Shares of Estee Lauder (EL) plummeted on Wednesday after the cosmetics company delivered mixed fiscal first quarter and slashed its guidance — the latter of which forces us to question management’s credibility. Revenue fell 10% year over year to $3.52 billion, missing the Street’s consensus estimate of $3.53 billion, according to LSEG. Sales were down nearly 11% on an organic basis. Adjusted earnings-per-share (EPS) cratered 92% to 11 cents, but still beat the loss of 20 cents expected by analysts. Bottom line The quarterly numbers really don’t matter. We were expecting a bad quarter, but we were led to believe it would be the last bad quarter. That made the horrendous downward revision delivered by Estee Lauder’s management team extremely disappointing. Sales for the full fiscal 2024 are now expected to land between a 2% decline and 1% advance compared to 2023 — well below the prior forecast for growth of 5% to 7% and a far cry from the Street’s 5.4%. At this point, it hardly matters what else the Estee team has to say: The investor community has lost confidence in its ability to forecast. We understand the dynamic nature of macroeconomic forces, particularly over the last few years, which makes forecasting extremely difficult. But Wednesday’s revision shows management has no handle on what’s happening on the ground. It would have been better served by simply pulling its guidance and sticking to qualitative commentary. Estee Lauder did offer up a new “Profit Recovery Plan,” but the impact is not expected to kick in until fiscal years 2025 and 2026. It provides little comfort. There were no positives to pull from the quarterly report and conference call. China remains weak as the post-pandemic recovery still isn’t gaining traction — despite positive forecasts for several quarters — and the war in Israel and rising tensions in the Middle East more broadly represent a new headwind. As great as CEO Fabrizio Freda and team have been in the past, they clearly have lost control of the narrative and lost any credibility with investors. As a result, we are downgrading this name to a 4 rating and removing our price target. As a reminder, a 4 rating means that no action will be taken on the stock until we obtain a better understanding of how the company will fix its problems. Outlook Management had indicated that this quarter was the final hump to clear before settling back into a more normalized environment. Clearly, management lost its bearings. When you get this many downward revisions in a row, investors stop believing. The team was far too confident in its ability to navigate the environment and shareholders are paying for that today. Shares were down more than 17% in midday trading Wednesday. In addition to the guidance cut for fiscal 2024 sales, organic net sales — which excludes non-recurring, non-operating contributions or detractions (acquisitions/divestitures or currency fluctuations) and therefore provide a better look at the core business — are now expected to fall in a range of down 1% to up 2%, which is also a large downward revision versus the prior range of up 6% to 8% and = the Street’s estimate of 6.3%. This all amounts to an updated fiscal year 2024 adjusted earnings range of $2.17 to $2.42 per share, way down from management’s previous range of $3.50 to $3.75 and below the Street’s call for $3.59 per share. Sales for the current quarter were revised to be down 11% to 9%, below the 2.2% estimate. Organic sales are expected to decline 10% to 8%, below the 3.6% estimate. Management expects adjusted earnings of between 48 cents and 58 cents. We were looking for a gain of $1.23 per share. Profit recovery plan Management attempted to mitigate investor frustration by announced a turnaround strategy. Per the earnings release, the plan is anticipated to be substantially in place in the beginning of calendar 2024 to enable the realization of expected benefits in fiscal years 2025 and 2026, the majority of which are expected to benefit fiscal 2025 operating profitability. This plan is designed to improve gross margin and lower certain operating expenses over the next two fiscal years, while further investing in key consumer-facing activities. This plan is expected to increase operating profits by $800 million to $1 billion by completion. We understand why management would want to highlight a longer-term plan to get back on track. But it is basically saying that fiscal 2024 is a wash and to look past it. We find that hard to do considering there are three more quarters left in this fiscal year. That’s an eternity from our perspective, especially given that we’ve already sat through several quarters of disappointment. Quarterly commentary Skin care — Estee Lauder’s highest-margin category — remained under pressure, primarily due to ongoing efforts to reduce and rebalance inventory levels in the Asia travel retail business. The recovery of overall prestige beauty sales in mainland China has also proven to be slower than expected (again). Makeup was up slightly as growth in the Americas and the Asia/Pacific region (excluding China) were partially offset by a decline in Europe, the Middle East and Africa (EMEA). The pressure in EMEA are a result of the noted challenges in the Asia travel retail business. Fragrance sales benefited double-digit growth in the Americas and Asia/Pacific for the fragrances Le Labo and Tom Ford. Hair Care took a hit driven by softness in North America. In the Americas, organic net sales were up 6% on the back of mid-single-digits in the North America segment, led by the United States and high-single-digits growth in Latin America led by Mexico and Brazil. EMEA sales were down 27% on an organic base, while Asia/Pacific sales were down 3% organically as the recovery of overall prestige beauty in mainland China continues to disappoint. (Jim Cramer’s Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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An Estee Lauder pop-up store is seen inside daimaru Department Store on Nanjing Road Pedestrian street in Shanghai, China, August 6, 2021.
Costfoto | Future Publishing | Getty Images
Shares of Estee Lauder (EL) plummeted on Wednesday after the cosmetics company delivered mixed fiscal first quarter and slashed its guidance — the latter of which forces us to question management’s credibility.
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- Revenue fell 10% year over year to $3.52 billion, missing the Street’s consensus estimate of $3.53 billion, according to LSEG. Sales were down nearly 11% on an organic basis.
- Adjusted earnings-per-share (EPS) cratered 92% to 11 cents, but still beat the loss of 20 cents expected by analysts.
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