Founded in 1946, Estée Lauder (EL) has grown into a global powerhouse in the prestige beauty market. With a portfolio of over 25 brands, including MAC, Clinique, and La Mer, the company has its fingers in every pot, from skincare to fragrances. But lately, this cosmetics giant has been looking weak, down around 45% from its 52-week high. Further, the company’s performance in key markets like China has been underwhelming, and global economic uncertainties pose significant challenges. However, there is reason for optimism.
Despite the sharp decline, recent financial results have shown some positive signs, with a 5% increase in net sales and a notable 79% increase in net earnings for the third quarter of Fiscal 2024. Analysts project modest growth for the remainder of 2024, driven by strategic initiatives in e-commerce and sustainability.
Some believe there’s potential for a recovery, particularly with the anticipated rebound in travel retail and continued brand strength. Personally, though, I am neutral on the stock. While there are promising signs of recovery, the significant challenges in key markets and economic uncertainties make me hesitant to fully commit.
Let’s discuss why some people are betting on this beauty behemoth to bounce back and why others are being more cautious.
Market Realities and Challenges
The slowdown in the Chinese market presents one of the most significant challenges. Estée Lauder has been hit hard by the persistent softness in mainland China’s prestige beauty space. Despite the company’s efforts to adapt, such as investing in the Chinese beauty brand Code Mint through its investment arm, New Incubator Ventures, the recovery has been slower than anticipated.
In fact, Estée Lauder recently lowered its annual organic sales estimate due to the ongoing challenges in China. The company now expects full-year 2024 sales to decline by 1% to 2%, compared to its previous forecast of a 1% decrease to a 1% increase. The company now expects annual sales to decline by 2-3%. This adjustment reflects the subdued consumer confidence and softness during key shopping periods in the region.
The global economic uncertainties and shifts in consumer spending patterns also pose a threat. In the first quarter of Fiscal 2024, Estée Lauder reported a 10% decline in net sales to $3.52 billion, mainly due to an 11% drop in organic net sales. The company has had to cut jobs and implement cost-saving measures to shore up margins, potentially impacting its ability to invest in long-term growth initiatives.
The Bull Case for Recovery
Despite Estée Lauder’s challenges, several factors suggest the company is on the path to recovery. One of the key factors that has investors feeling optimistic is the rebound in the company’s Travel Retail segment. This part of the business was hit hard during the pandemic, but it’s showing signs of life again.
According to Estée Lauder’s latest earnings report, the company saw a solid 6% increase in organic net sales in the third quarter of fiscal 2024. This growth was primarily driven by double-digit growth in Europe, the Middle East & Africa (EMEA), which was in turn fueled by stronger sales in Asia travel retail.
As travel restrictions continue to ease and more people start globe-trotting again, the company expects this positive trend to continue.
In fact, despite the challenges in the overall prestige beauty market, especially in mainland China, Estée Lauder still managed to grow net sales by 3% in Asia. This was largely thanks to a double-digit increase in Hong Kong, where the return of travelers gave a nice boost to sales.
Of course, we can’t ignore the potential for margin improvement. Estée Lauder has been working hard to cut costs and boost efficiency through its Profit Recovery Plan. The goal is to generate an incremental $1.1 to $1.4 billion in operating profit over the next couple of years. If the company can pull this off while also reinvesting in its brands and consumer-facing initiatives, it could be a recipe for sustainable growth.
Estée Lauder’s current trailing price-to-earnings (P/E) ratio stands at 50x, which is notably higher than its five-year average of 45x. While this might seem high, it’s actually a significant drop from its peak P/E of 129.14 back in September 2020. The stock has seen a dramatic decline of around 45% from its 52-week high, which some analysts interpret as a potential buying opportunity.
Essentially, the stock is trading at a discount compared to its historical highs, suggesting it might be undervalued right now.
Long-Term Growth Opportunities for Estée Lauder
On the bright side, Estée Lauder is actively working to address these challenges. The company has been actively pursuing strategic initiatives to bolster its market position, including the recent acquisition of DECIEM, known for its famous brand, The Ordinary. This move is expected to significantly boost Estée Lauder’s growth in the Skincare segment.
Beyond acquisitions, Estée Lauder is embracing new technology and digital experiences. A notable development is its partnership with Microsoft to leverage AI for innovation. The AI Innovation Lab aims to develop solutions for closer consumer connections and faster market response. This collaboration could be a game-changer, enabling Estée Lauder to quickly adapt to social trends and consumer demands.
Looking ahead, analysts are forecasting revenues of $16.9 billion for 2025, representing a 9.9% increase from the previous year. The company also expects full-year 2024 adjusted profit per share between $2.14 and $2.24 compared with a prior forecast of $2.08 to $2.23. This optimistic outlook is supported by the company’s Profit Recovery Plan. Estée Lauder remains optimistic about its long-term prospects, believing these measures will help rebuild stronger, more sustainable profitability.
Is Estée Lauder Stock a Buy, According to Analysts?
According to the latest analyst ratings, Estée Lauder stock has a Moderate Buy consensus rating. Out of 21 analysts covering the stock, eight rate it a Buy, and 13 rate it a Hold. The average EL stock price target of $137.69 implies a potential upside of around 40.07% from the current price of $100.84.
Conclusion
Estée Lauder is at a crossroads. On the one hand, the company boasts a strong brand portfolio and is seeing a rebound in its Travel Retail segment. On the other hand, it’s grappling with significant challenges in China and supply chain disruptions.
I believe that Estée Lauder has the potential for long-term growth, but it’s essential to approach the stock with a critical and nuanced perspective. Estée Lauder’s stock looks like a Hold rather than a Buy at this point. The smart play here is to watch and wait. The company needs to demonstrate its ability to execute its recovery plan and navigate the ongoing challenges in China before I would consider it a compelling investment opportunity.
