Cosmetic giant Estee Lauder Companies Inc. (EL: 58.66 0.00 0.00%)announced that it has completed the acquisition of privately held makeup brand Smashbox Beauty Cosmetics Inc. The deal is expected to be accretive to Estee Lauder’s earnings in fiscal 2011, before transaction and integration costs. The acquisition will give Estee Lauder an expanded presence outside department stores, particularly in Sephora cosmetics stores and on televised home-shopping channels, where Smashbox is one of the best selling brands.On May 17, 2010, Estee Lauder had announced its intention to acquire Los Angeles, California-based Smashbox Beauty. Smashbox Beauty Cosmetics was founded in 1996 to create a makeup brand, meeting the demanding needs of a professional photo shoot. Since then, Smashbox has established itself as a highly successful prestige cosmetics brand and a top performer in specialty channels.
The Smashbox brand complements Estee Lauder’s portfolio of leading prestige cosmetic brands. This fresh new brand will help Estee Lauder deliver strong growth in its makeup segment as it is expected to draw young customers to Estee Lauder.
Smashbox is largely concentrated in North America , and is sold in the stores of Ulta Salon, Cosmetics & Fragrance Inc. (ULTA: 22.21 0.00 0.00%), Sephora,Macy’s Inc. (M: 17.41 0.00 0.00%) and Nordstrom Inc. (JWN: 31.97 0.00 0.00%), on televised home shopping channel and online at the brand’s website and on Beauty.com. The brand generates a small percentage of sales internationally, where it is sold through distributors in 50 markets around the world.
Smashbox will thus help reduce Estee Lauder’s exposure to the U.S. department stores by increasing the company’s presence in the faster-growing U.S. retail channels –specialty retail, online and home shopping. The brand also fits nicely into Estee Lauder’s makeup artist portfolio, with Smashbox products generally priced in between the company’s M-A-C and Bobbi Brown lines.
Further, Smashbox is a strong brand and will help contribute to Estee Lauder’s international expansion plans. Estee Lauder’s global platform provides Smashbox a distribution network that spans more than 140 countries.
Estee Lauder has displayed its ability to nurture and grow niche makeup franchises in the past as is evident from the performance of its acquired professional makeup artist lines, M-A-C and Bobbi Brown. M-A-C and Bobbi Brown were both acquired as small U.S. focused businesses. M-A-C was acquired in 3 stages between 1994 and 1998 and Bobbi Brown was acquired in 1995, and over the last decade, both have proved to be Estee Lauder’s fastest growing brands.
In its third quarter of fiscal 2010, ended March 31, 2010, Estee Lauder posted a 10% year-over-year increase in sales to $1.86 billion. By category, skin care products fared the best with a growth of 16% to $819.8 million. By region, Asia-Pacific posted the highest growth rate of 20%. Earnings per share (EPS) were 34 cents, more than double the 16 cents reported in the year-ago period. The increase was driven by cost-cutting measures and strong sales overseas, particularly in Asia.
For its fiscal 2010 ending June 30, 2010, the company expects its sales to increase between 4% and 5% and EPS to be in the range of $2.65 to $2.75. The Zacks Consensus Estimates for fiscal 2010 and 2011 currently stand at $2.76 and $3.19, respectively.
The company is currently undertaking initiatives to reduce overheads and optimize inventory levels, which augur well for future operating performance. Furthermore, Estee Lauder has a consistent track record of returning cash to shareholders in the form of regular dividend payments.
We believe the Smashbox acquisition is a good deal as Estee Lauder can leverage its infrastructure and international expertise to grow both the brand domestically and internationally as well as boost its earnings. Our long-term recommendation on Estee Lauder is Outperform as we anticipate that it will perform well above the broader market.
The Estee Lauder Companies sells products in the skin care, makeup, fragrance, and hair care categories, at more than 30,000 points of sale in more than 140 countries. Its brands include: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series and Origins. Its acquired brands include M-A-C, Bobbi Brown, La Mer, Jo Malone, Aveda, Bumble and bumble, and Darphin and Ojon. The company is the fragrance and beauty products licensee for Kiton, Tommy Hilfiger, Donna Karan, Michael Kors, Sean John, Missoni and Tom Ford.
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