Estée Lauder Struggles

Estée Lauder Cos.' stock is having a good year, but the cosmetics maker is still smoothing out some wrinkles.

Shares of the high-end makeup, skincare and fragrance company have rallied around 12% during the past six months, buoyed by the company's prospects for international growth. Still, the company continues to grapple with tough competition in North America and effects of retail consolidation.

"With the stock, the one thing that you've seen is there has been a lack of consistence with earnings performance," said A.G. Edwards analyst Jason Gere. "One quarter is very strong and the next isn't."

Estée Lauder's profit fell slightly in its fiscal first quarter, doubled in the second quarter, but missed analyst expectations despite a rise in the most recent fiscal third period.

One pressure has been Federated Department Stores' 2005 acquisition of May Department Stores, which merged Estée Lauder's two largest customers under the Macy's Inc. umbrella. In the most recent third quarter, the company said weaker shipments of certain fragrance products, particularly Tommy Hilfiger products, contributed to weakness in North America.

"The trend toward consolidation in the retail trade, particularly in developed markets such as the United States and Western Europe, has resulted in us becoming increasingly dependent on key retailers...who have increased their bargaining strength," the company said in a recent regulatory filing.

The company has responded by boosting its presence in alternative channels like the Internet. And to overcome lackluster growth in the U.S., Estée Lauder has been trying to expand internationally, especially in countries like China and Russia.

"Its global opportunity is quite extensive," says Shauna Sexsmith, manager of the Elliott & Page Canadian Equity fund, which owns Estée Lauder shares. Ms. Sexsmith also likes the fact that the company's brands are well-established names.