By Michael Elkins
TD Cowen initiated coverage of The Estée Lauder Companies Inc. (NYSE:EL) with an Outperform rating and a $280.00 price target after conducting a proprietary survey.
TD Cowen analysts wrote in a note, "In our view EL's brands have strong brand equity across regions with a loyal following, which cannot be easily replicated by indie brands. Per TD Cowen’s survey work, EL's larger brands, namely Estée Lauder, Clinique, MAC, and The Ordinary, rank among the top 10 brands US consumers use on a regular basis."
"We rate EL Outperform as we believe it has opportunities to gain share across regions with its diversified portfolio of prestige brands, especially in emerging markets," they continued. "The beauty category is also highly resilient, increasing at a +M-HSD% CAGR and we believe EL can sustain its long-term financial algorithm of: 6-8% top-line growth, ~50bps EBIT margin expansion, and +LDD% EPS growth. EL is also known for fostering new brands through acquisitions, and we expect management to pursue strategic acquisitions to complement the overall portfolio."
TD Cowen's survey also highlighted that the Estée Lauder brand skews higher toward older women in the US. The analysts believe that the average age of EL's legacy brands is higher in the US as it is more distributed in department stores vs. other countries where EL's brands are popular among younger consumers. As EL continues to evolve its distribution structure, the analysts see opportunities to recapture share in the US market.
EL's sales growth and margins have been pressured since 4Q22 due to stricter COVID restrictions. The analysts view the impact from China as transitory, and as China resumes social activities, EL is well-positioned to benefit from potential "revenge" spending.
TD Cowen expects trends in China to recover as COVID restrictions ease, but if the macro backdrop deteriorates and GDP growth in China remains muted, consumer demand could be hampered, and therefore EL's sales could remain pressured.
The analysts also note that EL has highlighted that they are losing shares in the US. EL's failure to rejuvenate its brands in the US could lead to continued share losses and relevance among young consumers. They expect EL to focus on innovating the brands, but there could be a risk that other emerging brands continue to capture shares from EL.
Shares of EL are up 2.63% in mid-day trading on Tuesday.