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The Ratings Game

July 15, 2021, 11:59 a.m. EDT

Estee Lauder upgraded as department store sales sink but e-commerce jumps

Tonya Garcia

Estee Lauder Co. has seen North American department stores sales drop to just 6% of the beauty company’s total sales over the last 20 years, down from 46%, part of a channel shift that drove an upgrade of the stock at Raymond James.

Raymond James moved Estee Lauder’s rating up two notches to strong buy from market perform with a price target of $355.

E-commerce has risen to 30% of total sales from 20%-to-25% pre-pandemic. And sales in China total about 25%.

Certainly, Estee Lauder (NYS:EL) will benefit from the world re-opening after the COVID-19 pandemic. But analysts say there’s more to Estee Lauder’s growth than the resumption of travel, parties and events.

See: Levi Strauss gets a boost from changing waistlines during the pandemic

“Powering the company is a more diversified, margin accretive growth engine as Estee Lauder proactively shifts its presence towards China, skin care, and e-commerce, which offer more growth and more profit,” Raymond James wrote.

“The combination of an attractive category and the company’s mix shift should drive upside for Estee Lauder versus what the market is pricing in.”

Estee Lauder stock has gained 22.4% for the year to date while the S&P 500 index (S&P:SPX) is up 16.1% for the period.

The upgrade was part of a number of upgrades and initiations in the beauty and personal care space at Raymond James.

Ulta Beauty Inc. (NAS:ULTA) was upgraded to outperform from market perform with a $395 price target, with the retailer seen as a potential beneficiary of a number of post-COVID trends.

“Ulta benefits from a number of tailwinds as both in-store shopping and the beauty market recover, with innovation picking up after a number of launches were shelved last year,” Olivia Tong wrote in a note.

Ulta Beauty shops are heading to Target Corp. (NYS:TGT) this year.

Sally Beauty Holdings Inc. (NYS:SBH) was upgraded to market perform from underperform, and while Tong doesn’t see Amazon.com Inc. (NAS:AMZN) as a big threat, the company is still facing stiff competition.

“While Sally Beauty has a defendable moat around hair care/hair color, there is significant competition in near-neighbor categories,” the note said. “We do not see Amazon as a formidable near-term threat, but other retailers could continue to challenge Sally Beauty and make further investment necessary.”

Also: Honest Co. CEO ready to face big-name competition like P&G and Revlon with ‘clean’ brand strength

Sally Beauty was recently upgraded at Cowen as well.

And Edgewell Personal Care Co. (NYS:EPC) , parent company to shave brands like Schick, feminine hygiene brands like O.B. and sun care brands like Banana Boat, was initiated at market perform.

Tong says the company faces competition from brands like Gillette and cost inflation could be a challenge, but a “well-recognized brands” and a “return to normalcy” should be tailwinds.

Link to MarketWatch's Slice.