Estée Lauder Cos. is lagging behind its rivals as the reopening of China boosts the luxury-retail outlook. There’s a familiar culprit: supply-chain troubles.
(Bloomberg) — Estée Lauder Cos. is lagging behind its rivals as the reopening of China boosts the luxury-retail outlook. There’s a familiar culprit: supply-chain troubles.
While logistical troubles have moved into the background for many companies, they continue to plague Estée Lauder because it has longer supply chains in Asia than rivals. The owner of brands including Tom Ford Beauty and Jo Malone has been importing most of the products it sells in Asia from outside the region, forcing duty-free shops in China to order merchandise at least six months in advance.
Now, those stores have too much stuff. When merchants placed orders six months ago, they expected a gradual unwinding of China’s zero-Covid policy to underpin a steady sales surge. Instead, the Chinese government’s sudden lifting of restrictions at the end of last year led to a spike in infections and sales volatility.
That contributed to Estée Lauder slashing its annual forecast for the third time in six months this week, citing a plunge in sales at duty-free shops in China and South Korea in particular. Shares plummeted the most on record May 3 following the earnings report. They finished the week down 18%.
The results differ from those of rival L’Oréal SA, which said last month that its travel retail sales in Asia were “flattish” during roughly the same time frame. Executives at the French company said they were beginning to see a pickup in sales in China, echoing comments from other high-end beauty firms, including LVMH, Kering SA, Coty Inc. — which manufactures and sells fragrances including Gucci and Chloé — and La Prairie owner Beiersdorf AG.
“The beauty market itself is still in excellent shape but Estée Lauder has some company-specific problems at the moment,” Morningstar analyst David Swartz said. The New York-based beauty company’s repeated forecast cuts have “people questioning whether Estée Lauder has good visibility into its own sales.”
An Estée Lauder spokeswoman declined to comment.
‘Inventory Issue’
Stocked with too many face creams and serums, travel retail shops on the popular island of Hainan and elsewhere in China have pulled back on orders from Estée Lauder. “We are going through an inventory issue,” Chief Executive Officer Fabrizio Freda told analysts during a call on Wednesday. L’Oréal, by contrast, manufactures more products in Asia, enabling shorter lead times.
“Over the last three years, with such big shocks, you can’t have a six- to nine-month supply chain,” said Amanda O’Neill, S&P Global Ratings consumer products director. Estée Lauder expects total sales to fall 10% to 12% for the fiscal year ending in June.
The timing of the slowdown is inopportune: It comes as the company is tapping a $2.2 billion commercial-paper facility to fund its purchase of Tom Ford Beauty. “We have concerns about the underperformance given that they also have higher debt because of the Tom Ford acquisition,” O’Neill said. S&P revised its credit outlook on Estée Lauder to negative from stable on Friday.
In a bid to ship its products to Asia more quickly, Estée Lauder recently opened a manufacturing facility in Japan and is opening distribution centers in mainland China and in Hainan. “We have done investments to reduce our risk,” Freda said.
But some analysts say those investments came too late to meet the needs of its growing travel retail business, which is focused in Asia, and represented an estimated 27% of total sales in the most recent fiscal year versus 8% at L’Oréal.
South Korea
Estée Lauder’s South Korea duty-free business also suffered, as did L’Oréal’s. Executives cited vague post-pandemic policy changes as the reason for the weakness and a slow restart to group tours.
Also driving the decline is fewer purchases by resellers who buy sought-after products in South Korea and elsewhere and sell them back home in China, a practice known in Mandarin as daigou (dye-go). During the pandemic, sales at South Korea’s duty-free stores were mainly to daigou resellers, according to Bloomberg Intelligence analyst Angela Hanlee, as evidenced by high per-head sales figures.
Those figures have declined this year in part because of pushback on the practice from South Korea’s government and because travel retailers, eager to appease authorities, cut back on daigou sales when bidding for space in Seoul’s main airport in recent months, Hanlee said.
Freda says that despite the travel retail headwinds, Estée Lauder plans to stick with its travel retail strategy because it’s a good way to introduce brands to customers at high-end stores with well-trained staff — and more cost-effective than opening stores in hundreds of cities across China.
Temporary Setbacks
Most analysts who cover the company say the setbacks are temporary. They point to strong sales growth outside of Asia travel retail, in regions such as the Americas, as evidence that “demand for Estée Lauder’s products remains healthy and the company is poised for growth once the Asia travel retail dynamic is smoothed out,” RBC Capital Markets analyst Nik Modi wrote in a research note on Thursday.
Still, there are signs that the company’s bounceback could be choppy.
While China’s duty-free stores work through backlogs, they are simultaneously confronting more sluggish demand for Estée Lauder’s products than executives had expected. That’s in part because consumer traffic is rebounding faster in China than consumer spending, likely due to price cuts and weakened spending power post-Covid.
While that dynamic is affecting retail companies broadly, L’Oréal and other rivals still say they’re seeing momentum in their China sales. That raises questions about whether Chinese shoppers are less keen on Estée Lauder’s brands, which include La Mer and Clinique.
Estée Lauder’s brands “need reinvigoration, innovation and better marketing,” said Milton Pedraza, CEO of the Luxury Institute, a consultancy.
–With assistance from Daniela Wei and Shirley Zhao.
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