We came across a bullish thesis on The Estée Lauder Companies Inc. (EL) on Substack by D Invests. In this article, we will summarize the bulls’ thesis on EL. The Estée Lauder Companies Inc. (EL)’s share was trading at $68.69 as of Feb 14th. EL’s trailing and forward P/E were 80.96 and 68.03 respectively according to Yahoo Finance.
A photograph of a customer testing out different products in the skincare aisle at a store.
Estee Lauder’s recent quarter was marked by disappointing results and limited forward guidance, following the company’s earlier decisions to withdraw 2025 targets and cut its dividend by nearly 50%. With net sales down 6% year-over-year to $4 billion, the decline was largely attributed to a challenging retail environment, especially in Asia/Pacific, as well as issues with their Asia travel retail business. Despite this, the company managed to achieve a notable gross margin expansion of 310 basis points, reflecting improved pricing power and progress in its restructuring efforts. However, operating losses of $580 million, primarily due to goodwill and impairment charges related to the Too Faced and Tom Ford brands, further dampened the outlook. Non-GAAP results, excluding these non-cash charges, also showed a decline, with a drop in margin and adjusted diluted earnings per share of $0.62.
Regional sales also reflected the ongoing difficulties. In the Americas, net sales fell by 2%, driven by weak retail performance in North America, though some new brand launches on Amazon’s U.S. Premium Beauty Store helped offset the decline. EMEA saw a 6% drop, impacted by a significant downturn in travel retail, while Asia/Pacific experienced an 11% decline due to subdued consumer sentiment in China, Korea, and Hong Kong. Among product categories, skin care, Estee Lauder’s largest and most profitable segment, saw a 12% decline, while makeup sales were down by 1%. The fragrance category performed relatively better, growing by 2%, with Le Labo seeing double-digit growth across regions.
In response to these challenges, Estee Lauder introduced the “Beauty Reimagined” strategy, under new leadership from Stéphane de La Faverie and Akhil Shrivastava. This initiative aims to restore sustainable sales growth and achieve double-digit operating income growth in the coming years. Key elements include a restructuring plan that will cut 5,800 to 7,000 jobs to streamline operations and improve accountability. The company expects the initiative to lead to annual savings of $0.8 to $1 billion, which would support margin restoration and more profitable investments.
However, the outlook remains cautious, with organic sales expected to decline by 8-10% in the third quarter, driven largely by weakness in global travel retail. Full-year guidance was scrapped due to ongoing uncertainties. Despite the disappointing quarter, the long-term thesis for Estee Lauder remains intact. The company’s strong brand pricing power, margin improvement, and focus on operational efficiency are key factors to monitor in the coming years. Assuming the company can execute its turnaround successfully, the stock has significant upside potential, with estimates pointing to a 66% increase in market cap by 2027, driven by margin improvements and a rebound in sales. Nonetheless, execution risks remain, and the turnaround will take time, requiring investors to be patient for the potential long-term rewards.
The Estée Lauder Companies Inc. (EL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 49 hedge fund portfolios held EL at the end of the third quarter which was 47 in the previous quarter. While we acknowledge the risk and potential of EL as an 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 more promising than 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.