Fiscal 2Q16 gross margin
During its fiscal 2Q16 earnings call, Estée Lauder (EL) reported a slight decrease in its gross margin, which remained virtually flat from the prior year at 81.2%. The positive contributions of the supply chain were offset by the category mix, a slower growth in skincare, and some higher promotional expenses over the holidays.
Peer comparison: Operating margin
Estée Lauder’s operating income decreased 0.5% to $0.6 billion in fiscal 2Q16. As a result, the operating margin decreased to 20.1% in fiscal 2Q16 from 20.8% in fiscal 2Q15. However, constant currency operating income before charges increased 11%. The constant currency operating margin improved 60 basis points, primarily due to expense leverage.
Similarly, Coty’s (COTY) adjusted operating margin grew 180 basis points to 17.7% from 15.9% in fiscal 2Q16. Procter & Gamble’s (PG) operating margin grew to 22.8% in fiscal 2Q16 from 19.4% in fiscal 2Q15.
Despite weaker margins, Estée Lauder remains one of the leading companies to use cash for future growth. In the six months ended December 31, 2015, EL generated $0.9 billion in cash flows from operating activities, 3% less than the cash flows from the same period last year. Excluding the impact of the shift from last year, operating cash flow this year rose 17%.
Strengthening through channels
Like peers L’Oréal (LRLCY) and Avon (AVP), Estée Lauder aims to strengthen its product categories through channels such as e-commerce, m-commerce, digital media, social media, and travel retail. EL invested $0.2 million in capital expenditures, primarily to support new retail stores, counters, systems, and office space. EL makes up 0.4% of the First Trust First Trust Large Cap Growth AlphaDEX ETF (FTC).[1. As of March 15, 2016]