Estée Lauder Cos.’ Shares Tumble on Downgraded Outlook
More than three years after the global COVID-19 pandemic began, the Estée Lauder Cos. is still reeling from its impact.
The beauty giant and new owner of Tom Ford has once again slashed its full-year forecasts for both the top and bottom lines due to a slower-than-expected recovery in travel retail in Asia, its executive team revealed Wednesday, causing the company’s share price to tumble around 18 percent to $202.70.
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The lowered forecast comes despite an easing in lockdowns in mainland China, with sales in the region returning to growth in the third quarter.
Lauder’s overall net sales for the full year are now forecast to decrease between 10 percent and 12 percent, greater than the previously expected 5 percent to 7 percent drop. Adjusted diluted earnings per common share are anticipated to slide between 50 percent and 51 percent, compared with the previous forecast for a 27 percent to 29 percent decline.
“As the shape of recovery from the pandemic for Asia travel retail comes into better focus, it is proving to be both far more volatile than we expected and more gradual relative to what we experienced in other regions,” said Fabrizio Freda, president and chief executive officer. “While we work through the serious — but we believe temporary — headwinds facing Asia travel retail, we are encouraged by the strong momentum in the rest of our business.”
Lauder, which has a much bigger travel retail business than some of its competitors, saw its Asia travel retail business continue to be pressured by the slower-than-anticipated recovery from the COVID-19 pandemic, with global travel retail organic sales declining 45 percent in the third quarter, compared with a year earlier.
In South Korea, as well as in Asia more broadly, the travel retail recovery was challenged by the slower-than-expected resumption of international flights, granting of visas, and organized group tours. And in Hainan, a popular vacation spot in China, while traffic into the island exceeded prior-year levels, this did not lead to a surge in prestige beauty sales.
At the same time, Lauder continued to be pressured by the strong U.S dollar, historically high inflation and recession concerns, it said.
As a result, for the third quarter ended March 31, net sales came in at $3.75 billion, a decline of 12 percent from $4.25 billion in the prior-year period, but beating Wall Street estimates of around $3.72 billion. Organic net sales fell 8 percent, primarily driven by Asia travel retail in Hainan and South Korea.
Of the results, Tracey Travis, Lauder’s chief financial officer and executive vice president, said: “We are certainly not satisfied with our results this fiscal year and will address plans to progressively rebuild margin accretive areas of our business beyond this fiscal year from the current year’s level.”
While travel retail will remain an important part of the business, Travis told WWD that she is expecting growth to become more balanced, with the recovery in brick-and-mortar retail.
Olivia Tong, an analyst at Raymond James, noted: “While management has seen mainland China sales return to year-on-year growth in the quarter as a soft January was more than offset by double-digit increases in February and March and traffic into Hainan improved, overall travel retail has been slower to recover than expected, as has conversion of travelers into shoppers. This is leading to a lower-than-expected 4Q guide, as management is also addressing elevated retail inventories.”
A breakdown of the numbers showed that skin care net sales declined 17 percent. Within that, declines from La Mer, Estée Lauder and Dr.Jart+ were partially offset by growth from The Ordinary and MAC. In particular, the latter saw net sales more than double, fueled by its new skin care line Hyper Real, which launched earlier this year with a cleansing oil, serum and moisturizer priced from $48 to $55, and a $37 application brush as makeup brands expand into skin care.
Makeup sales were virtually flat, while fragrance grew double digits, reflecting strong performances in every region and from Tom Ford Beauty, Le Labo and Estée Lauder. Hair care, meanwhile, increased 3 percent.
On a geographical basis, net sales rose 6 percent in the Americas, but declined 24 percent in Europe, Middle East and Africa. Sales grew 7 percent in Asia Pacific, driven by the ongoing recovery from eased COVID-19-related restrictions compared to the prior-year period, led by Hong Kong, Australia, Japan and mainland China. This was somewhat offset by South Korea.
Net sales in mainland China returned to growth, reflecting double-digit increases in February and March, partially offset by the decline in January due to the impact from the increase in the number of COVID-19 cases.
The company reported net earnings of $156 million, compared with net earnings of $558 million in the prior-year period. Adjusted diluted net earnings per common share declined 75 percent to 47 cents, beneath analysts’ predictions for 51 cents.
Last week, the group completed its acquisition of Tom Ford, appointing Guillaume Jesel president and CEO of the brand, while Peter Hawkings has been tapped as creative director. The deal, which valued the brand at $2.8 billion, was funded by cash on hand and proceeds from the issuance of commercial paper, as well as $250 million received from Marcolin. An additional aggregate amount of $300 million in deferred payments from Estée Lauder to the sellers becomes due beginning in July 2025.
Tom Ford Beauty is expected to achieve $1 billion in net sales annually over the next couple of years, according to Lauder.
“We are thrilled to have enriched our brand portfolio last week, when we acquired Tom Ford, a power player in luxury with promising growth opportunities ahead. The deal is a wonderful outcome of our successful journey with the brand, which began when we collaborated with Tom Ford Beauty over 15 years ago,” said Freda during a post-earnings call with analysts.
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