After a strong second quarter, Estée Lauder Companies Inc.'s (EL) less ambitious targets could widen its shortfall in a market share to leader L'Oréal SA (OR) in Asia, while giving Revlon Inc. (REV) a chance to catch up.
Estée Lauder has been on a roll today, with its shares rising 3.4% on Monday despite lowering its prospects for the first quarter. The climb is largely driven by analyst and investor confidence in the company's ability to weather the storm of tariffs and its proven ability to increase sales numbers each quarter.
With lower earnings estimates and the threat of trade tariffs impacting the cosmetics market, the competition for the coveted Asian market share is heating up.
"Makeup sales of $1.36 billion grew 4%, but were 3% below estimates at $1.4 billion and segment margins of less than 3% came in meaningfully below estimates of 9% reflecting lower operating results from Makeup Art and Cosmetics," a research note published by Jefferies analyst Stephanie Wissink notes.
She adds that competition in Asia, the fastest-growing market for Estée Lauder, is intensifying and is requiring significant investment in advertising and promotion from the company to fend off its challengers.
Due to these concerns, among others, Wissink maintained a hold rating on the stock.
Markets in the APAC region include Australia, China, Hong Kong, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, Thailand, and Vietnam. As such, it represents the largest consumer base of any market available to the retailers by population size.
L'Oréal, not keen on losing its market leading status in this massive market, is homing in on the region and even smaller players like Revlon are starting to gain market share.
According to a L'Oréal report, Chinese consumer spending in international tourism on makeup and cosmetics products rose from $55 billion in 2010 to $261 billion in 2016.
The population now represents 45% of the travel retail market, outpacing the second place South Korean population by a whopping 35% and standing easily larger than Russian consumers in third, who make up just 5% of the overall markets.
US consumers, by contrast, make up only 3% of the global travel market.
For Estée Lauder, the Asia Pacific region generated over $700 million in added sales revenue for the past fiscal year, a 29% increase year over year which was primarily driven by gains in the Chinese market.
However, while this number is impressive, it is not the fastest acceleration rate in the region.
Revlon, during its August 7 earnings presentation, noted 46% sales growth in China, as well as 35% growth in travel retail according to CEO Debra Perlman.
She added that the company's 2016 acquisition of Elizabeth Arden is aiding in its travel retail and international growth.
Meanwhile, L'Oréal, the largest player in the sales of cosmetics worldwide, tallying $28.6 billion in sales in 2016, per an April 2017 report, has not been content to rest on its laurels.
"Growth in [Asia] came out at 22.0% like-for-like and 13.2% based on reported figures," a L'Oréal first half report published on July 26 reveals. "This strong growth is being boosted by Chinese consumers, as reflected in the growth in China and Hong Kong across all Divisions, especially for premium brands."
A growth of 22% for the largest brand over the first half of the year makes it that much more difficult for Estée Lauder to continue to gain market share in the massive consumer base.
To be sure, as the Chinese consumer base continues to grow and get wealthier, there will be enough consumers to contribute to growth for more than one cosmetics giant.
However, if Estée Lauder continues to slow down its guidance and the trade dispute puts a dent in the company's future earnings, the accelerated gains of both L'Oréal and Revlon will pose a serious risk to the company's fastest-growing segment.
