Individual Company Analysis: Estee Lauder Company

 

Estee Lauder Company, Inc is an American company specializing in the manufacture and sales of skin care and hair care products specially designed for use by women. In addition to the company’s prestigious skin care products, the company has also ventured into the production of makeup and fragrance, so as to build on the company’s brand. With the headquarters in New York, the company has managed to build itself into one of the most recognized beauty brands in the world.  Accordingly, the company has successfully managed to employ low-cost and high volume business strategies, all of which have played a role in the company’s financial growth and development.

This paper presents an individual company analysis of Estee Lauder Company Inc. The paper provides a financial analysis, internal analysis, as well as, an external analysis of the company in its industry. The paper also provides a comparison of the company’s financials with those of its competitors for the attainment of a proper comprehension of the analysis to be carried out. Conclusively, the paper examines the possible recommendations for the company, illustrating how these recommendations can be beneficial to the company.

Financial Analysis

In comparison to other organizations in the same industry, Estee Lauder Company Inc’s  has proved itself as a financially decent company in the industry. This is clearly illustrated in the company’s ability to maintain a proper balance between its income and expenditure, which allows the company to enjoy profitability at its maximum. To conduct a proper financial analysis, one must first consider the company’s financial statements for the last two operating periods. Additionally, the competitors’ financial statements also have to be considered so as to provide a comparison of this. Estee Lauder’s financial strength and stability is illustrated in table 1, 2 and 3.   Table 1 illustrates the change of the company’s financial between the current financial operating period and the previous financial operating period. Accordingly, the table indicates positive growth between these financial periods, which in turn illustrates the current financial state of the company.  Evidently, the company’s revenue are on the increase as illustrated in the table, a trend that has been common for the company in the last three years. This increase is in comparison with the previous years that the company has been in operation, and as illustrated the financial changes as presented in percentage form are positive, which is an illustration of an increase in revenue. However, some of the changes are presented as negatives, which when translated financially, illustrate the company expenses that present an increase in sales and a decrease in costs.  The company’s production activities are experiencing what can be termed as upward mobility, based on the statements produced for the last three financial years. Accordingly, this upward mobility is linked with the fact the company has managed to improve their resource management and technologies, while at the same time, reduce the variable costs incurred during manufacturing of products. Interestingly, the company illustrates steady financial improvement with the possibility of even more growth and development in the future.

Table 2, on the other hand, presents financial information regarding the common size statements for Estee Lauder Inc, as well as, its competitors. This information is based on certain variables including revenue and sales, and will be used to illustrate the factors that make this company stand out from its competitors in relation to financial management and control. Accordingly, information presented in table 2 indicates that Estee Lauder is far much financially efficient than its competitors. The revenue and sales cost as illustrated on the common size statement confirms the earlier notion that the company utilizes proper technologies, as well as, reduced costs for the sustenance of their financial health and stability.  Additionally, this strategy is further brought out when compared to the company’s competitors as the statements visibly illustrate the company’s ability to utilize these two strategies for the attainment of a competitive advantage.  This is achieved though a comparison of the company’s net income with that of its competitors for common share. According to the information presented on the table, Estee Lauder’s return is three times that of its competitors, thus implying the company as one of the best investment opportunities in the industry.

Conclusively, table 3 presents the financial ratios for Estee Lauders Inc, as well as, that of its competitors. The financial  ratios presented in this table clearly indicate that the company is slightly above its competitors in terms of financial performance. Evidently, the company has very little debt and liabilities that is calculated in the quick ratio, current ratio as well as, the ratio of debt to equity. The company’s ability to sustain minimal debt and liabilities makes it the best possible investment in the industry, as it demonstrates a lower risk of investment for potential investors in the industry. Because the debts incurred by the company appear as being substantially small, potential investors may also risk the possibility of being termed as being unable to have leverage over its competitors.  This is because of the common belief that companies that lack leverage have less returns on investment, which may be as bad for the company as it is good.

Table 1: Change in Financials

Estee Launders Inc.
Period Ending June 30 2011 June 30 2010 % Change
       
Income Statement      
Total Revenue      
Cost of Revenue      
Gross Profit      
       
Operating Expenses      
Research Development      
Selling General and Administrative      
Non Recurring      
       

Table 2: Common Size Statement for Case Firm and Closest Competitors

Table 3: Financial Ratios for Case Firm and Closest Competitors

Internal Analysis

Estee Lauder Inc has established itself as one of the leading companies, if not the leading company in the cosmetic industry. Its financial strong hold, as well as, its customer share has been responsible for the company’s success, and for that reason, an internal analysis is necessary to understand the application of this. Accordingly, three main factors have been identified as the company’s strengths including the company’s overall financial position, finances by products and price. In relation to financial position, the financial analysis carried out previously provides evidence of how the company’s financials are great strengths for the company. Accordingly, the financial statements illustrate that the company has the ability to balance its operations costs and revenues in such a way that it maintains its fair share of profitability.  A closer examinations of the financial statements illustrates a 3% increase in the company’s revenues owing to the recent growth of the company’s products as is branches out into the production of new products.  Additionally, the net profit incurred by the company also increases with every financial year, which reflects a growth of sales in the company. This is, however, not in America alone, but also in other geographical regions that the company has attained a significant market share size.  Relevantly, the company’s operating income has decreased by 15%, whereas the company’s long-term debts have reduced by 4% in the last three years.  Another strength identified for Estee Lauder Inc is finances by product, which refers to the amount of money made by the company for each product they sell individually. Accordingly, in the last three financial years, the finances by product have increased by 2%, illustrating the growth of sales owing to the launch of new products. When all of the sales are combined together, the net sales for the company are increased by 6%, which in turn reflects the growth the company incurred owing to the sale of individual products. Estee Lauder’s last strength I the price, which is a strategy that they have managed to successfully implement for the financial growth and development of their company. Accordingly, most of the company’s competitors focus on high-end customers, something that this company has gone against in the marketing and sale of its products. Estee Lauder has focused on the middle-income and low-income earners, thus making the sale of their products much easier in the market.

Interestingly, the Estee Lauder’s strengths are also the company’s weaknesses, as they both have their advantages and disadvantages. In relation to financial position, the increase in sales may be a disadvantage to the company, as the company is forced to put an equal amount of effort to sustain these sales. For that reason, the cost of sales increase as the company sales increase, which forces the company to incur costs that they would have otherwise used for investment purposes. Finances by products have also been proven to be a disadvantage to the company, thus the probability of being weaknesses for the company.  Whereas some products may record a large number of sales hence greater return for the company, others do not provide the same return on investment for the company, thus putting the company in a risky position. Evidently, as the net sales for some of their company products increase, others, such as the fragrances are at a constant decline, which hurts the financial state of the company.  Conclusively, the chief threats to Estee Lauder Inc include declining subsidies and government regulation, especially of beauty products that have been under constant watch in the last few years.  By employing the right strategies, the company can overcome its competitors and gain competitive advantage in the cosmetic industry. The company should consider business strategies that build on t5he company strengths and lessen the weaknesses for a better financial state than is being experienced by the company at present.

External Analysis

The beauty and cosmetics industry in America is slowly gaining momentum as the market share continues to grow each year. This industry has successfully managed to convince their consumers to demand more products and services, which have in turn secured an increase in sales for most of the companies operating in this industry. Most of the consumers making up the market share for this industry include women of all ages, all of whom are old enough to use cosmetics. For that reason, the market share for this industry will endure constant demand, as women use cosmetics for a larger part of their lives. Accordingly, companies operating in this industry need to develop products and services that suit the client’s needs, and at the same time are available for all the consumers. Evidently, Estee Lauder Inc has recognized the demands of its markets, and has, therefore, developed products that not only meet the needs of the consumers, they are also affordable to the consumers. Accordingly, when compared to its competitors, it is clear that the company provides the cheapest products, thus  allowing a growth of sales and market share for the company.  The company’s key market is women above the age of 18, who are not willing to spend too much, that they cannot sustain their purchase of the firms products, and at the same time, not too little that they question the quality of the products they buy. The challenges that Estee Lauder may face in relation to this strategy is the probability of the company’s competitors to take up a similar business strategy, which might force the company to be pushed out of the industry. Companies such as Lo’real have provided Estee Lauder with its market share because of their high product prices. If the companies consider the possibility of reducing their prices, then the company might lose its market share in the industry. Most of the company’s competitors are larger and a bit more profitable when considered from the operations cost perspectives. Most of the company’s competitors are also companies that have properly branded themselves and are acknowledged as strong brands in the industry and the possibility of taking up the same business strategy  would definitely put Estee Lauder out of business. In general, the company’s external environment is experiencing a rapid growth, which has in turn forced the company, as well as, most of the competitors to develop business strategies that will keep them in the market and ensure profitability for their companies.  Only companies that have the ability to withstand the threats and weaknesses while working on their strengths will succeed in this environment.


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