Estee Lauder Earnings: Sharper Focus on Active Derma and Digital Marketing to Fuel Sales Recovery

Wide-moat Estee Lauder delivered better-than-expected fiscal 2024 second-quarter results driven by steady channel inventory reduction that protected premium positioning and tight expense management. Sales fell 7% while operating profits grew 3%, ahead of our estimates for contractions of 8% and 5%, respectively. More importantly, we now see an improved profit outlook driven by a step-up in consumer-valued innovations (especially in active derma skincare) and by more agile marketing and channel strategies, which should bolster Estee’s long-term standing in prestige beauty and brand relevance with consumers. In addition, margins should benefit from a two-year restructuring aimed at delivering annual savings of $350 million-$500 million. As such, we expect to raise our 10-year sales CAGR projection to 7% (from 6.5%) and forecast a higher average operating margin at 16.2% (from 15.6%), which will likely drive a mid-single-digit percentage increase in our $200 fair value estimate. Shares popped 12% on the update, but we continue to view the stock as undervalued.