Estee Lauder Earnings: Sales Recovery Delayed on Weak Skincare Spending but Brand Standing Intact

We have cut our fair value estimate for wide-moat Estee Lauder EL to $200 from $249 to reflect a weaker-than-expected near-term outlook given soft spending in high-margin skin care products amid macro headwinds and lingering inventory issues in Asian travel retail. We now forecast fiscal 2024 sales to be flat (down from a 6.5% increase previously). This reflects a 5% contraction in skincare sales (versus a 6% growth in our prior model) driven by weak demand in China and in travel retail, while sales of the other segments remain in place. Further, the lower sales, unfavorable mix, and higher costs associated with the new factory in Japan and a step-up in digital marketing resulted in a lowered fiscal 2024 EPS of $2.31 (from $3.75), which squares with the firm’s revised outlook. Even with this, we see an attractive upside in this deeply undervalued stock.

The soft first-quarter update (sales and EPS down 11% and 94%) was in line with our expectations, but we view the double-digit decline in Estee’s global travel retail sales and weak macro data in China as negative signs that the sales recovery we had anticipated for second half of 2024 will now take longer to materialize. Skincare was most affected (sales down 21%), but we are encouraged by makeup and fragrance sales increases (of 1% and 5%, respectively) thanks to innovation (MAC’s Hyper Real release) and expanded distribution for Le Labo and Tom Ford. By region, we think the sales rebound in North America (5% growth in the quarter versus 2% contraction in 2023) and positive sales trends across Western Europe (excluding travel retail) suggest resilient demand, which should help offset weakness in Asia. As such, for fiscal 2025 onward, we still expect Estee to grow its top line at high-single digits on strong brands and premiumization trends, but now model operating margins to expand to 18% by 2033 (down from 22% previously) given higher selling and marketing expenses needed to fortify the firm’s competitive standing.