Estée Lauder Falls After Slashing Outlook on China Weakness

Estée Lauder Cos. shares fell after the company reported another lacklustre quarter and slashed its outlook for the rest of its fiscal year, citing continued sluggishness in its China business and incipient weakness in the US.

The beauty company said on Wednesday that it expects earnings per share in the current fiscal year of $5.01 to $5.21 versus an earlier target of $7.11 to $7.33. Estée Lauder sees net sales decreasing between 6 percent to 8 percent in the current fiscal year versus the year-ago period. That includes an expected decrease in net sales in the current quarter between 17 percent to 19 percent.

Estée Lauder said sales in its Americas division dipped 3% in the three months ended Sept. 30. The company attributed the decline in part to retailers in the US starting to tighten inventory as well as inflation and recession concerns curtailing demand.

Executives told analysts during an earnings presentation on Wednesday that they would continue to raise prices to offset most of the impact from inflation. They said they are mulling the possibility of an even bigger price hike in January or February than they had been planning.

Estée Lauder said the weaker demand from retailers would likely start to reverse course in January and continue to abate throughout the second half of its fiscal year. An end to some licensing agreements for fragrances also hit sales in the first quarter.

In China, where Estée Lauder typically generates around one-third of revenue, ongoing pandemic restrictions continued to drag on sales. The company said it expects sales in Hainan — an island province that’s a popular travel destination and major revenue generator — to recover in the second half of the fiscal year. That’s a slower pace than it had previously signalled. “Covid-19 restrictions in China presented a greater challenge than expected,” the company said in a statement on Wednesday.

Executives told analysts that they didn’t expect Hainan to be back to normal levels of travel or demand until the latter half of next year.

Estée Lauder shares fell 6.2 percent in New York trading at 11:14 a.m. The stock was down 44 percent this year through Tuesday, worse than the 19 percent drop of the S&P 500 Index.

Similarly, Canada Goose Holdings Inc. lowered its outlook for the year on Wednesday, saying coronavirus restrictions in China and “significant uncertainty” in the global economy will hurt sales and margins.

Estée Lauder relies more on China than many competitors and has also fared worse than peers such as L’Oréal SA in the country. “L’Oréal’s business tends to be more stable than Estée’s because it is more diverse,” Morningstar analyst Rebecca Scheuneman said.

L’Oréal has a wider range of beauty categories, including prestige products sold in department stores and at duty-free shops as well as more mass-market products sold in drug and grocery stores, for example. In contrast, Estée Lauder’s product range is more upscale overall. “Prestige beauty is economically sensitive,” Scheuneman said. “During recessions, some consumers trade down from prestige brands to mass.”

Scheuneman noted that L’Oréal has more diversified supply chains in China, which was a benefit when Shanghai closed down earlier this year. Estée Lauder’s main distribution centres are in that city, which meant the company struggled to quickly fulfil online orders.

By Jeannette Neumann

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The fragrance and skin care company said that it expects an 8 percent to 10 percent drop in sales this quarter, compared with a year ago.