The trade clash between U.S. and China isn't making Estée Lauder Companies Inc (EL) any less beautiful to analysts.
As numbers in North America have leveled off, Estée Lauder's rapidly rising sales figures in China have been a vital growth engine to the cosmetics retailer, allowing the cosmetics company to post a strong quarter and fiscal year.
"The strong growth in the Asia Pacific region of 24%, against a consensus of 12% was a major bright spot for analysts on the call, offset by some management concern about traffic in stores in the U.S. and United Kingdom," Robert Ottenstein, a research analyst for Evercore ISI said in an interview Monday.
Ottenstein maintained a price target for the stock of $170 reiterating a market outperform rating.
"Management said they had not seen any slowdown in China, however they are building into their guidance some sort of normalization so that is how they are looking at it," Ottenstein said. "They've been having extraordinary growth and though they don't report country data it has been very, very strong. The (fact) that the growth will be at a somewhat lower rate (in APAC) is not a surprise to anybody."
CFO Tracey Thomas Davis did reveal on the earnings presentation this morning that 9% of total sales for the company in the past quarter came from China specifically.
The company downplayed the impact of China-U.S. tariffs standoff on the earnings call on Monday.
"The tariff in China is only a proposal, so it is not clear if it will be implemented," CEO Fabrizio Freda told analysts, adding "less than one-third of our products are imported from the US to China."
The company's margin was also mentioned as a defensive position from trade troubles on income.
"We have 80% gross margin, so the tariff is less onerous on our industry than on commodities," he stated.
However, the tariffs certainly will affect the business in both its imports of Chinese materials for US products as well as its imports to China.
A regulation notice from the Office of the United States Trade Representative filed on July 17 noted that up to $200 billion in Chinese imports would be subject to potential tariffs, reaching up to 25% in duties.
The products, which include all "depilatories and other perfumery, cosmetic or toilet preparations" as well as "perfumes and toilet waters" and containers for perfumes or cosmetics, could have adverse effects for all beauty retailers that use Chinese goods in their manufacturing.
The loss of Chinese supply materials for beauty products is sure to push up prices on domestic products, negatively impacting already stagnant US sales.
Furthermore, retaliatory tariffs from China could adversely affect the purchasing power of Chinese consumers that are becoming more and more integral to the Estée Lauder's profits.
The Chinese impact for tariffs will also be more pronounced than US tariffs, as it is a complete 180 from previous policy.
Earlier this summer, the Chinese government decided to slash tariffs on products like those that Estée Lauder offers, cutting duties on the imports by an average of 5.5% per the Hong Kong Trade Development Council.
Now, only a little over a month later, the duty on these products could reach as high as 25%.
So, while the company is positive on growth opportunity in the region and analysts remain confident in the growth opportunity aside from the geopolitical risks, the preferred case would certainly be free trade.
"We continue to hope that the tariff will not be applied [in China]," Fabrizio Freda told analysts on the earnings, identifying the ideal scenario for Estée Lauder and for most cosmetic companies for that matter.
Martin Cassidy contributed to this article.