The Estée Lauder Cos. Cuts Full-year Forecast

In what could be the first sign that the crucial holiday period may not be what the beauty industry had been hoping for, the Estée Lauder Cos. Inc. has slashed its full-year forecast as COVID-19-related lockdowns in China, record high inflation and currency fluctuations weigh on the beauty giant, causing its share price to drop around 8 percent.

Delivering its latest set of earnings results, the owner of Clinique, MAC, La Mer and others reported that full-year net sales are forecast to decrease between 6 percent and 8 percent in the 2023 financial year, down from its previous forecast of growth of 3 to 5 percent.

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Adjusted diluted earnings per common share are expected to fall between 19 percent and 21 percent, versus prior expectations for growth of between 5 percent and 7 percent.

“Since we spoke in mid-August, the headwinds of COVID-19 restrictions in China, high inflation globally, and a strong U.S. dollar intensified significantly,” Fabrizio Freda, president and chief executive officer, told analysts during a call to discuss the earnings report.

In particular, in China’s Hainan province, the ongoing COVID-19 restrictions led to prolonged store closures, the curtailment of travel and caused the tightening of inventory by certain retailers that had previously placed orders in anticipation of the return of travel, which was since delayed.

Business was also negatively impacted by inflationary pressures and recession concerns, which caused certain retailers in the U.S. to tighten inventory.

For the second quarter, which includes the crucial holiday period that makes up the lion’s share of the retailer’s profits, reported net sales are forecast to decrease between 17 percent and 19 percent versus the prior-year period.

As for its first quarter ended Sept. 30, Lauder reported net sales of $3.93 billion, a decline of 11 percent from $4.39 billion in the prior-year period, but in line with Wall Street expectations.

Within that, skin care sales declined 11 percent as net sales growth from La Mer, Bobbi Brown and The Ordinary were offset by declines from Estée Lauder, Dr.Jart+ and Origins. Elsewhere, makeup was down 6 percent, but fragrance surged 18 percent and hair care was 11 percent higher.

On a geographic basis, sales in the Americas slipped 3 percent, while in Europe, the Middle East and Africa they were down 5 percent and in Asia Pacific they were 7 percent lower.

Net earnings came in at $489 million, compared with $692 million a year earlier. Diluted net earnings per common share were $1.35, compared with $1.88. On an adjusted basis, they declined 28 percent to $1.37. Analysts had been expecting $1.31.

Freda stressed, though, that the company is anticipating sequential acceleration to strong organic sales and adjusted EPS growth in the second half of its fiscal year as these pressures begin to abate.

“Our optimism in the long-term growth opportunities for our brands and for prestige beauty remains intact. Reflecting our confidence, today we raised our quarterly dividend.”

As for how the macroeconomic environment has affected its M&A strategy, executive vice president and chief financial officer Tracey Travis told WWD that Lauder is “certainly mindful of a higher cost of capital,” but continues to be active in terms of looking for brands that would fit strategically within its portfolio.

In August, the Estée Lauder Cos. emerged as a surprise front-runner to acquire Tom Ford International, according to industry sources. It already has the license for Tom Ford Beauty.

The Estée Lauder Cos.’s share price closed down 8 percent, or $16.80, to $189.96.

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