Despite Near-Term Headwinds, Wide-Moat Estee Lauder Has Beautiful Long-Term Growth Prospects

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.