Investing Club holding Estee Lauder reported better-than-expected results with its fiscal first-quarter 2022 earnings results on Tuesday before the opening bell. The shares are rallying back after opening lower.

Here's a full breakdown of the earnings report, the conference call and what to do next with the stock.

On the top line, sales of $4.39 billion (+23% YoY), outpaced the $4.24 billion consensus, while adjusted earnings of $1.89 per share were better than the $1.69 the Street was looking for.

On an organic basis, which excluded non-comparable impacts of acquisitions, divestitures and brand closures as well as the impacts from currency, sales were up 18% annually and when accounting for the impact of currency, earnings came in at $1.86 per share, still a strong result versus expectations.

CEO Fabrizio Freda commented on the release: “We delivered excellent performance to begin fiscal 2022, despite the increased volatility and variability globally during the quarter, by virtue of our dynamic multiple engines of growth strategy. Our growth engines increasingly diversified, as we expected. Makeup, developed markets in the West, and brick-and-mortar reignited and complemented momentum in Skin Care, Fragrance, mainland China, Travel Retail in Asia/Pacific, and global Online. Impressively, relative to the pre-pandemic first quarter of fiscal 2020, the overall business is much bigger and more profitable. Thirteen brands contributed double-digit organic sales growth versus the prior-year period, demonstrating the breadth of strength across our portfolio. Estée Lauder and M·A·C drove Makeup’s emerging renaissance, while La Mer and Clinique delivered stand-out results in Skin Care. Fragrance soared double-digits in every region, driven by Tom Ford Beauty and Jo Malone London. Our hero products performed exceptionally well and our innovation proved, once more, to uniquely capture consumer desires.”

Capital return plan shows confidence:

During the quarter, management returned a total of $749 million to shareholders via share repurchases and dividend payments. Furthermore, management also announced a 13% increase to the company’s quarterly dividend payment to $0.60 per share payable on December 15, 2021 to stockholders of record at the close of business on November 30, 2021.

While the resulting annualized dividend yield of 0.7% may not do much for income-oriented investors, we believe the move is a sign of management’s confidence in the path ahead.

Conservative guidance?

However, while the results were strong, management’s guidance came in below expectations.

For fiscal second quarter the team is forecasting annual sales growth of 11% to 13% (8% to 10% organic) versus expectations for 15% YoY top line growth, with adjusted earnings per share of $2.51 to $2.61, versus the street at $2.78 per share.
Full year guidance was closer but still missed the mark with management guiding for revenue growth of 12% to 15% (9% to 12% organic) versus expectations for 15% top line growth, and adjusted earnings of $7.23 to $7.38 versus expectations of $7.43 per share.
Freda added on the release, “Looking ahead, we remain focused on the safety and well-being of our employees and consumers. For fiscal 2022, we continue to expect strong net sales and adjusted earnings per share growth with margin expansion. Our confidence in the long-term growth opportunities for global prestige beauty and our Company is reflected in the announcement today to raise the quarterly dividend.”

While the guidance is a bit disappointing, we believe there maybe some conservativism on the part of management as the team highlighted headwinds from both the COVID-19 pandemic such as the reduction in social gatherings and resulting supply chain issues including port congestion, labor and container shortages and shipment delays that are resulting in some cost inflation – which should not be a surprise to investors at this point.

What we learned from the conference call:

Importantly, management spoke to strong underlying fundamentals, with Freda commenting on the conference call, “As brick-and-mortar reignites, our global online business continued to showcase its tremendous promise, with impressive organic results despite significant organic sales growth in the year-ago period. Online grew to be nearly double the size, on a reported basis, of the pre-pandemic first quarter of fiscal year 2020. Many markets capitalized on the remarkable new consumer acquisition trend of the pandemic to deliver sustained gain in repeat purchases. As we seek to engage with consumers in innovative ways, we advanced our work with Instagram, Snapchat, TikTok, WeChat and others to capitalize on exciting trends in social commerce. We also deployed a technology solution, which enables brands to better customize consumer outreach by leveraging data to merchandise and personalized communication. This is leading to higher conversion rates for new consumers and a deeper level of relationship building after the initial purchase to foster retention. Initiatives such as this position us well to realize even greater success with trial and repeat. We continued to invest in online to strategically expand our consumer reach and realize promising results.”

CFO Tracy Thomas added, “We are encouraged by the green shoots we are seeing around the world, even in the context of an environment of increased volatility. Our strong performance reflects our ability to navigate through the volatility while leveraging our multiple engines of growth. At the same time, we are mindful that recovery is tenuous and likely to be uneven. Nevertheless, we are cautiously optimistic, and our assumptions for fiscal 2022 remain consistent. We continue to expect an emerging renaissance in the makeup category as restrictions are safely lifted and social occasions increase. We welcome the resumption of some travel in the Americas and EMEA in the first quarter. And as intercontinental restrictions are lifted, we expect international passenger traffic to build toward the end of the fiscal year. We began taking strategic pricing actions in July. And overall, pricing is expected to add at least 3 points of growth, helping to offset inflationary pressures.”

Breaking down the operating results:

Taking a look at the various operating segments, starting with Skin Care, sales of $2.449 billion outpaced expectations of $2.427 billion, though operating income of $717 million came up short versus the $816 million consensus. Sales grew in every region led by double-digit growth in La Mer and Clinique, with the former seeing “significant strength with Chinese consumers.” Additionally, on the call, Freda commented, “impressively Skin Care solidly outpaced its prior year organic sales growth performance despite having by far toughest comparison among the categories.”
In Makeup, sales of $1.174 billion edged out the 1.126 billion expected while operating income of $91 million was significantly ahead of the $9 million consensus. Thomas noted on the call that “Estée Lauder foundations continue to resonate strongly with consumers, and MAC leaned into the makeup recovery with a number of fun and compelling campaigns.”
In Fragrance, revenue of $609 million was well ahead of the $447 million the street was looking and resulted in operating income of $131 million more than doubling expectations of $52 million. On the release, management noted that “Net sales grew in every region and across virtually all brands that sell fragrances, driven by continued resilience in luxury fragrance, easy comparisons versus the prior-year period, and the timing of shipments, including holiday shipments.” Speaking to consumer habits, Freda added on the call that “the self-care rituals related to scent which were embraced during the pandemic continue even as social and professional use education resume.”
Finally, Hair Care sales of $148 million edged out the $147 million consensus, though operating income of $2 million missed the $6 million expected. On the call, Thomas noted that “traffic in salons and stores in the U.S. and Europe began to return” and that the segment benefited from growth in Aveda and Bumble and bumble, while calling out “continued strength from innovation”

Geographic Results:

By region, quarterly sales of $1.194 billion in The Americas outpaced the $1.009 billion consensus “powered by readiness for makeup's emerging renaissance, ongoing strength in skincare and fragrance, and recovery in hair care.”
In EMEA (Europe, the Middle East & Africa) sales of $1.873 billion were ahead of expectations of $1.758 billion as “Net sales grew in virtually every market, led by the United Kingdom, Russia and the Middle East. The growth reflects recovery in brick-and-mortar as vaccination rates rose compared to the prior year when retail traffic was negatively impacted by COVID-19.”
However, Asia/Pacific sales of $1.326 billion came up short versus the $1.447 billion expected. With Freda commenting that “many markets [in the Asia/Pacific region] faced COVID-induced lockdowns and temporary store closure,” though adding that “the region still grew 10% organically driven by strength in Greater China and Korea. Mainland China achieved double digit organic sales growth owing to Skin Care and Fragrance with online and brick and mortar both higher.”

The bottom line for investors:

All in, this was a very strong release from Estee Lauder despite the noted headwinds.

This is a management team known to under-promise and over-deliver, and while shares initially sold off on the release, the stock has since recovered as we believe the commentary made during the call has investors looking through the near-term headwinds and focusing instead on the qualitative improvements management has made over the past year, such as the near doubling of online sales versus pre-pandemic levels and increased customer engagement that is leading to higher conversion rates for new customers and improved retention for existing ones – all of which have resulted in a larger and more profitable company.

Furthermore, we were encouraged by Thomas’ commentary around the company’s ability to take price and offset inflationary dynamics. As we have noted previously, pricing power is the key to a company’s ability to protect margins in an environment and believe that Estee Lauder’s ability to do so speaks to both the power of the brand and loyalty of the customer.

By setting low expectations with their fiscal first quarter release, the team as set themselves up to deliver earnings beats down the road with the opportunity to potentially raise guidance as supply chain headwinds ease and visibility improves.

We look forward to hearing even more from CEO Fabrizio Freda, when he sits down Jim to discuss the quarter and path forward tonight on Mad Money.

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