Estee Lauder: New Leadership, Insider Buys, and a Brighter Future?
Estée Lauder has been one of the S&P 500’s worst performers this year, ranking 6th from the bottom with a +50% decline—despite a 13% rebound in the past week. Among peers like Coty Inc., L’Oréal, Shiseido, and Beiersdorf (NIVEA’s parent), it has performed the worst.
Why? Weak China sales, sluggish travel retail recovery, compressed margins, repeated impairments, withdrawn guidance, and even a dividend cut. But is this the full story? Is the market overly pessimistic? Have Estée Lauder’s iconic brands truly lost value compared to a year ago?
As part of our ongoing search for companies with competitive advantages trading at compelling valuations, we decided to dig deeper. Does Estée Lauder now deserve a place in our portfolio? (You’ll find our conclusion at the end of this report).
Before we dive in, check out the deep dive we released last year, where we concluded: “While Estée Lauder remains a quality business with strong potential, we believe its current valuation does not provide sufficient margin of safety, especially considering the prevailing headwinds.” Give it a read, then fast forward to today’s article for a thorough update on the company.
Contents:
Introduction
Performance Update
Industry
Valuation
Conclusion
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1. Introduction
What does the company do?
The Estée Lauder Companies Inc. (ELC) is a global leader in beauty, specializing in the manufacture, marketing, and sale of skincare, makeup, fragrance, and hair care products. Its portfolio includes iconic brands such as Estée Lauder, Clinique, Origins, M·A·C, Bobbi Brown, La Mer, Le Labo, Aveda, Jo Malone London, TOM FORD, Too Faced, Dr.Jart+, and The Ordinary.
The company’s products are distributed through a variety of channels, including department stores, specialty multi-brand retailers, high-end perfumeries, pharmacies, salons, spas, freestanding stores, its own and authorized retailer websites, third-party online platforms, airport stores, and duty-free locations worldwide.
The stock: Estee Lauder’s market cap as of 25th of November stands at $26.2B with a 52-week low of $62 and a 52-week high of $160, whereas it currently trades at $73 with year to date returns of -50%. Analysts have a 12-month target price of $80.5 representing an upside of 10%.
Valuation: Estee Lauder trades at a TTM EV/EBITDA ratio of 10.7x (5-Year average of 21.5x).
Source: Koyfin (20% off for StockOpine readers and 3 months free trial for annual premium members)
2. Performance Update
In this performance update, we will assess Estée Lauder's overall results, delve into segmental and regional performance, and highlight other key updates.
As shown in the chart below, the company demonstrated signs of recovery in March 2024 (Q3 FY24) and June 2024 (Q4 FY24), with organic growth rates of 6% and 8%, respectively (reported changes are shown in the chart). However, performance weakened in the most recent quarter, with sales declining by 4% and organic growth dropping by 5%.
The primary driver of this underperformance remains the ongoing challenges in China, including a slowdown in the prestige beauty market and persistently low conversion rates in Asia Travel Retail and Hong Kong SAR. Excluding these headwinds, the growth rate would have been a modest 1%. On a positive note, standout performances were observed in Japan and Priority Emerging Markets.
Source: FinChat.io (affiliate link with a 25% discount for StockOpine readers)
Profitability at Estee Lauder has also faced a downward trend in recent quarters, starting from Q3’FY23 (March 2023), with operating margins declining from approximately 16.5% in Q1&Q2’23 to 8.8% in Q4’FY24 and further dropping to just 3.9% in Q1’FY25. This deterioration can largely be attributed to sales deleverage stemming from challenges in Asia and Travel Retail.
As illustrated in the following charts, while selling, general, and administrative (SG&A) expenses have decreased at a CAGR of about 8% over the last three years, sales have contracted at a faster pace of 17%CAGR. Simultaneously, gross margins dropped significantly, from ~78% in December 2021 to 69% in March 2023, due to factors such as discounts and promotions, fixed cost deleverage, obsolescence charges, and a lower mix of skincare (the most profitable segment). This pressure on gross margins has meant that gross profit couldn’t cover expenses effectively.
Source: FinChat.io (affiliate link with a 25% discount for StockOpine readers)
However, a positive trend in gross margins emerged starting in Q2’FY24 (December 2023), where margins recovered to 73%. Further improvement is anticipated in Q2’FY25 (the next quarter). This recovery is supported by