Estee Lauder Continues to Feel the Impact of Slow Travel Retail Recovery; Shares Fully Valued

Wide-moat Estee Lauder’s constant-currency sales dropped 11% in fiscal 2023’s (December-ended) second quarter, falling short of our negative 9% estimate, as reduced orders by retail partners in North America and coronavirus restrictions in China took a toll. Skin care, especially, was affected, with constant-currency sales down 20%. While the recent lifting of the restrictions should be positive, a recovery in travel retail in Hainan, South Korea, and other key markets will take time, affecting sales and profitability. Indeed, Estee Lauder’s fiscal 2023 net sales are expected to fall 5%-7% and, due to unfavorable currency movement and category and geographical mix, its operating margin is expected to come in at about 15.1%, down roughly 460 basis points from last year and below our 16.3% forecast. Thus, the firm lowered its fiscal 2023 adjusted EPS guidance to a range of $4.87-$5.02 from $5.25-$5.40 previously.