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Estée Lauder: 2Q16 Revenue Soars, but Operating Margin Falls


Apr. 4 2016, Updated 5:04 a.m. ET

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.

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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.

Cash flow

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]


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