What Concerns Citigroup's Estée Lauder Analyst?

In a report published last Thursday, Citigroup analyst Wendy Nicholson cautioned

investors that the company's two main brands – Clinique and Estee Lauder may see continued slowing growth. Nicholson noted the company's overall sales growth has slowed through 2013 and 2014 due to a more intensely competitive global marketplace. With 50 percent of total sales being derived from its two main brands, there is tremendous pressure on the company's remaining brand portfolio to grow in order for the country to meet its long-term target of 6 percent to 8 percent local currency sales growth. The analyst continued that Estée Lauder has seen its sales growth decline due to insufficient advertising and promotional spending, unfavorable channel mix (insufficient presence in Ulta, for example) and a "lackluster" innovation. The question remains, how can Estée Lauder turn itself around and reaccelerate top line growth for its key brands and the overall company? Nicholson answered that Estée Lauder would be "well-served" to increase its overall advertising and promotional spend. The company should look at its non-A&P SG&A as a percentage of sales and realize it is well-below levels seen historically. "This suggests to us that Estée Lauder would need to dig deep to find another source of savings to be able to fund higher A&P, or else its targeted rate of 50 basis points of annual operating margin expansion, and ultimately, its goal of a 17.5 percent operating margin in fiscal 2017, might be at risk," Nicholson suggested. Shares remain Neutral rated with an unchanged $83 price target.