Estée Lauder Cos. shares plummeted the most on record after the beauty company cut its forecast for the third time in six months, as travel recovers more slowly than expected in the key market of China.
(Bloomberg) — Estée Lauder Cos. shares plummeted the most on record after the beauty company cut its forecast for the third time in six months, as travel recovers more slowly than expected in the key market of China.
The retailer now expects annual sales to be down about 10% to 12% for the fiscal year ending in June, worse than its previous guidance for a 5% to 7% decline. The slower-than-expected return to travel shopping in Asia is causing “significantly greater headwinds” than were expected just a few months ago, Chief Executive Officer Fabrizio Freda said in a statement on Wednesday.
Estée Lauder’s shares tumbled as much as 21% in New York trading, the most since the company went public in 1995. The stock is trading at its lowest level since November.
The more downbeat forecasts caught Wall Street by surprise, since the owner of the Clinique, The Ordinary and Le Labo brands has been grappling with weakness in Asia for months and executives had already been preparing analysts for significant declines in sales.
But “we did not assume another negative EPS revision for FY2023,” Oppenheimer analyst Rupesh Parikh wrote. “We incorrectly believed management’s implied back-half guidance for earnings down more than 15% (at the low end) included a cushion and captured travel retail headwinds.”
Estée Lauder executives had said in February that they were expecting a rebound in the current quarter that ends in June, as more Chinese shoppers travel to domestic hot spots including Hainan. The popular island province generates around 14% of Estée Lauder’s sales, according to estimates from analysts at TD Cowen.
But the company now says it won’t be able to meet even those lowered expectations.
Excluding some items, profit is now expected to be between $3.29 and $3.39 per share for the fiscal year, far short of the $4.97 that analysts had estimated. The company had already lowered its forecast twice because of continued weakness in China.
Estée Lauder said that traffic to the popular travel destination Hainan has exceeded prior-year levels, a sign that domestic Chinese tourism is rebounding. But shoppers on the Chinese island aren’t buying as many of its high-end beauty products as the company expected. That raises the risk of discounts in coming months, Bloomberg Intelligence analysts Deborah Aitken and Andrea Ferdinando Leggieri wrote in a research note.
‘Common Occurrence’
Estée Lauder will need another quarter or two to sell through its oversupply of products in Hainan. The company’s fiscal-year outlook “downgrades seem a common occurrence,” the analysts wrote. The company also cited weakness in travel retail sales in South Korea.
The downbeat outlook from Estée Lauder is a contrast from many of its competitors. Coty Inc., LVMH, L’Oréal SA and Kering SA have all said that sales in China have begun to accelerate in the current quarter after a slow start to the year.
“Given that competitors recently posted strong prints and provided generally positive commentary on the outlook for China, Estée Lauder’s lowered outlook today is a bit of a surprise,” RBC Capital Markets analyst Nik Modi wrote. “However, we continue to believe that China’s reopening will be a positive to Estée Lauder, although it may now be delayed until the back half of calendar 2023.”
The company also said its acquisition of the Tom Ford brand, which closed last week, will dilute full-year earnings by about 3 cents to 4 cents a share.
(Updates with analyst commentary, additional context starting in fourth paragraph.)
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