Yes, you can Buy Love.
Sorry Paul!
On the contrary to McCartney's hit tune, money CAN buy you love.
I have been watching a few handsome stocks for a while. They have great potential and I do see a long term future with them. That said, I'm not ready to splurge on that diamond ring, for them to love me back.
I would like to start the love confession with the Estee Lauder Group. (EL)
1. Diversity in products
I used to think of this brand to only cater to mums or thereabouts in terms of age. My mum had the infamous advanced night repair and I always thought that's all Estee Lauder do. And it was not till recently (when I got into "investing" and all) that I realized how strategic their acquisitions are.
Target coverage is quite spread out, EL has haircare, fragrance, makeup, skincare for women and men. This also serve as a way to reduce cost, such as overheads from marketing/advertising and lab testing.
I used to think of this brand to only cater to mums or thereabouts in terms of age. My mum had the infamous advanced night repair and I always thought that's all Estee Lauder do. And it was not till recently (when I got into "investing" and all) that I realized how strategic their acquisitions are.
Target coverage is quite spread out, EL has haircare, fragrance, makeup, skincare for women and men. This also serve as a way to reduce cost, such as overheads from marketing/advertising and lab testing.
Having multiple brands also allow for proven formulations to be similar but under different umbrellas. For example, Smashbox's (under the EL umbrella) water base foundation is almost identical to Estee Lauder's Nude Foundation. To most people, this is a lazy move. I thought so too, however I can speculate a few reasons. One, don't change what's not broken. Two, not all consumers are aware that EL owns Smashbox and its a great way to diversify sales, addressing different age groups, social status and biases.
2. Growth through acquisition
EL's acquisitions actually started off with licensing Tommy Hilfiger fragrance in 1993, then later acquired M.A.C. in 1998, and from there, they really went shopping for brands.
Here's a timeline:
1993 - Licensing Tommy Hilfiger
1994 - Began investing in M.A.C.
1995 - Licensing Kiton. Acquired Bobbi Brown, La Mer. And going public.
1997 - Licensing Donna Karen (DKNY), started investing in Aveda
1998 - Acquired M.A.C.
1999 - Acquired Jo Malone
2000 - Became a majority stakeholder in Bumble & bumble
2003 - Licensing Michael Kors
2005 - Agreement with Tom Ford to develop and distribute fragrance and cosmetics
2006 - Acquired Bumble & bumble
2010 - Acquired Smashbox
2011 - Licensing Tory Burch
2012 - Launched AERIN Beauty
2014 - Acquired RODIN, Le Labo
2015 - Acquired Editions de Parfums Frédéric Malle and GLAMGLOW
2016 - Acquired Becca Cosmetics. Too Faced, which was acquired later that year is the company's biggest acquisition to date at USD1.45 billion
EL has recently become a minority stakeholder in DECIEM, a Toronto-based beauty company. The brand is marketed as a no frills, no exaggeration skincare brand. Its social media did have (and probably still having) backlash on its CEO, Brandon Truaxe's "erratic" behaviour. In my view, I think he is just a no bullshit, genuine person. Besides that, their products are building a cult following, and despite what some beauty gurus may say about efficacy of concentrates. And from personal experience, I have seen great results. History may indicate an acquisition in the near future and I have a feeling it's going to top Too Faced. Cost of multiple diamond rings maybe?
3. Marketing is relatively done with tact
With reference to EL's core brand, it produces high quality products that has been in the beauty scene for decades. This iconic Double Wear Foundation has been highly recommended among makeup artist and every day mortals. Formulation of their products are beautiful and for consumers without technical application skills, it's easy to achieve the results desired and that's what sells for.
It bloody works.
*There is really no objective and honest review in this modern age, even if they claim they are.
Of course, there are downsides.
1. Getting complacent
With EL acquiring upcoming, growing companies, is there a point where having more is going to backfire and have diminished returns?
Can the brands still continue to grow at rates it used to?
Would they run out of creative juices and not know how to please customers?
In their earnings call in May, executives Fabrizio and Tracy strongly emphasize upcoming investments in advertising and digital marketing. There are plans to grow social media presence and a global reach. They did mention exciting things happening, but until it launches, its merely hearsay for now.
The possibilities of growth are definitely there, finding it is another question.
Can the brands still continue to grow at rates it used to?
Would they run out of creative juices and not know how to please customers?
In their earnings call in May, executives Fabrizio and Tracy strongly emphasize upcoming investments in advertising and digital marketing. There are plans to grow social media presence and a global reach. They did mention exciting things happening, but until it launches, its merely hearsay for now.
The possibilities of growth are definitely there, finding it is another question.
2. Animal rights
I don't want to come across as a heartless hater but truth is, the tests are more efficient and more effective. It runs risks of irritation, sensitivity, and other possible side effects. Would a human be willing to sacrifice their skin without an expensive price tag?
EL is an international brand and one of their biggest customers is China. The reason for the tests is due to the bad reputation China gets got allowing sale of poor quality and dangerous products and fakes. Some labs simply don't have the financial resources to seek alternative methods or have the technical skills to do it, for which staff needs training and certification. And only until recently, China required all cosmetics to be tested on animals, although this requirement has been relaxed for non-specialized cosmetics such as nail care and perfume.
On the up side, many ingredients have already been extensively tested, and there is no need to repeat it. Major advances in technology has also prove alternative testing methods, such as reconstructed skin cells and sophisticated 3-D tissue models. I am quite certain EL is moving towards the cleaner, cruelty free path as the tests are only done when required by law.
EL is an international brand and one of their biggest customers is China. The reason for the tests is due to the bad reputation China gets got allowing sale of poor quality and dangerous products and fakes. Some labs simply don't have the financial resources to seek alternative methods or have the technical skills to do it, for which staff needs training and certification. And only until recently, China required all cosmetics to be tested on animals, although this requirement has been relaxed for non-specialized cosmetics such as nail care and perfume.
On the up side, many ingredients have already been extensively tested, and there is no need to repeat it. Major advances in technology has also prove alternative testing methods, such as reconstructed skin cells and sophisticated 3-D tissue models. I am quite certain EL is moving towards the cleaner, cruelty free path as the tests are only done when required by law.
3. It's expensive
Fabrizio mentioned that the luxury brands are the most stable in terms of sale because the wealthier part of the population would be the least affected in an economical cycle. That's true, but a neglect in the more affordable brands would need to be addressed as well.
Stock wise, it is currently trading at 44 times earnings. And at the time of writing, there has been a slight pullback to $135. It's still a tad expensive.
Fabrizio mentioned that the luxury brands are the most stable in terms of sale because the wealthier part of the population would be the least affected in an economical cycle. That's true, but a neglect in the more affordable brands would need to be addressed as well.
Stock wise, it is currently trading at 44 times earnings. And at the time of writing, there has been a slight pullback to $135. It's still a tad expensive.
4. Consumer alternatives
With Asian skincare being more "holistic" and upcoming indie brands, EL has some competition. Over the last decade, the beauty industry has changed a lot. Consumers are willing to experiment more and are more open to products beyond the western realm, being more environmental-conscious, developed understanding about formulas and ingredients, dependent on reviews on social media especially YouTube and going towards more "specialized" skincare.
Fabrizio also explains how EL's success stems from high repurchase rates. I am concern over innovation of the brand as a whole if repurchase of hero products remains the focus . EL is a very established brand, and when I go for my facials, my esthetician uses the western brands because they are researched based, they trust them and have existed for a long time. There is no denying that most consumers have the mentality that "Well, this brand have been around for so long, they must be good." Take Darphin for example, pride on their use of essential oils to deliver a spa-like experiences at home. Those in their 30s or even 60s that I know have something from Darphin on their vanity. Trust and quality is huge for that age group, and they would probably remain loyal to EL. Compared to the millennials, they want to see new, and are more likely to experiment and look for quality within their budget.
Conclusion:
I would like to see EL dip their toes into other geographic areas, cultures and experiment with their comfort zones. Asian beauty such as Korean products have a similar cult following as well. "Dupes" or the more affordable alternatives have been recognized for the Estee Lauder brand, where ingredients are similar or if results are comparable, for a budget-concerned consumer, they would pick the more affordable option. Going back to my mum's use of Advanced Night Repair, she stopped purchasing it because the more affordable Asian alternative did the same thing, achieve the same results but was a third of the price. So why spend more?
Like buying beauty products, if the valuation is far in excess of your own judgement, leave it, if you do own stocks, maybe take some off the table. There are opportunities out there, and sadly we don't have a bottomless pot of money to invest in whatever we like. Resources need to be allocated to where we think is best. I love the company, it has great growth, ethics and culture. The beauty industry isn't going anywhere but forward, however, I do have my reservations. It might be worth setting the calendar for the report earnings date which is expected to be on the 20th of August.
This recent pullback could potentially make it a buy, and I might just get that diamond ring.
Fabrizio also explains how EL's success stems from high repurchase rates. I am concern over innovation of the brand as a whole if repurchase of hero products remains the focus . EL is a very established brand, and when I go for my facials, my esthetician uses the western brands because they are researched based, they trust them and have existed for a long time. There is no denying that most consumers have the mentality that "Well, this brand have been around for so long, they must be good." Take Darphin for example, pride on their use of essential oils to deliver a spa-like experiences at home. Those in their 30s or even 60s that I know have something from Darphin on their vanity. Trust and quality is huge for that age group, and they would probably remain loyal to EL. Compared to the millennials, they want to see new, and are more likely to experiment and look for quality within their budget.
Conclusion:
I would like to see EL dip their toes into other geographic areas, cultures and experiment with their comfort zones. Asian beauty such as Korean products have a similar cult following as well. "Dupes" or the more affordable alternatives have been recognized for the Estee Lauder brand, where ingredients are similar or if results are comparable, for a budget-concerned consumer, they would pick the more affordable option. Going back to my mum's use of Advanced Night Repair, she stopped purchasing it because the more affordable Asian alternative did the same thing, achieve the same results but was a third of the price. So why spend more?
Like buying beauty products, if the valuation is far in excess of your own judgement, leave it, if you do own stocks, maybe take some off the table. There are opportunities out there, and sadly we don't have a bottomless pot of money to invest in whatever we like. Resources need to be allocated to where we think is best. I love the company, it has great growth, ethics and culture. The beauty industry isn't going anywhere but forward, however, I do have my reservations. It might be worth setting the calendar for the report earnings date which is expected to be on the 20th of August.
This recent pullback could potentially make it a buy, and I might just get that diamond ring.
Disclosure: I have no positions in the Estee Lauder Company Inc.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.
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