JPM研报 EL

Completed 20 Mar 2017 09:13 PM EDT
Disseminated 21 Mar 2017 12:15 AM EDT

North America Equity Research
21 March 2017
Initiation
Overweight
The Estee Lauder Cos EL, EL US
Price: $86.51
The Beauty of Fast Growing Premium Categories;
Price Target: $100.00
Initiating Coverage with an Overweight
We initiate coverage of Estee Lauder (EL) with an Overweight rating and a Dec- Beverage, Household & Personal
17 price target of $100. ELs exposure to high-growth premium color cosmetics Care Products
gives the company the highest rate of organic growth in our coverage universe Andrea Teixeira, CFA
AC
(mid- to high-single digits vs. low-single digits). That growth should flow into (1-212) 622-6735
EPS and cash flows given its high ROE (~33%) and free cash flow conversion andrea.f.teixeira@jpmorgan.com
rate. We believe concerns over department store closures and weak mall traffic are Bloomberg JPMA TEIXEIRA <GO>
overdone, as EL has been able to more than offset these headwinds with Christina Brathwaite, CFA
alternative distribution under Sephora and online. As the Worlds leading (1-212) 622-0149
christina.m.brathwaite@jpmorgan.com
premium beauty player, EL benefits from the selfie obsessed generations, who
Peter K Grom
consume an outsized amount of online make-up tutorials. We believe these drivers
(1-212) 622-4876
will allow EL to deliver its long-term goal of double-digit EPS growth in local peter.k.grom@jpmorgan.com
currencies in FY18. J.P. Morgan Securities LLC
Secular trends remain supportive of strong top-line growth in Beauty Price Performance
ahead of other HPC categories. Beauty sales, in particular color cosmetics,
105
have been outperforming broad personal care due to increased use of selfies and
95
beauty tutorials. This trend has been driving 6% color cosmetics growth $
globally over the past five years, and is expected to drive 4% growth over the 85
next three years, according to Euromonitor. 75

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
EBIT margin expansion targets seem achievable. EL is the biggest spender EL share price ($)
S&P500 (rebased)
among HPC and beverage names in our coverage universe. Its SG&A rate is a YTD 1m 3m 12m
Abs 11.9% 1.8% 11.4% -8.1%
remarkable 65% (vs. 33%, on avg., for our HPC coverage), which the company Rel 6.8% 0.9% 6.9% -23.8%
defends as marketing investments, beauty consultants who drive sales growth,
and the costs of the retail footprint. Given this outsized SG&A spend, we see
ample opportunity for EL to reach its LT target of 110-150bps EBIT margin
expansion by FY19, with modest gross margin expansion.
Valuation looks relatively attractive, as the sector has re-rated. While we do

not view 24x CYP/E17E as cheap, we argue that EL offers an appealing relative
investment opportunity given structural industry trends that support the
companys long-term growth profile. EL has been the rare security not
benefitting from the recent HPC sector re-rating, despite having the largest
SG&A savings potential and top-line growth opportunity, in our view. We see
ELs 17% discount to Beauty peers (COTY, OR, Amore Pacific, Shiseido) as an
attractive entry point.
The Estee Lauder Companies Inc. (EL;EL US)

FYE Jun 2016A 2017E 2018E 2019E Company Data
EPS-Recurring ($) Price ($) 86.51
Q1 (Sep) 0.82 0.84A 0.94 1.03 Date Of Price 20 Mar 17
Q2 (Dec) 1.22 1.22A 1.36 1.51 52-week Range ($) 97.48-75.30
Q3 (Mar) 0.73 0.72 0.81 0.92 Market Cap ($ mn) 31,637.85
Q4 (Jun) 0.43 0.55 0.60 0.69 Fiscal Year End Jun
FY 3.20 3.33 3.72 4.15 Shares O/S (mn) 366
Bloomberg EPS FY ($) 3.17 3.33 3.71 4.15 Price Target ($) 100.00
Adjusted P/E FY 27.0 26.0 23.3 20.9 Price Target End Date 31-Dec-17
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 31 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
Andrea Teixeira, CFA North America Equity Research
(1-212) 622-6735 21 March 2017
andrea.f.teixeira@jpmorgan.com
Table of Contents
Investment Thesis ....................................................................3
Risks to Rating and Price Target ............................................4
Top-Line Trajectory ..................................................................7
Revenue Growth of 6-8% Depends on EM.............................................................10
Acquisitions Offsetting Organic Slowdown ...........................................................13
Organic Growth Well Above Peers ......................................14
Gross Margins at Peak Levels...............................................15
Opportunity to Lower SG&A for Long Run ..........................16
Long-Term Outlook to Expand EBIT 110-150bps..............................................17
but SG&A Savings Are Limited in the Near Term.............................................17
Strong Free Cash Flow Generation.......................................18
Underleveraged Balance Sheet .............................................20
Earnings Outlook....................................................................21
Back-End Loaded Growth in 4Q17 (Calendar 2Q17) .............................................21
Earnings Growth to Reaccelerate in FY18 .............................................................22
Border Tax Adjustment Dilutive to Earnings .......................22
Valuation .................................................................................23
Price Target Derivation .........................................................................................25
Financial Statements..............................................................27
Pricing and valuation on cover as of March 20, 2017s close; all other pricing and
valuation as of March 17, 2017s close.
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Investment Thesis
Estee Lauder Right Category (Makeup) + Strong Mix (Premium) = Above-Peer Sales
We believe Estee Lauder offers the best organic growth opportunity among large-cap
(EL) HPC in our coverage universe, with its long-term sustainable target of 6-8% local
Overweight currency sales growth versus the low- to mid-single-digit top-line growth trajectory
across the rest of our HPC coverage. Breaking down the drivers, ELs annual target
should be driven by ~200bps growth from pricing (FX offsets and premiumization),
~200-300bps from distribution expansion (new retailers, regions, and company-
owned stores on a brand by brand basis), and ~200bps from innovation driving
comparable store sales growth. We view this target as sustainable over the next few
years given the secular trend toward increasing makeup use, combined with
consumer preferences to trade up in beauty products, with EL the best positioned
within the market to capitalize on trends.
Secular Beauty Trends Are Here to Stay

In tandem with the rise of social media platforms such as Facebook and Instagram
has come an increased obsession with selfies, which in turn has driven a constant
push for women in particular to look their best at every moment. This desire,
combined with increasing video beauty tutorials (both sponsored and non-
sponsored), has made complicated makeup techniques like contouring more
accessible to the everyday consumer, driving increased sales across the beauty
category in general. This trend has been driving ~3% annual growth globally in
overall color cosmetics over the past five years, according to Euromonitor, with
premium color outpacing mass at ~6% growth annually. Looking ahead,
Euromonitor expects premium cosmetics to grow ~4%+ over the next three years,
and we view EL as the best positioned within our coverage to continue to benefit
from this trend with ~42% of total sales driven by cosmetics.
ELs Scale Advantage Boosts Plug and Play M&A Opportunity

Besides the tailwind from a high growth category (Beauty), EL is the largest
premium player in this segment, with LVMHs (covered by M. Flouquet) cosmetics
business ELs largest direct competitor. Assuming the premium cosmetics channel
continues to grow at a faster pace than mass, we see ELs dominant share in the
category as sustainable longer term given the difficulty for entrepreneurial brands to
gain widespread distribution quickly. We believe EL will continue to drive
sustainable revenue growth through its plug and play acquisition model in which the
company leverages its global selling platform to expand the reach of acquired brands.
To this end, the 2016 acquisitions of By Kilian, Becca and Too Faced cosmetics are
expected to drive ~180bps of revenue growth in FY17 alone.
US Department Store Concerns Appear Overblown

The rapid deceleration in mall traffic trends at US department stores and tourist retail
stores pressured sales growth in FY16 and will likely continue to pressure sales in
FY17. ELs exposure to Macys (~22% of North American sales, covered by M.
Boss) has been of particular concern given plans to close 100 stores in FY17 (out of
659 stores at the end of FY16). While certainly a headwind to sales growth, we see
store base rationalization as a long-term net positive for the health of ELs brands
and will likely be margin accretive for the company, as these were low productivity
department stores that still carried the cost of the selling space and beauty associates.
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(1-212) 622-6735 21 March 2017
In addition, we believe sales contraction from the department stores can be offset by
continued growth from the specialty retail channel, with ULTA (covered by C.
Horvers) targeting 1,400-1,700 stores (from ~880 today) and LVMH planning to
open ~150 new stores annually.
Exposure to Emerging Markets Is Still a Net Positive

There are many white spaces for EL expansion globally, including in the US and
developed Europe. EL derives 30% of its sales from emerging markets. We believe
EM growth will continue to outpace DM on a currency-neutral basis, as underlying
fundamentals of a rising middle class and urbanization increases demand for
aspirational items such smartphones with cameras and internet in this increasingly
digital world.
Targeted 110-150bp EBIT Margin Opportunity Driven by SG&A Reductions

EL has the highest SG&A rate across our HPC coverage universe at ~65% vs. ~33%,
on average, driven by outsized marketing investments (~24% of sales vs. average
HPC companys ~8.3%) to drive sales growth as well as a structural difference in
operating model, with EL financing the cost of store beauty associates along with
operating its retail store base. Despite these structural differences, we see room for
EL to right-size its expense base, particularly as sales increasingly move online
versus in-store and US department stores close underperforming stores. To this end,
EL plans to cut costs through its Strategic Monetary Initiative (~$150M in savings)
and Leading Beauty Forward plan (~$200-$300M), which are expected to be fully
realized by FY19, driving 110-150bps of EBIT margin expansion. Within this
context, management expects gross margins to remain above 80% with modest
improvement annually driven by pricing increases and SMI savings (~25% in GM).
Valuation Looks Relatively Attractive.

While we do not view 24x P/E17E as cheap, we argue that EL offers an appealing
relative investment opportunity given structural industry trends that support the
companys long-term growth profile. EL has been the rare security not benefitting
from the recent HPC sector re-rating, despite having the largest SG&A savings
potential and top-line growth opportunity, in our view. We see ELs 17% discount to
Beauty peers (COTY, OR, Amore Pacific, Shiseido) as an attractive entry point. Our
$100 price target is based on 25x our CY1818 EPS estimate of $4.01.
Risks to Rating and Price Target

Slowing Brick and Mortar Traffic
ELs sales are dependent on traffic trends at brick and mortar retailers, with only 6%
of the companys sales generated through the EL-owned websites (i.e. excludes
online sales from retailers). ELs sales can be impacted by traffic fluctuations, as
slower/faster traffic impacts the level of impulse purchases from consumers.
Additionally, given challenging store traffic trends, particularly at mall-based
retailers in the US, some retailers are reducing the size of their store fleets as sales
increasing move online. Notably, Macys accounted for ~9% of ELs sales in FY16
and plans to closed at least 100 stores by January 2017, which should reduce ELs
sales.
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Foreign Exchange Fluctuations

Over 60% of ELs FY16 sales were generated outside of the US, with those net sales
denominated in local currencies such as the euro, British pound, Chinese yuan, Hong
Kong dollar, Australian dollar, and Canadian dollar, among others, which creates risk
that reported sales will be higher/lower than constant currency sales after translating
into US dollars. Additionally, the majority of ELs costs of goods sold are
denominated in US dollars, creating transactional risk to gross profit when currencies
fluctuate. Furthermore, if the proposed tax reform is approved with the border tax
adjustment, the US dollar may appreciate even further.
Fluctuations in Discretionary Spending

Given the discretionary nature of its products, combined with premium pricing, ELs
sales are susceptible to changes in macroeconomic factors that impact discretionary
spending levels. A recession or significant pullback in discretionary spending will
likely have an adverse impact on ELs business if consumers spend less on beauty or
begin to trade down to mass beauty products from premium.
Tax Reform Would Be Net Negative, Assuming Stronger USD

Our sensitivity analysis implies currently discussed tax reform options would create a
~12% drag on ELs FY18E earnings. Our analysis assumes: (1) a 20% US corporate
tax rate; (2) the USD exchange rate adjusts for the new border tax, appreciating by
50% of the new tax rate (i.e. 10%); (3) imported COGS (estimated at ~40% of total
US COGS) are not deductible for taxable income; and (4) interest expense is not
deducted from taxable income. Excluded from this analysis is the potential for
domestic sales to expand if retailers were to reduce shelf space currently allocated to
international manufacturers, such as LVMH, and increase allocation to domestic
manufacturers.
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Company Description
Estee Lauder is the leading global player within the global prestige beauty business,
manufacturing and marketing skin care (43% of FY16 sales), makeup (38%),
fragrance (13%) and hair care (5%). ELs products are sold in more than 150
countries, with 42% of FY16 sales generated in the Americas, 39% in EMEA, and
19% in Asia Pacific. The company manufacturers products under about 30 prestige
brands, the most well-known being Estee Lauder, Clinique, Origins, MAC, Jo
Malone London, Bobbi Brown, and Aveda; the company also has global fragrance
license relationships for select designer brands such as Tommy Hilfiger, Donna
Karan New York, DKNY, Michael Kors and Tom Ford. EL has increased acquisition
activity more recently, purchasing BECCA cosmetics (completed in November 2014)
and announcing a bid for Too Faced (November 2014), with both brands focused on
broadening ELs exposure to younger consumers. Products are primarily
manufactured in the US, Belgium, Switzerland, the U.K. and Canada.
Figure 1: EL's Power Brands
Source: Company Reports, J.P.Morgan
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Top-Line Trajectory
Global Market Expectations Still Solid
According to Euromonitor data, the color cosmetics industry (including mass and
LT EPS Algorithm: prestige) has accelerated from low-single-digit to mid-single-digit growth in the last
Revenue: +6-8% two calendar years (in constant currency). Looking ahead, Euromonitor expects the
global cosmetics industry to continue to grow at a low-single-digit rate annually,
EBIT Margin: +110-150bps
helped by premiumization across the globe, solid growth in China and Asia Pacific
= DD EPS Growth (ex-FX) as a whole, despite the slowdown in mass cosmetics in the US in particular.
Figure 2: Color Cosmetics Still Showing Solid Growth in China and Broadly Asia Pacific
Y/Y Growth in Constant Currency (2015)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2012 2013 2014 2015 2016E 2017E 2018E 2019E
World Asia Pacific China USA
Source: Euromonitor
EL only sells premium Premium Color Cosmetics Driving Growth, Mass Cosmetics Decelerated
cosmetics, a category that
Importantly, within the global cosmetics industry, premium cosmetics growth is
has recently grown much
faster than mass expected to outpace mass, with Euromonitor projecting premium color cosmetics to
grow in the mid-single digits globally in the next years, with outsized expansion in
China and Asia Pacific as a whole.
Figure 3: Premium Cosmetics Driving the Growth, Which Is Positive for Estee Lauder
Y/Y Growth in Constant Currency (2015)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2012 2013 2014 2015 2016E 2017E 2018E 2019E
World Asia Pacific China USA
Source: Euromonitor
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Figure 4: EL Dominates the US Premium Color Cosmetics Market... Figure 5: ...While LVMH Is Better Positioned in China
Estimated Premium Color Cosmetics Market Share in the U.S. (2015) Estimated Premium Color Cosmetics Market Share in China (2015)
Others, 17.7% Others, 19.3% LVMH, 22.2%

COTY, 1.0%
Amway, 1.8% Inter Parfums, 1.2%
EL, 42.6% LG, 1.4%
Chanel, 4.5% MGPIN, 2.5%
Shiseido, 3.7%
LVMH, 5.8%
Amway, 4.6% EL, 15.0%
Shiseido, 11.6% AmorePacific, 9.3%

L'Oreal, 11.1%
L'Oreal, 15.0% Chanel, 9.7%
Source: Euromonitor
Source: Euromonitor
Outsized market growth is largely attributed to social media and the proliferation of
the selfie culture, which encourages social media users to focus more critically on
their appearance. Increasing availability of makeup tutorials is also helping
accelerate cosmetic sales, as the average consumer is able to more easily learn how
to use products as well as preview additional products. To this end, new generations,
in particular the Millennials and Generation Z, have been consuming more makeup
than previous generations. We see this trend continuing going forward, driving
outsized sales growth within the beauty category.
Skin Care Is Not Growing as Fast and Is More Competitive, but Still Solid
The global skin care market is expected to grow at a ~3.5% CAGR over the next five
years, driven primarily by growth in China (~23% of the global market) and the US
(~14% of the market), according to Euromonitor. The premium skin care market, in
particular, within these regions is expected to see outsized growth, with Euromonitor
forecasting China premium skin care sales +9.9% and US skin care sales +4.7%.
The downside risk to these estimates is the share of wallet shifting to color
cosmetics, in particular for Asian consumers. CFO Tracey Travis mentioned that
part of the growth of makeup is driven by the fact that the [sic] Asian women have
discovered make-up. Historically, Asian markets were dominated by sales of
skincare; for example skincare made up ~65% of the market in China historically,
(versus only about 30% of sales in the US). This composition within Asia has been
shifting with ELs total organic sales in the region expanding double digits in 1H17
driven by makeup sales. The penetration delta of makeup and skincare in these
markets points to room for continued makeup expansion in Asia, which could help to
accelerate ELs growth. As color cosmetic sales in Asia continue to rise, EL will
likely see a commensurate deceleration in skincare sales as consumers shift their
spend from skincare to makeup, instead of makeup being an incremental spend,
particularly as the line between cosmetics and skincare continues to blur. We note,
however, that this sales mix shift from skincare to makeup is gross margin dilutive
for EL (skincare gross margins > makeup > fragrance).
While EL should receive a natural tailwind from growth in the overall market,
increasing ecommerce penetration, particularly in China, has allowed smaller brands
to gain mind and market share over large multinational corporations, muting growth.
Over the last six quarters, ELs skin care business has been tempered by slowing
traffic trends at department stores and reduced tourism in the US and Asia, which has
pressured Estee Lauder and Clinique brand sales. We expect sluggish traffic trends
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domestically and abroad to continue to weigh on ELs sales and for ecommerce to
continue outpacing brick and mortar trends, helping smaller brands continue to gain
market share.
Makeup Recently Surpassed Skincare to Become ELs Biggest Engine

Estee Lauders sales were nearly balanced in makeup (42%) and skin care (40%) in
FY16, with the remainder from fragrance (13%) and hair care (5%). The faster
growth in color cosmetics and recent acquisitions (Too Faced and Becca, which are
growing c70% y/y) recently made makeup become more relevant than skin care for
EL. As we discussed before, the distinction between makeup and skin care is
becoming blurrier, with some skin care products such as BB, CC creams, and photo
primers becoming multi-functional. These products offer skin care benefits such as
moisturizing, sunscreen, and anti-aging, while also providing color and intersecting
with bases and foundations.
Figure 6: Cosmetics & Skin Care Represent More than 80% of EL's Sales
FY16 Sales by Product
Hair Care, 4.9% Other, 0.7%
Fragrance, 13.2%
Skin Care, 39.5%
Makeup, 41.8%
Source: Company Filings
Figure 7: EL's Sales Are Geographically Diversified Figure 8: Outsized LC Sales Growth Likely Continues in EMEA and
FY16 Sales by Region Asia Pacific
Annual Local Currency (LC) Sales Growth
Asia Pacific, 19.3% 16.0%
14.0%
12.0%
The Americas,
41.8% 10.0%
8.0%
6.0%
4.0%
2.0%
Europe, Middle East, 0.0%
& Africa, 38.9% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Americas EMEA Asia Pacific
Source: Company Filings
Source: SEC Filings & J.P. Morgan Estimates.
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Revenue Growth of 6-8% Depends on EM

The foundation of ELs growth trajectory is its portfolio of about 30 brands,
anchored by its three largest brands (Estee Lauder, Clinique, and MAC), each
LT Revenue Algorithm:
generating $2B+ in sales for the company and collectively more than $17B at retail
Distribution: +200-300bps prices in CY15, according to Euromonitor, providing stability to the top line. This
Pricing: +200bps stability is augmented by bolt-on acquisitions of smaller brands where EL can use its
global reach to expand distribution, with brands such as Jo Malone, Tom Ford, and
Innovation: +200bps Smashbox all growing double digits. To this end, ELs long-term revenue target calls
= 6-8% Annual Growth for 6-8% constant currency annual revenue growth, driven by 200bps of pricing, 200-
300bps of distribution expansion (partially fueled by acquisition accretion), and
200bps of comparable door growth driven by continued product innovation.
2017
LC growth rate =4-5%. Distribution Expansion to Drive 200-300bps Annual Revenue Growth
1pt reduction to LT plan Management expects 200-300bps of annual revenue growth to continue to be driven
driven by: by selective distribution expansion, increasing door penetration within existing
markets as well as geographical footprint expansion, particularly for newly acquired
- Challenges in US and dept
stores brands as EL leverages its worldwide relationships with retailers. We expect this
growth to be achieved globally, despite the headwinds in the US department stores,
- Middle East and Turkey are in particular given Macys store closures. Products are distributed through limited
challenging
channels with a focus on maintaining the luxury status of each brand, through high-
- Hong Kong struggling end department stores, specialty multi-brand retailers, travel retail, perfumeries,
salons, and spas. The company also operates free standing stores (~1,260 company-
operated stores at the end of FY16; 400+ third-party stores) primarily for MAC, Jo
Malone London, and Bobbi Brown, with plans to continue expanding this store base.
Lastly, EL supports direct ecommerce sites for its brands in about 30 countries, while
its retail partners also provide online fulfillment.
Figure 9: FY16 Sales by Channel
Other, 12%
Perfurmeries, 5%
Brand.com, 6% Department
Specialty-Multi Stores, 46%
Stores, 8%
Freestanding retail
Stores, 11%
Travel Retail, 12%
Source: Company Reports
Meticulously Selective Distribution Strategy on Store and Brand Basis

A fundamental aspect to ELs distribution expansion strategy is the companys store-
level focus on distribution expansion meaning, rather than expanding distribution
by choosing new retail partners solely on a chain level, brand-specific distribution
managers make expansion decisions on a store basis, focusing on the location and
quality of each specific store in order to determine if its a right fit for a particular
brand. To this point, during 2Q17, EL selectively expanded distribution of Clinique
to 50 new Sephora/JCP shop-in-shop locations (out of JCPs 577 Sephora shop-in-
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shops at the end of FY16; JCP covered by M. Boss) and began an initial Estee
Lauder launch into 30 ULTA stores (out of 874 stores by the end of FY16) and
ULTA.com.
Management uses similar caution when expanding internationally, using its

ecommerce platforms to generate and gauge demand levels within a region before
formally entering that market with a brick and mortar store. Using this ecommerce
strategy along with incremental marketing spend allows EL to enter a market with
pull demand, giving a reasonable level of assurance to the depth of customer
demand in the new region prior to making large investments. For example, EL
currently has brick and mortar exposure through retailers in China in over 100 cities
(with aspirations to eventually expand this to 300+ cities), but its ecommerce
operations allow it to reach final consumers in 750 cities. This method helps
management determine the level of demand and which brands will be most
appropriate in which region, noting distribution expansion decisions occur on a brand
level.
Specialty Retail Store Growth Offsetting US Department Store Weakness

Distribution opportunities are also being driven by store builds at key retailers such
as Ulta (Ticker: ULTA; covered by C. Horvers) and Sephora (owned by LVMH;
covered by M. Flouquet), with Ulta targeting 1,400-1,700 stores (from ~874 today)
and Sephora targeting about 150 new stores per year in addition to continued shop-
in-shop expansion within JCPenney stores. Noteworthy, EL still has opportunity to
expand its product offering within existing Ulta doors, with ULTA announcing on its
4Q16 earnings call that the company will be launching MAC products in select doors
beginning in May 2017, with plans to reach more than 100 stores by the end of FY17
(i.e. MAC will have distribution expansion through ELs 1HF18).
While the specialty retail channel continues to build stores, their expansion will be
partially offset by continued store count contraction within US department stores,
with brick and mortar traffic continuing to decline as shoppers increasingly purchase
products online. Within this framework, Macys announced 100 store closures in
August 2016 (with the majority closed by early spring 2017); 9% of ELs total FY16
sales were generated by M, which is equivalent to 22% of the companys North
American business. Although M store closures will present a headwind to sales for
EL, we see closures as margin accretive for EL, as the company will no longer have
to invest makeup associates in low-traffic, underperforming real estate. The closures
will likely continue to create a distribution headwind for EL until the company laps
the majority of closures in Spring 2018 (i.e. ELs 4QF18). In an attempt to offset
these closures, management aims to increase distribution penetration in stores near
closed Macys units in the hopes of a sale transfer at brick and mortar in addition to
the sales that will naturally transfer online. A key problem to the shift to online
purchases within the beauty space is that it limits the upsell opportunity that
traditionally exists when a customer is interacting with a beauty sales representative
and/or impulse purchasing. As a result, this increasing shift to online could pressure
units per transaction.
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Table 1: Department Store Footprint Contracting While Specialty Is on the Rise
Ticker Analyst Rating Store FY16 FY17E FY18E CAGR

M M. Boss Neutral Macy's 597 582 555 -3.6%
Bloomingdales 55 54 54 -0.9%
Bluemercury* 101 104 134 15.2%
DDS M. Boss Underweight Dillard's 293 291 289 -0.7%
JCP M. Boss Neutral J.C. Penney 1,014 879 869 -7.4%
Sephora Shop-in-Shops* 577 650 690 9.4%
JWN M. Boss Underweight Nordstrom (Full Line) 118 120 122 1.7%
ULTA C. Horvers Overweight Ulta 974 1,074 1,174 9.8%
LVMH M. Flouquet Overweight Sephora* 2,300 2,450 2,600 6.3%
Source: SEC Filings & JP Morgan Estimates; *As estimated by A. Teixeira team
Pricing Increases Projected to Drive ~200bps of Revenue Growth

Management foresees opportunity to continue increasing pricing going forward,
driving ~200bps of revenue growth annually. EL has a methodical approach to
increasing prices, with the company looking at products prices on a SKU basis
within each individual market to determine the appropriate level increases given the
elasticity of demand in the market. The company has a wide breadth of price points
ranging from entry-level prestige products such as Clinique and MAC, to premium
price points with La Mer and Tom Ford. Price increases take inflation and currency
changes into account in order to preserve gross margins, in addition to product
innovation, as continued product improvement and differentiation allows EL to
command a premium. To this point, the company increased prices in January 2017,
which should help drive top-line acceleration in 2H17.
Chinese Import Tariff Changes Unlikely to Weigh on Earnings

In a bid to spur domestic consumption, Chinese officials reduced the average
consumption tax on premium makeup and fragrances to 15% (from 30% previously)
and imposed a new 15% tax on skincare (previously untaxed) beginning in October
2016. In response, certain competitors such as LOreal and AmorePacific reduced
pricing to maintain competitive positioning and EL followed suit, reducing prices on
a select amount of SKUs (not on all SKUs). Since then, EL has not seen a material
change in profitability for the region, with sales up double digits in 2Q17, driven by
La Mer and makeup trends. Noteworthy, management does not expect a material
impact going forward, citing a historical precedence with a similar tax rule change
three years ago that also resulted in the company reducing prices on SKUs in
response.
Comparable Store Growth through Innovation

ELs ability to obtain additional market share should be driven by the companys
focus on launching products with meaningful innovation. Over the last few years,
product innovation has funded 20-24% of revenue growth. Management defines new
innovation as products that satisfy a need in a meaningfully different way, excluding
products that are color extensions (like a new lipstick shade) or capsule collections.
Meaningful technological advancements also allow EL to command higher pricing
on products, furthering bolstering its goal to generate 200bps of revenue growth
through pricing.
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Acquisitions Offsetting Organic Slowdown

ELs acquisition strategy should continue to augment the companys sales growth,
boosting FY16 revenue growth by 50bps and expectations for an additional 180bps+
lift in FY17 following the acquisitions of BECCA cosmetics and Too Faced (largest
acquisition in history). EL is able to plug new brands into its existing infrastructure,
leveraging its vast distribution platform to increase the acquired brands retail
presence within pre-acquisition markets as well as international regions, expediting
the brands growth. CEO Fabrizio Freda mentioned that when they acquired M.A.C.
or Bobbi Brown, the brands generated 90% of the sales from North America. Today,
M.A.C. only derives 30% from North America.
Table 2: EL Has Been Accelerating M&A Most Recently in Makeup

Date Acquirer Target Value in Sales Sales EBITDA
Announced US$mn Multiple Multiple
Nov-16 Este Lauder Too Faced Comestics LLC 1,450 270 5.4 24.4
Oct-16 Este Lauder Becca Inc 200 80 2.5 27.1
Feb-16 Este Lauder By Kilian SAS n/a n/a n/a n/a
Oct-15 Este Lauder Have & Be Co Ltd n/a n/a n/a n/a
Jan-15 Este Lauder Parfums Frederic Malle n/a n/a n/a n/a
Dec-14 Este Lauder Glamglow Inc. n/a n/a n/a n/a
Oct-14 Este Lauder L Rodin LLC n/a n/a n/a n/a
Oct-14 Este Lauder Le Labo Inc n/a n/a n/a n/a
May-10 Este Lauder Smashbox Beauty Cosmetics 256 n/a n/a n/a
Sep-08 Este Lauder AGI Dermatics n/a n/a n/a n/a
Jul-08 Este Lauder Forest Essentials n/a n/a n/a n/a
Aug-07 Este Lauder KPRKAR LLC n/a n/a n/a n/a
Jul-07 Este Lauder Ojon Corp n/a n/a n/a n/a
Apr-06 Sun Capital Stila Corp n/a n/a n/a n/a
Feb-04 Jane & Co Jane business n/a n/a n/a n/a
Jul-03 Este Lauder Rodan & Fields skin care line n/a n/a n/a n/a
May-03 Este Lauder Michael Kors Fragrances n/a n/a n/a n/a
Jan-03 Este Lauder Darphin Group n/a n/a n/a n/a
Aug-01 Este Lauder Cela Cosmeticos SA n/a n/a n/a n/a
Jun-00 Este Lauder Bumble & Bumble LLC n/a n/a n/a n/a
Apr-00 Este Lauder Gloss.com n/a n/a n/a n/a
Oct-99 Este Lauder Jo Malone Ltd. n/a n/a n/a n/a
Aug-99 Este Lauder Stila Cosmetics Inc n/a n/a n/a n/a
Feb-98 Este Lauder Make-Up Art Cosmetics Inc n/a n/a n/a n/a
Nov-97 Este Lauder Aveda (US) 300 n/a 2.7 n/a
Sep-97 Este Lauder Rights to beauty products n/a n/a n/a n/a
Sep-97 Este Lauder Sassaby Inc n/a n/a n/a n/a
Oct-95 Este Lauder Bobby Brown n/a n/a n/a n/a
Source: Company reports, Bloomberg, J.P. Morgan estimates
Towards the end of 2016, EL closed on the acquisitions of BECCA cosmetics

(completed in November) and Too Faced (completed in December). These two
brands are estimated to have generated a collective $340M in sales CY16 (about 7%
inorganic growth relative to ELs total makeup sales of ~3% in total), growing about
70% for the year. BECCA (estimated ~$70M in sales in CY16) is a leader in
complexion products with a multicultural consumer focus and a strong presence in
North America through Sephora, Ulta and select department stores. Too Faced
(estimated ~$270M in sales in CY16) produces a feminine line of cosmetics for eyes,
lips, and face, and has a particularly strong position with Millennials and Generation
Zs (85% of consumers under 40, according to management).
In FY17, acquisitions are expected to drive ~180bps of sales growth (with Too Faced
driving 100bps), fueling revenue growth, offsetting slowdown seen in 1H, and
allowing management to maintain guidance of +6-7% local currency sales growth.
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The long-term opportunity for each of these brands is continued international

expansion over the next 3-5 years with EL able to leverage its robust international
distribution network, particularly in the travel retail arena, to further accelerate brand
growth, noting an impressive 70% sales growth in CY16.
Organic Growth Well Above Peers

Fastest Sales Growth among HPC Stocks in Our Coverage Universe
EL counts on three main advantages in its business model: delivering high (1) local
currency top-line growth in the high-single digits, as it is positioned in a premium
category that is growing the fastest; (2) gross margins of 80%+ (the best in the
sector) due to the aspirational nature of its products; and (3) returns including a top-
tier ROE, ROIC, and FCF conversion with an unlevered balance sheet that allows for
a robust dividend payout.
Figure 10: Estee Lauder Tops Group in Organic Growth

% Growth Y/Y Organically - Fiscal Year
12% 10.3% 10.6% 9.8%
9.3%
10% 8.2%
7.1% 6.7%
8%
6% 4.5% 4.0%
4% 2.9%
2%
0%
-2%
-4%
-6%
-8%
-10%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
CHD CL CLX KMB NWL PG EL
Source: Company reports and J.P. Morgan estimates.
Figure 11: and Delivers Highest Gross Margin in Coverage Universe

% Gross Margin - Fiscal Year
90%
78.1% 79.5% 80.1% 80.3% 80.5% 80.6%

80% 74.8% 76.7%
74.8% 74.4%
70%
60%
50%
40%
30%
EL COTY Average CPG ex EL
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Gross Margins at Peak Levels

Gross margin reached an all-time high coming out of FY16 at 80.6%, above the
average gross margin of 76.4% from FY99-FY15. Looking ahead, management sees
the opportunity for gross margins to remain at around 80%, benefitting in part from
SMI initiatives with about 25% of the expected $150M in FY17 savings flowing
through gross margin. Despite managements confidence, we see the potential for
downside to ELs gross margin, primarily driven by mix shift and FX. On mix shift,
we believe mix will continue to be a headwind for EL as makeup continues to
outperform skincare (gross margin rank: Skincare > Makeup > Fragrance) and key
international markets underperform (Hong Kong, the U.K., and the Middle East in
particular); both should be partially offset by increasing sales from DTC channels
(freestanding stores + brand.com businesses = ~17% of sales), with EL receiving
retail prices on these sales instead of wholesale.
Figure 12: Expecting Gross Margins Roughly Flat Going Forward

Annual Gross Margin Rate History & Forecast
81.0% 80.3% 80.5% 80.6% 80.3% 80.3%
80.1%
80.0% 79.5%
79.0% 78.1%
78.0%
76.7%
77.0%
76.0%
75.0%
74.0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Gross Margin
Source: SEC Filings & J.P. Morgan Estimates
On foreign exchange, the USD appreciation will likely continue to be a headwind for
EL, particularly given the sharp currency re-ratings following Brexit and the US
Presidential election. Although the company increased prices in January to offset
some of the currency devaluation, price increases alone are likely not enough to fully
offset the currency impacts, as some demand elasticity has been seen particularly in
the U.K. in the wake of the GBPs 17% YOY decline following Brexit (noting the
U.K. generates 9% of sales, excluding the travel retail channel). These headwinds
should be partially offset by the aforementioned SMI initiatives benefiting from
sourcing efficiencies and reduced obsolescence charges.
Modest Gross Margin Expansion Ahead

Going forward, management has guided for modest gross margin improvement over
the next few years. For the balance of FY17, we expect a 44bp decline and then a
10bp recovery from that lower base in FY18.
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Table 3: EL's Gross Margin Trends Have Been Negative the Last Two Quarters
In Basis Points, change Y/Y
Gross Margin Change Components (bps): 1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17 3Q17E 4Q17E FY17E
Mix Shift 30 (40) (30) (37) (20) (20) (50) (50) (20) (35)
Pricing / Promotions (20) (10) 30 2 0 0 0 20 20 10
Obsolescence Charges (10) 0 0 53 10 (20) (50) 0 0 (18)
Manufacturing Variances 0 50 80 28 40 60 0 0 0 14
FX 0 0 (20) (22) (10) (50) (20) (20) 0 (22)
Other 3 (3) (9) (19) (8) 3 32 0 0 9
Total Gross Margin Change 3 (3) 51 5 12 (27) (88) (50) 0 (42)
Opportunity to Lower SG&A for Long Run

ELs high SG&A ratio of 65% of sales eats up a good portion of the 80% gross
margin, leaving a more modest 15% operating profit margin. As we look at the
components of SG&A, marketing is probably difficult to cut given that the products
have a short shelf life. However, there could be more efficiencies in overhead that are
not consumer-facing.
Figure 13: ELs Operating Margin Is Below Most Peers Despite the c80% Gross Margin
% Operating Margin - Fiscal Year
30%
25%
20%
15%
10%
5%
0%
CHD CL CLX KMB NWL PG COTY EL
Even excluding marketing and R&D expenses, EL spends much more than peers in
SG&A ex-marketing and R&D. Part of the variance is structural, as EL sales to
department stores requires EL to bring its own sales reps to the stores, and Sephora
reportedly charges 60% margin to bring the product to its shelves. We view these as
opportunities to trim costs.
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Figure 14: ELs SG&A Is Above Peers Due to Sales Force but Has Room to Improve
% SG&A Ratio - Fiscal Year
70%
60%
50%
40%
30%
20%
10%
0%
CHD CL KMB COTY PG CLX EL
Source: Company reports.
Long-Term Outlook to Expand EBIT 110-150bps

ELs long-term outlook calls for 110-150bps of EBIT margin expansion by the end
of FY19 from 15.5% during FY16, primarily driven by cost reductions related to
both the Strategic Monetary Initiative (SMI) and the Leading Beauty Forward
programs. Although this EBIT margin expansion target assumes 6-8% revenue
growth, there is room for management to flex SG&A investments down to offset
softer-than-expected top-line trends.
Figure 15: EBIT Margin History & Forecast

18.0% 16.6% 15.9%
15.2% 14.9% 15.5% 15.4%
16.0% 14.2%
14.0% 13.0%
11.2%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
EBIT Margin
Source: SEC Filings, J.P. Morgan Estimates
but SG&A Savings Are Limited in the Near Term

EL has announced a targeted $150mn in SMI savings in FY17 and the opportunity
for $200-$300M in savings longer term through the Leading Beauty Forward (LBF)
initiative. Those savings should come primarily from indirect procurement, A&P
optimizations, supply chain initiatives and selling effectiveness, some of which will
be used to invest behind the companys newly acquired brands and omni-channel
capabilities. We see relatively limited opportunity for SG&A leverage in the near
term due to the investments needed in order to reap LBF savings. More specifically,
management has guided to $600-$700M incremental in costs related to implementing
the teams and infrastructure needed in order to generate LBF savings, with these cost
reductions near-term weighted and flowing through in FY17 and FY18. The $200-
$300M savings are expected to begin flowing through gradually beginning in FY18
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and ramping up through FY20. In the meantime, EL will be partially offsetting the
LBF investments with SMI savings with about 75% of the announced $150M total
(~$113M) benefitting SG&A. We also note that EL should experience some SG&A
savings related to the 100 Macys store closures, as the company will no longer incur
costs affiliated with Beauty Advisors formerly employed in those stores. Fixed costs
related to opening additional stores will continue to pressure the SG&A rate given
the accelerated pace (140-150 new stores planned in FY17), as it typically takes 2-3
years before the stores become margin accretive.
Figure 16: SG&A Savings Should Continue to Drive EPS Growth

SG&A Rate History & Forecast
66.0% 65.6%
65.5%
65.5% 65.3%
65.1% 65.1%
65.0%
65.0% 64.8%
64.6%
64.5%
64.0% 63.7%
63.5%
63.0%
62.5%
SG&A Rate
On the 2Q17 conference call, management highlighted that they are managing
expenses tightly in order to offset the softer top line. EL has cut back on travel,
consulting projects, and some hiring.
Strong Free Cash Flow Generation

EL has a history of generating strong free cash flow, averaging ~$1.3B (~4.1% of
market cap) over the last three years, driven by strong net income generation (~$1.1B
over the same time period) and working capital management. Looking ahead, ELs
working capital management is expected to continue to improve, driven by
managements goal to reduce average inventory days to ~150 by the end of FY19
from ~212 at the end of FY16, with management expecting ~$400M in additional
available cash related to the initiative.
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Figure 17: Free Cash Flow History and Forecast

$1,800 $1,649
$1,600 $1,470
$1,400 $1,263 $1,309
$1,200 $1,025
$1,000 $765
$800 $686 $676 $706
$600
$400
$200
$0
Free Cash Flow
We expect EL to maintain its capex spend at around 4.5%-5.0% of sales going

forward as the company continues to invest in its organic business. Specifically, we
expect EL to continue to invest in the DTC business by opening additional
freestanding stores, information systems, and supporting its ecommerce platforms.
Figure 18: Capital Expenditure History and Forecast

$700 7.0%
$600 6.0%
4.5% 4.7% 4.4% 4.7% 4.6% 4.6%
$500 4.3% 5.0%
4.0%
3.5%
$400 4.0%
$300 $563 3.0%
$510 $525 $540
$421 $461 $473
$200 $351 2.0%
$271
$100 1.0%
$0 0.0%
Capital Expenditures Capex, % Sales
Beyond organic investments, EL will also likely continue to use free cash flow to
make small bolt-on acquisitions of prestige beauty brands (see Table 2) in order to
supplement revenue growth. We expect acquisition targets to focus on the makeup
category, as it is expected to remain the fastest growing category within the industry.
Likely take-out targets are also likely to have a limited international distribution
breadth, with the goal for management to use its established distribution relationships
to meticulously build a broader platform for each brand.
We believe EL will also continue to redistribute cash to shareholders through regular

dividend payments and share repurchases. Over the last three years, EL has repaid
~32% of attributable net income to shareholders in the form of dividends with
todays $1.17/share annual dividend equivalent to a 1.5% yield at current prices; we
expect EL to maintain its ~30% dividend payout ratio going forward. On share
repurchases, EL has repurchased ~10.9M shares annually, on average, over the last
few years, equivalent to ~$850M per year (~3.0% of todays market cap); we expect
EL to maintain this level of share repurchase.
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Figure 19: Shareholder Cash Distribution History and Forecast

$1,200 121.9% 140.0%
108.3% 103.2% 107.7% 120.0%
$1,000
88.1% 100.0%
$800 77.0% 80.3%
67.6% 73.1%
80.0%
$600
$983 $981 60.0%
$400 $890 $865
$667 40.0%
$593
$200 $397 $419
$388 $302 $423 $436 $469
$267 $148 $350 20.0%
$109 $204
$0 0.0%
Dividends Share Repurchases Cash Distributions, % Adj. Net Income
Underleveraged Balance Sheet

Even after adding ~$1.5B in debt to its balance sheet in order to finance the
acquisitions of Too Faced and Becca at the end of FY16, EL ended 2Q with a strong
balance sheet and gross debt-to-LTM EBITDA of 1.8x. Factoring in the companys
~$1.3B in cash implies a net debt-to-EBITDA ratio of 1.3x. To this point, EL
financed its recent acquisitions using commercial paper instead of a bridge loan
facility typically used to finance acquisitions. Following 2Q results, the company
refinanced deal-related debt with $1.5B in senior notes, maturing equally in 2020,
2027, and 2047.
We expect the company to use debt to fund any future acquisitions, with ELs strong
free cash flow profile enabling the company to pay down borrowings quickly. This
fiscal prudence, combined with strong EBITDA generation, should allow the
company to reduce its net debt/EBITDA levels to 1.0x fairly quickly, which is the
leverage level in line with ELs historical precedence and one that enables the
company to retain its A+/A2 credit rating.
Figure 20: Gross Debt / EBITDA History and Forecast

2.0x 1.8x
1.8x
1.6x 1.4x
1.4x
1.2x 1.1x 1.0x
1.0x 0.8x 0.8x
0.7x 0.7x
0.8x 0.6x
0.6x
0.4x
0.2x
0.0x
Debt / EBITDA
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Earnings Outlook
Back-End Loaded Growth in 4Q17 (Calendar 2Q17)
We are modeling ELs adjusted EPS to increase 4.1% to $3.33, driven by 4.7%
organic sales growth, with 43bps of gross margin contraction partially offset by
33bps of SG&A leverage. The acquisitions will represent 7cts of headwind in the
year in terms of EPS, while FX will likely represent a $0.16 negative impact. If we
exclude the non-recurring acquisition impact, EPS would grow 6%, which is above
that of most peers. We model most of the growth coming from the last quarter of the
fiscal year (2Q17 calendar), as the company would fully benefit from the acquisitions
that will likely boost growth by ~250bps in the quarter.
From an organic standpoint for 2017, management guided for mid-single-digit

growth, with underlying LC growth rate, a 1pt reduction to LT plan driven by
challenges from US department stores, Middle East and Turkey demand and
decelerating Hong Kong sales.
Table 4: JPM Estimates at the High End of Guidance
3Q17 FY 2017
Item Guidance JPM Est. Prior Guidance New Guidance JPM Est.
Top-Line
Constant Currency Growth +7% to 8% 7.7% +6% to 7% +6% to 7% 6.6%
Acquisition Benefit +3.5% to 4.0% 3.5% N/A +1.8% 1.9%
Organic CC Growth +3.5% to 4.5% 4.2% +6% to 7% +4.2% to 5.2% 4.7%
FX Impact About -2% -2.5% Less than -1% About -2% -2.0%
Net Sales +5% to 6% 5.2% +6% to 7% +4% to 5% 4.7%
Earnings
GAAP EPS $0.60 to $0.67 $3.20 to $3.30 $3.07 to $3.14
Adjusted EPS $0.65 to $0.70 $0.72 $3.38 to $3.44 $3.29 to $3.33 $3.33
EPS Growth -11.0% to -4.1% -1.4% +5.6% to +7.5% +2.8% to 4.1% 4.1%
Constant Currency EPS Growth -6.8% to flat +8% to 10% +8% to 9%
FX Impact -$0.03 -$0.08 -$0.16
Acquisition Impact -$0.03 N/A -$0.07
Source: SEC Filings, JP Morgan Estimates
Revenue Growth Should Accelerate Sequentially in 3Q17

Our model embeds 5.2% net sales growth in 3Q17, driven by +4.2% organic sales
growth (noting pricing increases taken in January) and a 350bp acquisition benefit
(sales from By Kilian, BECCA and Too Faced), partially offset by a 2.5% decline in
currency. By category, we model skincare increases 4% on a local currency basis
(100bps sequential deceleration on 2-year stack) as consumers continue to favor
makeup over skincare. Makeup sales in local currency increase 11% in our model
(200bps acceleration), driven by incremental revenues from Too Faced and BECCA
(we estimate ~700bps benefit to makeup sales; ~300bps benefit to total sales),
product innovation in the organic business, and social media initiatives. In
fragrances, we model local currency sales increase 11% (500bp deceleration on 2-
year stack but a 600bp acceleration on 3-year stack), driven by continued double-
digit gains from Jo Malone and Tom Ford in particular, plus incremental sales from
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By Kilian, partially offset by declines at the namesake Estee Lauder brand. Lastly,
we model hair care generates +4% local currency revenue growth (flat on a 2-year
stack) with potential for sales acceleration in 4Q given back-half weighted product
launch cadence.
Moving to margins, we forecast ELs operating margin contracts by ~60bps to

14.4%, driven primarily by gross margin pressure. We expect gross margins to
contract ~50bps (a sequential improvement from 2Qs 90bp contraction) driven by
mix shift pressure and FX, partially offset by pricing increases taken in January.
SG&A rate deleverages ~10bps in our model, as EL shifted advertising expenses
from 1H into 3Q, partially offset by LBF savings. In total, we expect adjusted EPS to
contract ~1% to $0.72 in 3Q.
with Guidance Implying a Steep Revenue Acceleration in 4Q

We model net revenue growth acceleration of ~520bps sequentially in 4Q17 to
10.4%, equating to total full-year sales growth of 4.7% (vs. guidance for 4-5%). Our
modeled revenue growth embeds 12.1% local currency growth (530bp acceleration
on a 2-year stack but a 270bp deceleration on a 3-year stack), assuming planned new
product launches drive incremental sales growth from 3Q. By category, we model
skin care local currency sales increase 6% (500bp acceleration on 2-year stack),
makeup increases 18% (800bp acceleration), fragrance increases 16% (flat), and hair
care increases 4% (flat).
We also model EBIT margins accelerate sequentially, expanding 120bps to 10.4% in

4Q, primarily driven by further cost reduction initiatives and leverage on higher
sales. Specifically, we expect gross margins to remain flat at ~80.7% as mix shift
pressure is fully offset by increased pricing. Below the line, we see 120bps of SG&A
leverage driven primarily by reduced G&A expenses on LBF initiatives and outsized
sales growth (+10%) driving fixed cost leverage, partially offset by higher marketing,
stock-based comp, and store operations deleverage on newly opened retail stores.
Earnings Growth to Reaccelerate in FY18

We model earnings growth reaccelerates in FY18, increasing by ~12% to $3.72
(from a 4% EPS increase in FY17), in line with managements long-term double-
digit annual EPS growth target. Our model embeds about 6% revenue growth (5%
organic), with skin care increasing ~3% on a local currency basis and makeup
increasing ~9%, fragrances increasing ~10% and hair care increasing ~7%. EBIT
margins improve 51bps to 15.9%, by our model, driven primarily by 35bps of SG&A
leverage (primarily G&A and marketing leverage partially offset by stock-based
comp and new store openings) and 10bps of gross margin improvement (benefitting
from SMI initiatives).
Border Tax Adjustment Dilutive to Earnings

Amidst continued uncertainty surrounding the details and feasibility of potential tax
policy changes, we created a scenario analysis in an attempt to estimate (at least
directionally and proportionally) the potential impact. Our analysis implies
currently discussed tax reform options would create a ~12% drag on ELs
projected FY18 earnings. Our analysis assumes: (1) a 20% US corporate tax rate;
(2) the USD exchange rate adjusts for the new border tax, appreciating by 50% of the
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new tax rate (i.e. 10%); (3) imported COGS (estimated at ~40% of total US COGS)
are not deductible for taxable income; (4) interest expense is not deducted from
taxable income; and (5) a one-time cash repatriation tax of 9%. Excluded from this
analysis is the potential for domestic sales to expand if retailers were to reduce shelf
space currently allocated to international manufacturers, such as LVMH, and
increase allocation to domestic manufacturers.
Table 5: Border Tax Adjustment Scenario

USDmn except per share data unless otherwise noted
2018E
Income Statement Current Proposed
Sales 12,526 11,865
COGS 2,467 2,443
Gross Profit 10,059 9,422
Operating Expenses 8,067 7,630
EBIT 1,993 1,793
Interest Expense 62 62
Non-Deductible Costs 0 546
Taxable Income 1,931 2,277
Tax Expense 550 551
Tax Rate 28.5% 24.2%
Post-Tax Income 1,381 1,726
Non-Deductible COGS 0 484
Non-Deductible Interest Expense 0 62
Non-Controlling & Other 7 7
Net Income 1,373 1,172
Shares Outstanding 369 359
EPS $3.72 $3.27
% Change -12.1%
Source: J.P. Morgan Estimates
Valuation
Initiating Coverage of EL with an Overweight Rating and $100 Dec-17 PT
We see EL as one of the best positioned beauty companies within the space, with a
diversified portfolio of premium brands with a vast geographic distribution network
that should allow the company to capitalize on the outsized global premium beauty
market growth. We view ELs long-term sustainable top-line trajectory of 6-8%
annual growth as one of the most attractive across our coverage universe and view
the companys path to double-digit annual EPS growth as sustainable longer term,
despite the investments required to drive sales growth. Our PT is based on a 25.6x
multiple, in line with ELs last twelve months historical average and still at a
discount to its longer history (2 and 5 years please refer to Figure 21 and Figure
22). Note that the target multiple is still much below the beauty comps average of
29.0x.
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Table 6: Comparable Trading Multiples
Historical Fwd Historical Fwd

EV / EBITDA EV/EBITDA Avg P/E P/E Avg. PEG Div. FCF Yield ROIC
Company 2017E 2018E 1-yr 5-yr 2017E 2018E 1-yr 5-yr Ratio Yield 2017E 2018E 2017E 2018E
CHD 15.5x 14.9x 15.2x 13.4x 26.6x 24.4x 25.6x 22.9x 3.7x 1.5% 4.2% 4.6% 16.1% 16.5%
CL 15.6x 14.5x 14.7x 13.4x 25.4x 23.1x 23.8x 21.3x 3.9x 2.2% 3.8% 4.1% 37.0% 25.1%
CLX 15.9x 15.0x 13.9x 12.2x 25.1x 23.5x 23.5x 20.8x 3.2x 2.3% 3.6% 3.9% 31.7% 33.3%
COTY 10.4x 9.5x 10.8x 10.9x 25.8x 19.9x 22.4x 22.0x 4.6x 2.6% 5.2% 5.4% 2.9% 4.3%
EL 14.1x 13.1x 14.2x 13.2x 24.1x 21.8x 24.6x 23.9x 2.5x 1.6% 4.0% 4.6% 18.1% 19.5%
KMB 13.1x 12.5x 12.4x 11.0x 21.3x 19.7x 19.9x 17.5x 3.8x 2.9% 4.8% 4.6% 26.6% 27.8%
NWL 11.9x 10.8x 11.7x 10.8x 16.1x 13.9x 16.5x 15.2x 1.7x 1.6% 7.2% 7.7% 6.6% 7.6%
PG 14.2x 13.5x 14.0x 12.5x 22.7x 21.4x 21.5x 18.9x 3.7x 2.9% 4.4% 4.7% 9.8% 10.2%
OR FP (L'Oreal)* 14.8x 14.0x 14.6x 13.4x 25.5x 23.8x 24.7x 23.1x 3.6x 1.9% NA NA NA NA
002790 KS (Amore Pacific)* 7.5x 6.5x 7.9x 7.8x 25.2x 21.1x 28.3x 27.5x 2.1x 0.4% NA NA NA NA
4911 JT (Shiseido)* 13.3x 11.6x 12.5x 10.3x 39.4x 31.6x 34.7x 29.2x 4.0x 0.7% NA NA NA NA
Large Cap Intl Beverages
KO 17.9x 18.1x 17.4x 15.1x 22.7x 21.9x 21.9x 19.5x NM 3.5% 6.1% 6.0% 13.4% 14.0%
PEP 13.6x 12.8x 13.2x 11.8x 21.7x 20.1x 20.9x 18.9x 3.3x 2.7% 8.0% 8.6% 18.6% 19.6%
Comparison Analysis (yields in bps)
Total US HPC Average 13.8x 12.9x 13.3x 12.0x 23.3x 20.9x 21.9x 19.8x 3.5x 2.3% 4.8% 5.0% 18.7% 17.8%
EL vs. Avg. Prem/(Disc) 1.9% 0.8% 7.0% 10.0% 3.5% 4.5% 12.5% 21.0% -29.1% (70) (71) (44) (61) 166
US HPC Average 13.8x 12.9x 13.3x 12.0x 23.3x 20.9x 21.9x 19.8x 3.5x 2.3% 4.8% 5.0% 18.7% 17.8%
EL vs. Avg. Prem/(Disc) 1.9% 0.8% 7.0% 10.0% 3.5% 4.5% 12.5% 21.0% -29.1% (70) (95) (91) (61) 166
Total Beauty 11.5x 10.4x 11.5x 10.6x 29.0x 24.1x 27.5x 25.5x 3.6x 1.4% 5.2% 5.4% 2.9% 4.3%
23.7 -
EL vs. Avg. Prem/(Disc) 22.3% 25.8% % 24.7% -16.8% -9.6% 10.7% -6.0% -30.5% 21 (118) (81) 1,515 1,517
Large Cap Multi Average 14.9x 14.3x 14.3x 12.7x 22.8x 21.2x 21.6x 19.2x 3.7x 2.8% 5.4% 5.6% 21.1% 19.3%
EL vs. Avg. Prem/(Disc) -5.6% -8.7% -1.2% 3.7% 5.8% 2.6% 13.9% 24.5% -32.2% (127) (138) (103) (300) 17
Source: Company reports and J.P. Morgan estimates, except for companies highlighted with * which are derived from Bloomberg consensus. Priced as of 3/17/17.
We see ELs +6-8% long-term sales growth target in local currency as reasonable as
emerging market penetration continues to expand. Despite the department store
weakness in the US, we expect growth to resume online and through specialty
retailers like Sephora and Ulta.
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EL De-Rating Seems Excessive

EL is trading at a NTM P/E that is 9% and 4% below its 2-year and 5-year averages,
and just close to the past 10-year average, a time that EL was not growing as fast.
Figure 21: NTM P/E vs. Historical Multiples

33.0x
31.0x
29.0x
27.0x
25.0x
23.0x
21.0x
19.0x
17.0x
15.0x
May-05
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
NTM PE 2Y 5Y 10Y
Source: Bloomberg, JPMorgan
Figure 22: NTM P/E vs. Large Cap HPC/Beverages Averages

80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
EL NTM P/E relative to Large Cap P/E 2Y 5Y 10Y
Source: Bloomberg; Peer group includes PG, COTY, CL and EL
Price Target Derivation

We view EL as a best-in-class high growth large cap company and, as such, it has
always traded at a premium to peers. The concerns surrounding the department store
distribution, while legitimate, seem overdone as the headwind has and should
continue to be mitigated by alternative distribution through specialty retailers such as
Sephora and Ulta, as well as in standalone stores, online initiatives, and international
expansion. As such, we expect ELs multiple to expand back to ~25x NTM earnings
from the current 24.1x our FY17 EPS estimate, still below the beauty average of 29x.
Below we detail our PT derivation.
Table 7: Price Target Derivation

$, unless otherwise noted
Price Target
2018E EPS ex. Amortization CY $4.01
Target Multiple 25.0x
Dec-17 Price Target $100
Source: J.P. Morgan estimates.
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Table 8: Total Shareholder Return

In USD or %
Total Shareholder Return (TSR)
Dec-17 Price Target $100.00
Current Price $85.96
Price Appreciation Potential 16%
Dividends 2%
Total Shareholder Return 18%
Source: J.P. Morgan estimates.
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Financial Statements
Table 9: Income Statement
USD Ms, Unless Otherwise Noted FY15 FY16 1Q17 2Q17 3Q17E 4Q17E FY17E FY18E FY19E
Net Sales $10,780 $11,264 $2,865 $3,208 $2,795 $2,922 $11,792 $12,526 $13,278
% change -1.7% 4.5% 1.1% 2.7% 5.2% 10.4% 4.7% 6.2% 6.0%
Cost of Products Sold, Reported 2100.6 2180.9 596.0 637.0 544.4 563.4 2340.8 2466.6 2560.8
as a % of net sales 19.5% 19.4% 20.8% 19.9% 19.5% 19.3% 19.9% 19.7% 19.3%
Change as % of net sales (bps) (19) (12) 44 101 50 0 49 (16) (41)
Non-recurring charge 0 2 5 4 0 0 9 0 0
Gross Profit, Adjusted $8,680 $9,083 $2,274 $2,575 $2,250 $2,359 $9,458 $10,059 $10,717
as a % of net sales 80.5% 80.6% 79.4% 80.3% 80.5% 80.7% 80.2% 80.3% 80.7%
Change as % of net sales (bps) 19 12 (27) (88) (50) - (43) 10 41
% change -1.5% 4.6% 0.7% 1.5% 4.6% 10.4% 4.1% 6.4% 6.5%
SG&A, Adjusted 7073.5 7337.8 1825 1917 1847 2053 7643 8067 8528
as a % of net sales 65.6% 65.1% 63.7% 59.8% 66.1% 70.3% 64.8% 64.4% 64.2%
Change as % of net sales (bps) 192 (47) 5 (66) 10 (120) (33) (41) (17)
% change 1.2% 3.7% 1.1% 1.5% 5.4% 8.5% 4.2% 5.5% 5.7%
Operating Income Adjusted $1,606 $1,745 $449 $658 $403 $305 $1,815 $1,993 $2,189
as a % of net sales 14.9% 15.5% 15.7% 20.5% 14.4% 10.4% 15.4% 15.9% 16.5%
Change as % of net sales (bps) (173) 59 (32) (22) (60) 120 (10) 51 58
% change -11.9% 8.6% -0.9% 1.6% 1.0% 24.7% 4.0% 9.8% 9.9%
Interest Expense, net 46 55 15 17 23 15 70 62 64
Income Before Taxes, Adjusted $1,561 $1,690 $434 $641 $381 $290 $1,745 $1,931 $2,126
as a % of net sales 14.5% 15.0% 15.1% 20.0% 13.6% 9.9% 14.8% 15.4% 16.0%
% change -12.0% 8.3% -1.2% 1.1% -1.2% 25.3% 3.3% 10.6% 10.1%
Tax Expense, Adjusted 467 478 118 185 110 84 497 550 606
Tax Rate 29.9% 28.3% 27.2% 28.9% 29.0% 29.0% 28.5% 28.5% 28.5%
Net Income, Adjusted $1,093 $1,212 $316 $456 $270 $206 $1,248 $1,381 $1,520
as a % of net sales 10.1% 10.8% 11.0% 14.2% 9.7% 7.0% 10.6% 11.0% 11.4%
% change -9.4% 10.9% 1.7% -1.0% -2.1% 25.0% 3.0% 10.6% 10.1%
Non-controlling interests (5) (6) (2) (2) (1) (2) (7) (7) (8)
Net Income to Common, Adjusted $1,089 $1,206 $314 $454 $269 $204 $1,241 $1,373 $1,512
as a % of net sales 10.1% 10.7% 11.0% 14.2% 9.6% 7.0% 10.5% 11.0% 11.4%
% change -9.4% 10.7% 1.5% -1.0% -2.1% 25.2% 2.9% 10.6% 10.1%
Adjusted Diluted EPS $2.82 $3.20 $0.84 $1.22 $0.72 $0.55 $3.33 $3.72 $4.15
% change -7.8% 13.5% 2.4% 0.0% -1.4% 27.9% 4.1% 11.7% 11.6%
Weighted Avg. Diluted Shares 385.7 376.6 373.3 372.6 372.6 372.1 372.6 369.4 364.4
Source: Company reports and J.P. Morgan Estimates
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Table 10: Balance Sheet
USD Ms FY15 FY16 1Q17 2Q17 3Q17E 4Q17E FY17E FY18E FY19E
Assets
Current Assets
Cash & Cash Equivalents 1,021 914 664 1,262 2,288 2,581 2,581 1,910 1,879
Short-Term Investments 504 469 525 413 413 413 413 413 413
Accounts receivable (net) 1,175 1,258 1,624 1,508 1,490 1,388 1,388 1,429 1,535
Inventories 1,216 1,264 1,296 1,278 1,195 1,333 1,333 1,270 1,237
Other current assets 553 320 292 328 416 116 116 119 128
Total current assets $4,468.5 $4,225.0 $4,401.0 $4,789.0 $5,802.0 $5,831.1 $5,831.1 $5,140.5 $5,191.3
Net property, plant and
equipment 1,490 1,583 1,569 1,563 1,576 1,670 1,670 1,777 1,891
Intangibles/goodwill 1,471 1,572 1,569 3,287 3,278 3,270 3,270 3,238 3,206
Long-term investments 420 1,108 1,050 996 996 996 996 996 996
Other assets 389 735 759 577 577 577 577 577 577
Total assets $8,239.2 $9,223.0 $9,348.0 $11,212.0 $12,229.4 $12,344.5 $12,344.5 $11,728.5 $11,861.6
Liabilities
Current Liabilities
Short-term debt 30 332 592 2,143 643 643 643 643 643
Accounts payable 635 717 546 617 668 860 860 885 951
Other accrued liabilities 1,470 1,632 1,574 1,698 1,697 1,872 1,872 1,927 2,071
Total current liabilities $2,135.6 $2,681.0 $2,712.0 $4,458.0 $3,008.5 $3,375.5 $3,375.5 $3,455.3 $3,664.9
Long term debt 1,608 1,910 1,908 1,890 3,690 3,387 3,387 2,766 2,766
Other long-term liabilities 842 1,045 1,053 1,056 1,023 1,153 1,153 1,181 1,242
Total liabilities $4,584.9 $5,636.0 $5,673.0 $7,404.0 $7,721.9 $7,915.7 $7,915.7 $7,402.0 $7,673.2
Equity
Common stock and APIC 2,877 3,167 3,292 3,355 3,378 3,402 3,402 3,549 3,704
Retained earnings 7,004 7,693 7,876 8,178 8,324 8,405 8,405 9,242 10,172
Accumulated other
comprehensive income (loss) (382) (545) (548) (639) (20) (20) (20) (20) (20)
Treasury stock (5,857) (6,743) (6,963) (7,101) (7,190) (7,373) (7,373) (8,460) (9,683)
No controlling interest 11 15 18 15 15 15 15 15 15
Total Equity $3,654.3 $3,587.0 $3,675.0 $3,808.0 $4,507.5 $4,428.7 $4,428.7 $4,326.5 $4,188.4
Total Liabilities & Equity $8,239.2 $9,223.0 $9,348.0 $11,212.0 $12,229.4 $12,344.5 $12,344.5 $11,728.5 $11,861.6
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Table 11: Cash Flow Statement
USD Ms FY15 FY16 1Q17 2Q17 3Q17E 4Q17E FY17E FY18E FY19E
Operating Activities
Net income 1,093 1,121 296 430 269 204 1,199 1,373 1,512
Depreciation and amortization 409 415 106 112 112 119 449 484 512
Increase/(decrease) in deferred taxes (53) (94) (32) (23) 0 0 (55) 0 0
(Increase)/decrease in NWI 348 145 (608) 402 152 331 276 102 137
Other 145 202 88 53 (88) 300 353 (3) (9)
Net cash from operations $1,943.3 $1,788.7 ($150.0) $974.0 $445.1 $953.6 $2,222.8 $1,955.6 $2,151.1
Investing Activities
Capital expenditures (473) (525) (85) (123) (117) (205) (529) (558) (594)
Acquisitions (241) (101) (10) (1,680) 0 0 (1,690) 0 0
Other (902) (643) 29 142 (33) 130 268 28 62
Net cash from investments ($1,616.2) ($1,269.3) ($66.0) ($1,661.0) ($149.4) ($74.7) ($1,951.1) ($530.8) ($532.4)
Financings Activities
Dividends paid (350) (423) (111) (125) (123) (123) (482) (536) (582)
Increase / (decrease) debt and debt issuance costs 295 604 261 1,553 300 (303) 1,811 (621) 0
Purchase of treasury stock (983) (890) (222) (141) (89) (183) (635) (1,087) (1,223)
Other 143 103 36 19 642 23 721 148 155
Net cash from financing ($894.8) ($604.9) ($36.0) $1,306.0 $730.3 ($585.9) $1,414.5 ($2,096.3) ($1,649.8)
Effect of FX change on cash and cash flow used for

discontinued operations (40) (22) 2 (21) 0 0 (19) 0 0
Net change in cash ($607.7) ($107.3) ($250.0) $598.0 $1,026.0 $293.1 $1,667.1 ($671.5) ($31.1)
Beginning cash and equivalents 1629 1021 914 664 1262 2288 914 2581 1910
Ending cash and equivalents 1021 914 664 1262 2288 2581 2581 1910 1879
Free Cash Flow $1,470.3 $1,263.4 ($235.0) $851.0 $328.3 $749.1 $1,693.4 $1,397.3 $1,557.2
YoY Growth 43.4% -14.1% 187.6% 3.7% 35.2% 166.0% 34.0% -17.5% 11.4%
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The Estee Lauder Cos: Summary of Financials

Income Statement - Annual FY15A FY16A FY17E FY18E FY19E Income Statement - Quarterly 1Q17A 2Q17A 3Q17E 4Q17E
Revenue 10,780 11,264 11,792 12,526 13,278 Revenue 2,865A 3,208A 2,795 2,922
COGS (2,101) (2,181) (2,341) (2,467) (2,561) COGS (596)A (637)A (544) (563)
Gross profit 8,680 9,083 9,458 10,059 10,717 Gross profit 2,274A 2,575A 2,250 2,359
SG&A (7,074) (7,338) (7,706) (8,067) (8,528) SG&A (1,851)A (1,954)A (1,847) (2,053)
Adj. EBITDA 2,016 2,160 2,264 2,476 2,701 Adj. EBITDA 555A 770A 516 424
D&A (409) (415) (449) (484) (512) D&A (106)A (112)A (112) (119)
Adj. EBIT 1,606 1,745 1,815 1,993 2,189 Adj. EBIT 449A 658A 403 305
Net Interest (46) (55) (70) (62) (64) Net Interest (15)A (17)A (23) (15)
Adj. PBT 1,561 1,690 1,745 1,931 2,126 Adj. PBT 434A 641A 381 290
Tax (467) (434) (471) (550) (606) Tax (107)A (170)A (110) (84)
Minority Interest (5) (6) (7) (7) (8) Minority Interest (2)A (2)A (1) (2)
Adj. Net Income 1,089 1,206 1,241 1,373 1,512 Adj. Net Income 314A 454A 269 204
Reported EPS 2.81 2.96 3.21 3.72 4.15 Reported EPS 0.79A 1.15A 0.72 0.55
Adj. EPS 2.82 3.20 3.33 3.72 4.15 Adj. EPS 0.84A 1.22A 0.72 0.55
DPS 0.91 1.12 1.29 1.45 1.60 DPS 0.30A 0.34A 0.34 0.34
Payout ratio 32.3% 37.9% 40.3% 39.1% 38.5% Payout ratio 37.8%A 29.2%A 46.4% 61.1%
Shares outstanding 373 366 366 361 356 Shares outstanding 366A 367A 367 366
.
Balance Sheet & Cash Flow Statement FY15A FY16A FY17E FY18E FY19E Ratio Analysis FY15A FY16A FY17E FY18E FY19E
Cash and cash equivalents 1,021 914 2,581 1,910 1,879 Gross margin 80.5% 80.6% 80.2% 80.3% 80.7%
Accounts receivable 1,175 1,258 1,388 1,429 1,535 EBITDA margin 18.7% 19.2% 19.2% 19.8% 20.3%
Inventories 1,216 1,264 1,333 1,270 1,237 EBIT margin 14.9% 15.5% 15.4% 15.9% 16.5%
Other current assets 553 320 116 119 128 Net profit margin 10.1% 10.7% 10.5% 11.0% 11.4%
Current assets 4,469 4,225 5,831 5,140 5,191
PP&E 1,490 1,583 1,670 1,777 1,891 ROE 29.0% 33.4% 31.1% 31.5% 35.6%
LT investments 420 1,108 996 996 996 ROA 13.5% 13.8% 11.5% 11.4% 12.8%
Other non current assets 809 1,843 1,573 1,573 1,573 ROCE 21.5% 22.6% 18.2% 17.6% 20.5%
Total assets 8,239 9,223 12,344 11,729 11,862 SG&A/Sales 65.6% 65.1% 65.3% 64.4% 64.2%
Net debt/equity 16.9% 37.0% 32.7% 34.7% 36.5%
Short term borrowings 30 332 643 643 643
Payables 635 717 860 885 951 P/E (x) 30.6 27.0 26.0 23.3 20.9
Other short term liabilities 1,470 1,632 1,872 1,927 2,071 P/BV (x) 8.9 8.9 7.2 7.2 7.4
Current liabilities 2,136 2,681 3,376 3,455 3,665 EV/EBITDA (x) 16.0 15.3 14.6 13.4 12.3
Long-term debt 1,608 1,910 3,387 2,766 2,766 Dividend Yield 1.0% 1.3% 1.5% 1.7% 1.8%
Other long term liabilities 2,449 2,955 4,540 3,947 4,008
Total liabilities 4,585 5,636 7,916 7,402 7,673 Sales/Assets (x) 1.3 1.3 1.1 1.0 1.1
Shareholders' equity 3,643 3,572 4,414 4,312 4,173 Interest cover (x) 44.1 39.2 32.4 40.0 42.3
Minority interests 11 15 15 15 15 Operating leverage 695.8% 192.6% 86.0% 156.9% 164.5%
Total liabilities & equity 8,239 9,223 12,344 11,729 11,862
BVPS 9.77 9.77 12.06 11.95 11.73 Revenue y/y Growth (1.7%) 4.5% 4.7% 6.2% 6.0%
y/y Growth (3.4%) (0.0%) 23.5% (1.0%) (1.8%) EBITDA y/y Growth (8.7%) 7.1% 4.8% 9.4% 9.1%
Net debt/(cash) 616 1,328 1,449 1,499 1,530 Tax rate 29.9% 28.3% 28.5% 28.5% 28.5%
Adj. Net Income y/y Growth (9.4%) 10.7% 2.9% 10.6% 10.1%
Cash flow from operating activities 1,943 1,789 2,223 1,956 2,151 EPS y/y Growth (7.7%) 13.4% 4.0% 11.6% 11.6%
o/w Depreciation & amortization 409 415 449 484 512 DPS y/y Growth 18.2% 23.7% 15.3% 12.3% 10.0%
o/w Changes in working capital 348 145 276 102 137
Cash flow from investing activities (1,616) (1,269) (1,951) (531) (532)
o/w Capital expenditure (473) (525) (529) (558) (594)
as % of sales 4.4% 4.7% 4.5% 4.5% 4.5%
Cash flow from financing activities (895) (605) 1,414 (2,096) (1,650)
o/w Dividends paid (350) (423) (482) (536) (582)
o/w Net debt issued/(repaid) 295 604 1,811 (621) 0
Net change in cash (608) (107) 1,667 (672) (31)
Free cash flow to firm 1,502 1,303 1,743 1,442 1,603
y/y Growth 41.8% (13.3%) 33.8% (17.3%) 11.2%
Note: $ in millions (except per-share data).Fiscal year ends Jun. o/w - out of which
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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
securities issued by The Estee Lauder Cos.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for The Estee
Lauder Cos within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: The Estee Lauder Cos.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment
banking clients: The Estee Lauder Cos.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
entity(ies) as clients, and the services provided were non-investment-banking, securities-related: The Estee Lauder Cos.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and
the services provided were non-securities-related: The Estee Lauder Cos.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services
from The Estee Lauder Cos.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from The Estee Lauder Cos.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from The Estee Lauder Cos.
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of The Estee
Lauder Cos.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406,
or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
31
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The Estee Lauder Cos (EL, EL US) Price Chart
152
133
N $88
114
N $78 N $81 N $85 N $92 N $100 Date Rating Share Price Price Target
95
($) ($)
05-May-14 N 74.06 78.00
Price($)
76 05-Nov-14 N 72.00 81.00
04-Mar-15 N 82.91 85.00
57
06-May-15 N 86.90 88.00
38 18-Aug-15 N 82.80 92.00
22-Aug-16 N 91.38 100.00
19
0
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
14 14 14 14 15 15 15 15 16 16 16 16 17
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage May 05, 2014.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
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Coverage Universe: Teixeira, Andrea: e.l.f. Beauty Inc (ELF)
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2017

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 43% 45% 12%
IB clients* 52% 48% 34%
JPMS Equity Research Coverage 43% 50% 7%
IB clients* 67% 61% 43%
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Other Disclosures
32
(1-212) 622-6735 21 March 2017
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next three years, according to Euromonitor. 75

Valuation looks relatively attractive, as the sector has re-rated. While we do

The Estee Lauder Companies Inc. (EL;EL US)

See page 31 for analyst certification and important disclosures.

Secular Beauty Trends Are Here to Stay

ELs Scale Advantage Boosts Plug and Play M&A Opportunity

US Department Store Concerns Appear Overblown

Exposure to Emerging Markets Is Still a Net Positive

Targeted 110-150bp EBIT Margin Opportunity Driven by SG&A Reductions

Valuation Looks Relatively Attractive.

Risks to Rating and Price Target

Foreign Exchange Fluctuations

Fluctuations in Discretionary Spending

Tax Reform Would Be Net Negative, Assuming Stronger USD

Figure 1: EL's Power Brands

Source: Company Reports, J.P.Morgan

Others, 17.7% Others, 19.3% LVMH, 22.2%

Shiseido, 11.6% AmorePacific, 9.3%

Makeup Recently Surpassed Skincare to Become ELs Biggest Engine

Hair Care, 4.9% Other, 0.7%

Source: Company Filings

Revenue Growth of 6-8% Depends on EM

Figure 9: FY16 Sales by Channel

Source: Company Reports

Meticulously Selective Distribution Strategy on Store and Brand Basis

Management uses similar caution when expanding internationally, using its

Specialty Retail Store Growth Offsetting US Department Store Weakness

Table 1: Department Store Footprint Contracting While Specialty Is on the Rise

Ticker Analyst Rating Store FY16 FY17E FY18E CAGR

Pricing Increases Projected to Drive ~200bps of Revenue Growth

Chinese Import Tariff Changes Unlikely to Weigh on Earnings

Comparable Store Growth through Innovation

Acquisitions Offsetting Organic Slowdown

Table 2: EL Has Been Accelerating M&A Most Recently in Makeup

Towards the end of 2016, EL closed on the acquisitions of BECCA cosmetics

The long-term opportunity for each of these brands is continued international

Organic Growth Well Above Peers

Figure 10: Estee Lauder Tops Group in Organic Growth

Source: Company reports and J.P. Morgan estimates.

Figure 11: and Delivers Highest Gross Margin in Coverage Universe

78.1% 79.5% 80.1% 80.3% 80.5% 80.6%

Source: Company reports and J.P. Morgan estimates.

Gross Margins at Peak Levels

Figure 12: Expecting Gross Margins Roughly Flat Going Forward

Source: SEC Filings & J.P. Morgan Estimates

Modest Gross Margin Expansion Ahead

Opportunity to Lower SG&A for Long Run

Source: Company reports and J.P. Morgan estimates.

Source: Company reports.

Long-Term Outlook to Expand EBIT 110-150bps

Figure 15: EBIT Margin History & Forecast

Source: SEC Filings, J.P. Morgan Estimates

but SG&A Savings Are Limited in the Near Term

Figure 16: SG&A Savings Should Continue to Drive EPS Growth

Source: SEC Filings & J.P. Morgan Estimates

Strong Free Cash Flow Generation

Figure 17: Free Cash Flow History and Forecast

Source: SEC Filings, J.P. Morgan Estimates

We expect EL to maintain its capex spend at around 4.5%-5.0% of sales going

Figure 18: Capital Expenditure History and Forecast

Source: SEC Filings, J.P. Morgan Estimates