Yahoo Finance The Estée Lauder Cos. Reaches Inflection Point, Analysts Say Recovery Won’t Be Linear
Updated May 1 at 4:51 p.m.
Is the Estée Lauder Cos. finally turning a corner after being hit hard by a slowdown in Asia?
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The company said it thinks so, but analysts cautioned that the recovery won’t be linear, with Lauder needing to jumpstart sales in mainland China and its home market, where it is being surpassed by rivals and indie brands.
After releasing third-quarter fiscal 2024 earnings showing both profit and sales beats, Lauder’s chief executive officer Fabrizio Freda said he is confident that the second half of fiscal 2024 will prove to be an inflection point for the company’s performance, while chief financial officer Tracey Travis told WWD that she believes the worst is behind them.
These sentiments, however, were not enough to stop shares sliding around 13 percent to $127.37 as investors zeroed in on downgraded full year guidance for organic sales.
“Overall, we think F3Q24 results and F4Q24 organic sales guidance suggest the worst is behind the company, though reduced organic sales guidance also indicates a recovery will not be linear given company/category weakness in key geographies/segments,” said Mark Astrachan, an analyst at Stifel Corp.
Indeed, while Lauder’s travel retail sales category finally returned to growth after seven consecutive quarters of decline and the company made inroads in driving down inventory levels in Asia travel retail, net sales in mainland China were lower than expected and in North America they were flat.
“While there are green shoots with travel retail returning to growth, muted Chinese consumer demand in prestige beauty will likely limit substantial upside near term,” said Oliver Chen, an analyst at TD Cowen.
In an interview, Travis said there is still softness in certain markets amid geopolitical and macro uncertainty, but stressed the company is navigating through.
“Given some of the actions we’ve taken thus far and the actions we will be taking under the proper recovery plan, it positions us very well for continuous progress and growth,” she said.
The company has taken several measures to kickstart growth, including launching Clinique on Amazon in the U.S. after years of eschewing the platform. Early results are positive, according to the company, with a handful of other Lauder brands set to debut on Amazon in the coming months. Net sales from Clinique rose double digits globally in the third quarter.
In China, it plans to ramp up marketing spending around key holidays in the fourth quarter.
At the same time, Lauder is still implementing its Profit Recovery Plan unveiled last quarter, which is now expected to drive incremental operating profit of $1.1 billion to $1.4 billion. As part of the plan, the company said in February that it would be reducing its 62,000-strong global workforce by between 3 and 5 percent.
Overall, net sales came in at $3.94 billion for the third quarter ended March 31, up 5 percent from $3.75 billion a year earlier. Analysts polled by Factset had predicted $3.91 billion.
Net earnings were $330 million, compared with $156 million in the prior-year period. Adjusted diluted net earnings per common share increased to 97 cents, topping Wall Street estimates of 50 cents.
The group raised its diluted net earnings per common share outlook for the whole year to be between $2.14 and $2.24, up from its previous estimate of between $2.08 and $2.23.
Still, this was a touch below Wall Street estimates of $2.25 and organic net sales are set to decrease between 1 percent and 2 percent.
A breakdown of the sales numbers for the quarter showed that skin care net sales increased 9 percent due to growth in every geographic region. On a brand level, La Mer was best performing, rising strong double digits globally.
Elsewhere, makeup net sales increased 4 percent, fragrance net sales grew 1 percent and hair care net sales decreased 4 percent, primarily driven by Aveda reflecting softness in the company’s North America salon channel.
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