The Estée Lauder Companies Inc. (EL) and L'Oréal S.A. (LRLCY) are two well-known cosmetic and hair care product manufacturers that operate worldwide. Based in New York, EL markets its products under Estée Lauder, Aramis, Clinique, Lab Series, Origins, Bobbi Brown, and other brands. Headquartered in Clichy, France, LRLCY sells its products under the brand names L'Oréal Paris, Garnier, Maybelline New York, Essie, Niely, Dark and others.
With the onset of the coronavirus pandemic last year, social distancing and mask wearing norms eviscerated the market for beauty and cosmetic products. Widespread closures of points of sales and a drastic fall in foot traffic at retail stores led to a tremendous decline in sales for beauty retailers EL and LRLCY. Although these companies are now rapidly strengthening their digital platforms to recover their markets and accelerate their growth, the resurgence of COVID-19 cases in many parts of the world could again negatively impact these companies' sales in the coming months.
Over the past year, EL has returned 62%, while LRLCY gained 88.9%. But, in terms of year-to-date performance, EL is the clear winner with 7.2% gains versus LRLCY’s negative returns. But are any of these stocks a good pick now? Let’s find out.
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Latest Movements
On March 2, priced $600 million of 1.950% senior notes, due 2031. It plans to use the proceeds to partially finance its investment in DECIEM Beauty Group Inc., for working capital, and to repay short-and long-term borrowing and other capital expenditures.
Last month, the company signed an agreement to increase its investment in DECIEM Beauty Group Inc., a Canada-based multi-brand company, to approximately 76% from 29%. DECIEM’s highly desirable and innovative product portfolio should allow EL to cater to a wider customer base and stand out in the market.
In February, LRLCY finalized the acquisition of Takami Co, a Japanese premium skincare brand. Takami’s omnichannel distribution and higher quality products should complement LRLCY’s brand and contribute to its growth.
Recent Financial Results
During the fiscal second quarter, which ended December 31, 2020, EL’s net sales increased 5% year-over-year to $4.85 billion. Its net earnings rose 56.7% from the same period last year to $873 million, its EPS grew 55.9% from the year-ago value to $2.37. And its operating income increased 307.3% year-over-year to $1.06 billion.
LRLCY reported total sales of €27.99 billion in the period ended December 31, 2020. The company’s operating profit was €5.20 billion, representing 18.6% of its sales. However, its gross cash flow was €5.72 billion, representing a decrease of 1.3% from the same period last year.
Past and Expected Financial Performance
EL’s revenues and ebitda have increased at CAGRs of 3.6% and 0.9%, respectively, over the past three years. In comparison, LRLCY’s revenues have increased at a CAGR of 2.5% over the past three years, while its ebitda grew 4.1% over this period.
However, EL’s net income and EPS have declined at a CAGR of 4.8% and 4.2%, respectively, over the past three years, while the CAGRs of LRLCYS’s net income and its EPS have declined 0.2% and 2.2%, respectively, over this period.
EL’s revenue is expected to rise 11.2% in the current year, and 12.8% next year. A consensus EPS estimate indicates a 43.3% improvement in fiscal 2021, and 16.8% rise next year.
In comparison, analysts expect LRLCY’s revenue to increase 6.2% in fiscal 2021 and 7.7% in 2022. Also, the company’s EPS is estimated to increase 12.5% in the current year and10.4% next year.
Profitability
LRLCY’s trailing-12-month revenue is more than two times EL’s. But EL is more profitable, with a gross profit margin of 75.4% versus LRLCY’s 73.1%.
However, LRLCY’s levered free cash flow margin of 18.2% compares favorably with EL’s 14.4%.
Valuation
In terms of trailing-12-month price/sales, EL is currently trading at 7.27x, which is 16.5% higher than LRLCY’s 6.24x. Also, its trailing-12-month ev/ebitda of 38.06x is 46% higher than LRLCY’s 26.06x.
EL is also more expensive in terms of trailing-12-month price/cash flow (34.45x vs 27.10) and trailing-12-month ev/sales (7.47x vs 6.11x).
POWR Ratings
Both EL and LRLCY have an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
EL has a Growth Grade of B, which is consistent with its increase in earnings and revenues over the past year. The expected increase in LRLCY’s revenues and earnings for 2021 is reflected in its Growth Grade of C.
In terms of Value Grade, LRLCY has a C, which is consistent with its higher-than-industry p/e ratio. Also, EL’s Value Grade of D is reflective of its higher-than-industry p/e ratio.
Moreover, in terms of Quality Grade, EL has an A given its higher profitability. In comparison, LRLCY has a Quality Grade of B.
Of the 66 stocks in the B-rated Fashion & Luxury industry, EL is ranked #23. LRLCY is ranked #19 of 67 stocks in the C-rated Consumer Goods industry.
In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both EL and LRLCY for Momentum, Stability, and Sentiment. Get all EL ratings here. Also, Click here to see the additional POWR Ratings for LRLCY.
The Winner
While both EL and LRLCY can be considered good long-term investments due to their global brand recognition and strong omni-channel platforms, we think this is perhaps not the right time to buy either of these stocks.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Fashion & Luxury industry. Also, click here to access the top-rated stocks in the Consumer Goods industry.
Click here to checkout our Retail Industry Report for 2021
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LRLCY shares were trading at $75.18 per share on Wednesday morning, down $0.79 (-1.04%). Year-to-date, LRLCY has declined -1.27%, versus a 4.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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