In Focus

Unscrambling Estee Lauder (NYSE: EL)

On my last birthday, I made a conscious decision that I was not going to dread it, instead it was going to be my year. No lipo, no augmentations, no lifts, just a facial and some beauty products. (Remember, I work in Hollywood, a face lift at 36 is not all that rare.scary, huh?) So I go to the spa, get my little facial and when I start to buy the products specially formulated for my "dry, dehydrated" skin", I discover they want $90 dollars for the eye cream! Are they kidding? I've also got a nose, cheeks, forehead, chin and neck to buy for! I know this is "my" year and all, but come on!

As I left, doomed to be a "prune face" forever, I remembered a product that I had used some time ago and had really loved.Aveda. I remembered their products didn't cost an arm and a leg, were all natural (no synthetics) and best of all, use no animal testing. We happen to have an Aveda spa near us, so off I went. The salesperson mentioned that Aveda was bought by Estee Lauder in 1995, a light bulb went off in my head, it's a stock! What Chick doesn't use some sort of makeup or skin care product? I couldn't wait to get home and run it through the dozen.

1. Buy What You Know
When I first got online and brought up their company profile, my jaw dropped - this company owns everything (in the make up world, at least)! Practically my whole make-up bag is a subsidiary of The Estee Lauder Companies Inc. without my even knowing it. Check out these brand names for yourself: Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C., Bobbi Brown essentials, Tommy Hilfiger, La Mer, jane, Donna Karan, Aveda, Kate Spade, Stila, Jo Malone and Bumble and Bumble. Pretty impressive, huh? As I said, in my own home I currently have Estee Lauder Sport Tint, Clinique eye pencil, Prescriptives brushes, M.A.C. lipstick and blush, and Origins "Clean Sheets" candle and room freshener, to name a few! Now, if only they owned L'Oreal, then I could include the Chicks favorite mascara "L'Oreal Le Grand Curl!!

2. Keep It Simple Sister (KISS)
Chicks and make up need no further explanation!

3. Industry
Its industry is listed as: Consumer/Non-cyclical. We Chicks can relate to the "consumer" part since that's what we are, but it's the "non-cyclical" part that I like. check out #5, Repeat Profitability, for further explanation.

4. Leader In Its Field
The company manufactures and markets quality skin care, makeup, fragrance and hair care products, selling in over 120 countries and territories. As far as competitors go, my goodness, if this company feels a little competition it looks like they buy them! Actually, acquiring smaller companies as it has, gives them a better stronghold against competition with other giants like L'Oreal S.A. (owner of Lancome, Ralph Lauren, L'Oreal, Maybelline and Plenitude).

5. Repeat Profitablility
We want a company that makes a product that people buy all year round. (Not that there aren't good cyclical stocks.) I might wear less make-up in the summer, but I certainly make up for it in sunscreen and skin care purchases. Most people use make-up, skin care, and hair products year round.

Note: For the following formulas, the figures I used can be found at www.marketguide.com. I used quarterly numbers from the income statement and balance sheets for the quarter ending 9/30/00.

6. Gross Margins
Well above 50%, EL boasts a GM of 77.64%!

(Sales - Cost of Goods Sold) / Sales

(1,177.7 - 263.3) / 1,177.7

914.4 / 1,177.7 = .7764

.7764 x 100 = 81.4%

7. Net Margins
Just shy of our 8% criterion, EL's margin is at 7.8%

Net Income / Sales

92.4 / 1,177.7 = .078

.078 x 100 = 7.8%

8. Cash vs. Long Term Debt
Unfortunately, it falls short in this area like so many other companies. They only have .6x the amount of cash as they do debt. Its funny, companies must be like people, they each have their own tolerance for debt. There are different reasons for debt. Theirs might be explained by the fact that the company has made a few acquisitions in the past year in addition to their recent entrée into the Internet.

Cash* / Long Term Debt

233.8 / 418.1 = .6x

*cash, including marketable securities

8. Flow Ratio
Just makes the mark at 1.59.

(Current Assets - cash*) / Current Liabilities - Short Term Debt

(1,701.7 - 233.8) / (929.8 - 6.6) =

1467.9 / 923.2 = 1.59

*cash, including marketable securities

9. Increasing Growth
In the last quarter sales have increased 18%.

(most recent quarter sales - last quarter sales) / last quarter sales = X

X x 100 = %

Sales from Q9/30 = 1,177.7

Sales from Q6/30 = 998.9

1,177.7 - 998.9 = 178.8

178.8 / 998.9 = .178

.18 (rounding off) x 100 = 18% sales INCREASE

In terms of growth, there are a couple more things to look at in Estee Lauder's favor. As I stated, they sell their products in 120 nations, that's pretty darn global! The beauty of that is even though higher interest rates threaten to slow down the U.S. economy and thus consumer spending, other areas such as Asia are just beginning to recover. This "global economy" is a perk for any multinational company, creating an immunity to any one particular country's woes.

Another thing I like, is that they don't shy away from progress. Not to be left out of the high-tech craze, Estee Lauder has joined the ranks of "e"-tailers online. Recently, Mr. Langhammer announced an entire Internet strategy. Basically, the goal is to build a substantial customer database, communicate with and market directly to both new and existing consumers, and to continue to enhance its brands and increase access to their products.

To put this strategy into action, the Estee Lauder Companies recently acquired beauty Web site, Gloss.com. Apparently, in the land of powderpuffs and eye shadow, this news is HUGE. I didn't realize how many existing beauty websites there are (Beautyjungle.com, Beautybuys.com, Beautyscene.com and Ibeauty.com to name a few), this deal puts many in jeopardy. One reason being, since Estee Lauder will now be selling their own products directly, they can severely undercut the prices on the sites that are doing unauthorized selling of their products. The consensus is that Estee Lauder will dominate. big time. The fall out will probably be rapid consolidation of the smaller sites that survive and the inevitable arrival of some major competitors' dot-coms.

By early 2001, we should be able to buy all of their brands on the Web, on the same site, for the first time. (Wow, if I don't end up buying their stock, at least I've found a whole new way to buy make up!) Estee Lauder management feels that the "opportunities for dramatically expanding and leveraging their database are enormous". The impact that this strategy will have on earnings will, for the first two years be minimal, but thereafter it'll grow like gang busters. (ok, maybe the CEO didn't say "gang busters" but that was the gist of it).

11. Strong Management and History
The company was founded in 1946 in New York City. Members of the Lauder family currently own approximately 58% of the Company's outstanding common stock and 92% of the combined voting power of the Company's common stock. The CEO and President is Fred Langhammer, and the Chairman is Leonard Lauder. Several board members carry the Lauder name as well. I kind of like a family-run business. Call me old-fashioned, but I think there's an extra amount of pride and care taken when your name is on the package.

12. Buy On Sale
52 week high: 55.87
52 week lo: 33.75
52 week average: 44.81
Current stock price (as of 11/28/00): 42.125

Yep, its on sale! This stock is definitely in the chicken coop, but not quite ready for our nest. Next time you get a new tube of mascara (that's supposed to be every 3 months), check in with Estee Lauder and see how its doing!