Company Reports

Wide-moat beauty product maker Estee Lauder has named Tara Simon as president of North America and Amber English as president of digital and online for the same region, both effective Jan. 1, 2025. The two executives in their new roles will overlap for six months with current president of North America Mark Loomis, who will retire in June 2025 after 28 years with the firm, including four years as the head of Asia-Pacific and three years leading North America.

Wide-moat Estee Lauder reported fiscal 2024 profits that exceeded our estimates but issued a sobering fiscal 2025 outlook, projecting another year of subdued growth as a weak China backdrop and sluggish Asia travel retail sales are again expected to weigh on performance. While we never anticipated a V-shaped recovery in China after two difficult years, we have revised the 2025 Asia-Pacific sales estimate (primarily China) to incorporate a low-single-digit decline as we now deem our prior forecast for a mild China rebound too optimistic. As such, we have lowered our 2025 forecast for sales growth to 2% (from 7%) and adjusted earnings per share to $2.87 ($3.95), which aligns with the company outlook. We’ve also tapered our expectations for years 2026 through 2029, resulting in our 10-year assumptions for average annual sales growth and operating margin falling to 6% and 15%, respectively, from 7% and 16% prior. Our fair value estimate is lowered to $176 from $210, but we continue to view shares as deeply undervalued trading at a 45% discount.

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.

We plan to maintain our $210 fair value estimate and our Standard Capital Allocation Rating for wide-moat Estee Lauder following the announcement that the company has promoted Corporate Controller Akhil Shrivastava to CFO, effective November. The outgoing CFO, Tracey Travis, will remain a senior advisor until her retirement in June 2025. As the two executives have worked together in the finance department for the past nine years, we expect a smooth transition of responsibilities in the coming months.

We plan to maintain our $210 fair value estimate and Standard Capital Allocation Rating for wide-moat Estee Lauder after the announcement that CFO Tracey Travis has decided to retire effective June 2025. The company said it has identified a successor to Travis to be named in the coming weeks, and we expect the two executives will work closely in the next 12 months to ensure a smooth transition of responsibilities.

As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive position 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 reported solid results in the March-ended third quarter of fiscal 2024 with sales and adjusted EPS up 5% and 106%, respectively. Encouragingly, the update showcased steady inventory management and agility in product innovation and consumer-facing initiatives that combined to fuel top-line growth, driving gross margin expansion that we view as crucial to its profit recovery trajectory. As a result, our 2024 $2.23 adjusted EPS estimate and operating margins averaging 16% over the next 10 years remain in place. However, cautious consumer spending in China remained a drag, leading us to trim our fiscal 2024 sales projection by a low-single-digit percentage but we maintain our 10-year sales CAGR forecast of 7%. Overall, our $210 fair value estimate is unchanged. Shares sold off 11% after the print, which we view as excessive, and we recommend that investors buy this deeply undervalued stock.

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.