Estee Lauder Earnings: Near-Term Outlook Dimmed by Travel Retail Woes; Shares Attractive

Although Estee Lauder’s (March-ended) fiscal 2023 third-quarter results were in line with guidance, the firm slashed its full-year outlook as travel retail, especially in China and South Korea, has been slow to recover. Specifically, the firm now anticipates a fiscal 2023 sales decline of 10%-12% and adjusted EPS of $3.29-$3.39, shy of our prereport estimates of negative 6% and $4.99, respectively. The new outlook implies a fourth-quarter sales decline of roughly 2% at the midpoint versus our forecast for 22% growth. Moreover, it appears that weakness in travel retail may persist through calendar 2023. Thus, we expect to reduce our $273 per share fair value estimate by a mid-single-digit percentage. Even so, we view Estee Lauder’s shares, which plummeted about 15% on the report, as attractive. While the firm has had to lower guidance in recent quarters, we attribute most of its problems to external factors related to COVID-19 restrictions and currency issues and anticipate margin recovery will begin in fiscal 2024. In the long run, we believe it can achieve mid-single-digit annual sales growth and operating margins in the low-20s as global demand for its prestige beauty products continues to rise. Our wide-moat rating is based on Estee Lauder’s portfolio of leading brands, strong distribution, and a scale-based cost advantage.