Company Reports

As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive standing with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we award Estee a wide moat rating.

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.

As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive standing with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we believe Estee deserves a wide moat rating.

We have cut our fair value estimate for wide-moat Estee Lauder to $200 from $249 to reflect a weaker-than-expected near-term outlook given soft spending in high-margin skin care products amid macro headwinds and lingering inventory issues in Asian travel retail. We now forecast fiscal 2024 sales to be flat (down from a 6.5% increase previously). This reflects a 5% contraction in skincare sales (versus a 6% growth in our prior model) driven by weak demand in China and in travel retail, while sales of the other segments remain in place. Further, the lower sales, unfavorable mix, and higher costs associated with the new factory in Japan and a step-up in digital marketing resulted in a lowered fiscal 2024 EPS of $2.31 (from $3.75), which squares with the firm’s revised outlook. Even with this, we see an attractive upside in this deeply undervalued stock.

As a leading provider of premium beauty products, Estee Lauder has fortified its competitive standing with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we believe Estee deserves a wide moat rating.

We plan to trim our $256 fair value estimate for wide-moat Estee Lauder by a low-single-digit percentage after assessing fiscal 2023 results and fiscal 2024 guidance. While 2023 revenue at $15.9 billion and EPS at $2.79 edged our estimates of $15.7 billion and $2.77, respectively, this was tempered by a cautious 2024 outlook that fell short of our forecast. We will adjust our projections to approximate management’s 2024 goals (5%-7% sales growth and 23%-33% EPS growth) but plan to stick with our 10-year targets for high-single-digit sales growth and operating margin expanding to 22% by the end of our forecast period. We view the shares as deeply undervalued and suggest investors buy into this beauty leader.

We view the shares of wide-moat Estee Lauder as compelling, trading at a 29% discount to our $256 fair value estimate. The stock sold off 27% year to date due to a slow post-COVID-19 recovery in China, but we don’t view the challenges as structural and long term in nature. We expect the firm to return to its historical growth trajectory by leveraging strong brands, tight channel relations, and research and manufacturing initiatives in Asia to reinforce its positioning. Shares of this beauty leader rarely go on sale, and we recommend investors looking for exposure to beauty to stock up on the name.

We are raising our fair value estimate for Estee Lauder to $256 (from $253), which implies 39 times multiple against our fiscal 2025 (June-ending) earnings estimate. The increase is driven by time value, as our increased annual sales growth estimates over the 10-year period (6.1% versus 5.3% prior) are offset by tapered average operating margin assumptions (20% versus 21%) due to a stepped-up manufacturing and selling cost outlook, leaving our net income forecast virtually unchanged. We view Estee shares as attractive, trading at a 25% discount to our intrinsic valuation, and suggest investors looking to ride beauty tailwinds start building a position in this name.

As a leading provider of premium beauty products, Estee Lauder has fortified its competitive standing with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we believe Estee deserves a wide moat rating.

We believe Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

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.

We believe Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

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.

After months of speculation by the media, wide-moat Estee Lauder announced it would acquire the Tom Ford brand, valuing the business at $2.8 billion. We had been apprehensive of this rumored deal, having been concerned that it would extend Estee’s reach into the fashion arena, which is beyond its core competencies. But we are pleased that the structure of the deal permits Estee to remain a pure-play beauty company as Ermenegildo Zegna will hold a long-term license for all Tom Ford-branded apparel and accessories excluding eyewear, for which Marcolin will retain the exclusive license.

We believe Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

We think the decline in Estee Lauder shares presents a compelling buying opportunity for long-term investors, as the market seems overly focused on near-term headwinds while long-term growth prospects remain robust. The shares are down about 50% year to date, including the mid-single-digit percentage drop on lowered full-year guidance disclosed in conjunction with the fiscal 2023 first-quarter report. The lowered guidance (sales down 6%-8% from 3%-5% growth previously and adjusted EPS to $5.25-$5.40 from $7.39-$7.54) is driven by three factors: weak travel retail in Hainan because of COVID-19-related restrictions, cautious holiday ordering by U.S. department stores given economic concerns, and currency headwinds. While these challenges affect our near-term outlook and we will adjust our fiscal 2023 estimates accordingly, they do not alter our long-term expectations for Estee, which include 7% annual sales growth and low 20s operating margins. We plan to trim our $278 fair value estimate by a mid-single-digit percentage, leaving the stock trading at a 30% discount to our valuation.

We believe Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

As wide-moat Estee Lauder’s fiscal fourth-quarter results were largely as expected, we don’t plan a material change to our $283 fair value estimate, leaving shares fully valued. Estee’s fourth-quarter sales fell 10% given a myriad of near-term headwinds—COVID-19-related lockdowns in China which limited demand for makeup and fragrance while curtailing the firm’s ability to ship product, suspension of its Russia and Ukraine operations, and a 3% currency hit. Although the Shanghai distribution facility resumed full operations in June, new lockdowns in Hainan and courier service limitations (which are inhibiting e-commerce shipments) are causing pressure to bleed into the first fiscal quarter. Estee issued fiscal 2023 sales growth guidance of 3%-5% (well below our 12.5% estimate) which includes a 1% hit from the newly announced termination of four licenses (DKNY, Michael Kors, Tommy Hilfiger, Ermenegildo Zegna) as part of its streamlining efforts. Even so, we think these headwinds will prove short-lived as demand has quickly rebounded once pandemic restrictions ease, and we are not wavering from our call for 7% long-term annual sales growth. Further, we think economic pressure will not pose a material threat to Estee, whose customers skew to the high-end, where higher discretionary incomes should help protect against inflation.

The global beauty market has realized 4%-5% annual growth over the past decade (excluding the pandemic), and we expect a modest acceleration to 5% in the next 10 years as China becomes a bigger portion of the mix (from 19% of the global market in 2021 to 29% in 2031 by our estimate) and as makeup continues to recover post-pandemic. China should continue to be a driving force of growth for years to come, as consumers in this region are just beginning to expand into makeup, fragrance, and haircare, although the skincare market is more developed. Further, as other emerging markets (Brazil, India, Mexico) experience rising incomes, this should boost their per capita consumption of beauty, providing additional growth potential beyond China.

We believe Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.