Estee Lauder Earnings: Weak 2023 on Travel Retail Woes; Branding and Innovation To Fuel Recovery

We plan to trim our $256 fair value estimate for wide-moat Estee Lauder EL by a low-single-digit percentage after assessing fiscal 2023 results and fiscal 2024 guidance. While 2023 revenue at $15.9 billion and EPS at $2.79 edged our estimates of $15.7 billion and $2.77, respectively, this was tempered by a cautious 2024 outlook that fell short of our forecast. We will adjust our projections to approximate management’s 2024 goals (5%-7% sales growth and 23%-33% EPS growth) but plan to stick with our 10-year targets for high-single-digit sales growth and operating margin expanding to 22% by the end of our forecast period. We view the shares as deeply undervalued and suggest investors buy into this beauty leader.

The 10% decline in 2023 revenue was largely due to a slow travel retail recovery in China that disproportionately affected skincare, which travel retail purchases tend to focus on—the category (52% of sales) saw a 17% revenue decline, whereas makeup and fragrance (down 3% and flat) sold mostly through traditional channels fared better. Encouragingly, skincare sales trends improved steadily over the past three quarters, with the decline narrowing to 5% in the June quarter (versus 25% two quarters ago), which we attribute to product refreshments and targeted marketing. We expect the positive trajectory to continue.

Operating margin contracted 840 basis points to 9.5%, burdened by low utilization of the new Asia factory and expense deleverage across selling, marketing, and research lines. We think Estee is prudent to step up investments in marketing (including on digital platforms such as TikTok) and lab research to assert its value proposition amid current consumer belt tightening. These investments may take a toll on profitability in the near future but should keep Estee on track to bring margins back to historical levels over the longer term, aided by strategic agility and solid execution.