The recently announced financials of The Estee Lauder Companies Inc. unveil significant financial strain stemming from macroeconomic challenges in China and the Asian travel sector market. Management is unsure how long it will take the Chinese market to recover. Considering these factors and the dividend cut, it seems best to stay away from the company’s stock in the short term.
Estee Lauder Companies Inc., established in 1946 by Estee Lauder and her husband Joseph Lauder, is a high-end entity in the beauty industry, offering skincare, makeup, fragrance, and hair care products. It is incomparable with its steadfast dedication to excellence, innovation, and strategic marketing which has enabled the giant to own a wide portfolio of luxury labels.
The company boasts a diverse product offering that highlights its industry leadership. In the skincare segment, brands like Estee Lauder, Clinique, and La Mer account for around 51% of fiscal 2024 sales.
Fragrance accounts for 16% of the total sales and makeup lines like MAC Cosmetics or Bobbi Brown make up 29%. The remaining 4% of sales come from specialized hair care brands like Aveda and Bumble and Bumble.
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Their products are distributed through department stores, beauty retailers, select e-commerce platforms, and company-operated outlets. Direct sales through department stores, particularly beauty retailers, e-commerce platforms, and dedicated brand stores, are among the main revenue drivers.
The company serves a diverse market, which is principally consumer retail looking for beauty and skincare products worthy of the price point at primary physical department stores like Sephora, Ulta Beauty, and Nordstrom. By adopting a luxury beauty strategy, Estee Lauder generates its revenue from the United States (30%), Europe, the Middle East, and Africa (39%), and Asia-Pacific (31%). This shows how the company’s products are well-received in various places across the globe.
Despite all the good things about the company’s products, it seems to be struggling on the financial front. Recent results show that the company is witnessing a dip in sales owing to uncertainty in the Chinese and other Asian markets. It has also withdrawn its future guidance as it shakes up its upper management, a red flag for many investors.
The demand strain reflects the company’s challenges, particularly in China, where consumer confidence has diminished and the Asian travel sector struggles to meet expectations.The skincare segment, which brings in the largest share of revenue was down 8%. The decline is expected to continue at a rate of 6%-8%.
As a result, the company needs some breathing space, which the announced dividend cuts will provide, something investors didn’t like. The stock is down over 25% since announcing the quarterly results.
While China and Asia Travel Retail are mainly blamed for the underperformance of the company, the ability of the company to recoup solely hinges on the leadership’s response to such shocks. The adoption of product repositioning and enhancing distribution strategies, like the recent launch of its Amazon Premium Beauty store, shows the management is working on improving the company’s position in the market. Presence on the largest e-commerce platform in the world will likely help the company gain more visibility.
That being said, investing in the company may not be preferred for short-term gains. Until the beauty powerhouse unveils a solution to declining sales and shifts focus toward sustainable, quality growth, investors would rather stay away.
Estee Lauder is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 47 hedge fund portfolios held EL at the end of the second quarter which was 51 in the previous quarter. While we acknowledge the potential of EL as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as EL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
