Estee Lauder Companies Inc. (NYSE:EL) continues to demonstrate a formidable foothold in emerging markets, serving as a buffer against economic challenges in more mature markets. The beauty giant, renowned for its thriving online business, is diligently executing a profit recovery plan to fortify its profit margins for the future. However, it is not impervious to external pressures.
Solid Footing in Emerging Markets
A substantial portion of The Estee Lauder Companies’ revenue stream originates from emerging markets, prompting strategic investments in distribution, digital, and marketing endeavors within these regions. The company is witnessing sustained momentum in numerous emerging markets globally, marked by robust organic sales and gains in prestige beauty shares.
During the first quarter of fiscal 2024, management underscored the company’s high mid-single-digit growth across emerging markets year-to-date. Noteworthy performances include stellar gains in India within EMEA’s emerging market and solid results in the Latin American prestige beauty market, particularly with double-digit organic growth in Mexico and Brazil. The company’s localized go-to-market initiatives across emerging markets are gaining traction, and efforts to expand consumer reach across high-growth channels while strategically entering new countries are proving successful.
Profitability Rebuilding Efforts on Course
The Estee Lauder Companies is diligently executing a profit recovery plan aimed at rebuilding profit margins for fiscal years 2025 and 2026. This plan focuses on enhancing gross margin and reducing operating expenses in key areas of the business. The company aims to optimize its product mix by emphasizing luxury across brands based on consumer preferences. Management is actively seeking opportunities to enhance value through favorable price realization and innovation, leveraging strategic investments such as a new manufacturing facility in Japan, innovation labs in Shanghai, and enhanced online capabilities. The anticipated outcome is an incremental operating profit of $800 million to $1 billion through fiscal years 2025 and 2026.
Online Business: Driving Force
Estee Lauder Companies is reaping the benefits of a robust online business, implementing cutting-edge technology and digital experiences. Initiatives such as online booking for store appointments, omnichannel loyalty programs, and high-touch mobile services have bolstered online sales. The company continues to expand its omnichannel capabilities to offer flexible and convenient shopping options for consumers.
Challenges in the Horizon
Despite its successes, The Estee Lauder Companies faces challenges, including a slower growth rate in Asia travel retail and overall prestige beauty in mainland China. This slowdown is evident in the presale period of the 11.11 Shopping Festival. Additionally, potential disruptions in Israel and other Middle Eastern regions pose risks to the company’s outlook. The exposure to unfavorable currency headwinds further adds to the challenges.
The impact of these external challenges has prompted management to revise its fiscal 2024 guidance, anticipating net sales in the range of a 2% decline and a 1% increase. This adjustment contrasts with the earlier projection of a 3-5% increase in net sales. Adjusted earnings per share (EPS) are now expected to decline 25-33% at constant currency, as opposed to the earlier forecast of 4-12% growth.
Despite these hurdles, the positive factors highlighted earlier are expected to provide some relief. The Estee Lauder Companies’ stock has experienced a 2.7% decline in the past three months, in contrast to the industry’s 9.2% growth.
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