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Estee Lauder (EL) reported a better-than-expected fiscal first quarter, but a downbeat forecast for the rest of its fiscal year sent shares lower Wednesday. However, if not for our Club trading restrictions , we would have been buyers on the weakness. First, the headline numbers: Quarterly revenue declined 11% year over year to $3.93 billion, which was in line with the consensus estimate, according to Refinitiv. Organic net sales fell 5%, and that’s a little better than management’s guidance of an 8% to 10% decline, as pressure related to Covid restrictions in China weighed on the results. Asia travel retail was limited in the quarter, especially at the popular Chinese vacation spot Hainan, leading to strict inventory management by certain retailers in travel retail. Adjusted earnings-per-share declined 28% to $1.37, beating management’s guidance of $1.22 to $1.32 and the consensus estimate of $1.31, according to Refinitiv. Bottom Line We kept a position small in Estee Lauder ahead of last month’s National Congress of the Chinese Communist Party on the belief that leaders in China might soften their stance on zero-Covid. As we now know, the annual meeting there did not turn out as we had hoped. Despite continued uncertainty in China, we think it would be foolish to sell the stock after its de-rating back to pre-Covid times and one quarter away from when revenue growth and earnings are expected to accelerate. While dropping 9% to a session low of $187.85, a level not seen since January 2020, the stock did pare about a third of those declines. If there’s any break in policy or if the Chinese government provides any sign that it’s ready to move on from rolling Covid lockdowns and travel restrictions, then we fully expect Estee Lauder to be one of the largest gainers in the S & P 500 that day. The prestige beauty company is one of the best ways to play the return of travel and store traffic in Asia. It will see a surge in its business the first day those restrictions are gone. If you own Estee Lauder, you must understand that its long-term growth outlook relies on China travel. Uncertainty around its recovery makes visibility in the near-term rather low, but we believe it’s better to be opportunistic about a great company before a transitory event passes us by, and not after. Management did an excellent job navigating the initial challenges of the Covid pandemic, pivoting towards direct-to-consumer channels, picking up share, and raising its operating margin structure. We expect this hiccup in China will be no different. If the U.S. dollar is peaking here and starts to pullback, Estee Lauder will also see a huge pressure point on its business gradually ease. Reflecting the near-term earnings pressure, we’re cutting our price target to $260 per share from $275. However, for the reasons we just discussed, we would be small buyers of Estee Lauder Wednesday, if we were not restricted, and we would have gone bigger if the price returned to its $180-per-share level we saw in premarket trading. Results by geography In The Americas , Estee Lauder’s fiscal first-quarter net sales declined 6% on a reported basis and 3% on an organic basis to $1.12 billion, slightly missing estimates of $1.19 billion. Although it was disappointing to see a decline in the region, most of this is due to tough comparisons and timing related issues. Last year, retailers in the U.S. secured shipments earlier for the holiday season because to supply chain concerns. Inventories may be tightening this year, but the underlying demand in the United States is still strong. In Europe, the Middle East, and Africa (EMEA) net sales declined 10% on a reported basis and 5% on an organic basis to $1.68 billion, beating estimates of $1.48 billion. In Asia/Pacific , net sales declined 15% on a reported basis and 7% on an organic basis to $1.13 billion, missing estimates of $1.29 billion. Although the region was pressured by a significant slowdown in travel retail, we can make the case that demand trends are healthy. If you combine Chinese travel retail and Chinese retail in its domestic business, sales grew by a mid-single digits percentage clip. Even though foot traffic may be down in stores, we think Estee Lauder is seeing solid growth from its direct-to-consumer channels. Results by main categories Skin Care revenue declined 14% on a reported basis and 11% on an organic basis to $2.1 billion, beating estimates of $1.99 billion. This category saw the most impact by Covid restrictions in Hainan. Makeup revenue declined 10% on a reported basis and 6% on an organic basis to $1.05 billion, missing estimates of $1.16 billion. Although sales are down from the prior year, we are encouraged by how the company said the business is doing quite well wherever the market is reopened. Fragrance revenue was flat on a reported basis and increased 18% on an organic basis to $607 million, missing estimates of $622 million. Hair Care revenue increased 7% on a reported basis and 11% on an organic basis to $158 million, beating estimates of $142 million. Outlook Turning to the company’s outlook for the rest of its fiscal year, reported net sales are expected to decrease between 6% and 8% versus the prior outlook for 3% to 5% growth. This updated view reflects tighter inventory management in travel retail in response to decreased traffic related to Covid-related restrictions, a 6% headwind from foreign currency translation and an additional 2% headwind from foreign currency transition, a 1% headwind from the termination of the company’s license agreements for DKNY, and 1% headwind due to restructuring. Organic net sales are expected to be flat to up 2%.That’s lower than the prior outlook for 7% to 9% growth. The company cut its fiscal year adjusted earnings per share outlook to $5.25 to $5.40, reflecting a 44-cent-per-share headwind from foreign exchange. It was well below estimates of $7.35. Despite Estee Lauder’s forecasted decline in sales, management is committed to making strategic investments to drive long term growth. Some of those investments include putting more money towards advertising and innovation as wells as its innovation center in Shanghai and its manufacturing facility in Japan. For its fiscal second quarter, management expects reported net sales to decrease between 17% and 19% versus last year. Organic sales are expected to decline between 9% and 11%, well below estimates for 4% growth. Adjusted earnings-per-share are expected to be in the range of $1.19 to $1.29 compared to estimates of $2.80. Despite the expected weakness in Estee Lauder’s fiscal second quarter, trends should improve as the company moves through the back half of its fiscal year. We think this is a reason why we want to stick with the stock. Management expects to see a gradual sequential improvement to low double-digit parentage organic sales growth and high teens adjusted EPS growth on a reported basis. Driving this upbeat view is the expectation that pressures related to the China travel restrictions, tight inventory at some U.S. retailers, and the strong dollar will all abate. Estee Lauder also anticipates a continuation of momentum in other areas of its business and ongoing investments in innovation and advertising to drive growth. Shares of Estee Lauder have dropped 13% since we started a position back near the end of September. We owned shares previously for the portfolio but exited in December 2021 at around $365 near an all-time for a 22% gain. Capital Returns Separately, Estee Lauder announced that it’s increasing its quarterly dividend payment by 10% to 66 cents per share. We believe this decision reflects confidence in the company’s future. We find it unlikely that Estee Lauder would bump up its dividend by 10% if it felt there was structural disruption to its long-term growth outlook. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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Justin Chin | Bloomberg | Getty Images
Estee Lauder (EL) reported a better-than-expected fiscal first quarter, but a downbeat forecast for the rest of its fiscal year sent shares lower Wednesday. However, if not for our Club trading restrictions, we would have been buyers on the weakness.
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