollar may lead to a disappointment for the company in fiscal 2009.

To learn more, read Currency Moves Highlight Equity Opportunities and The Impact Of Currency Conversions.

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