Nik Modi from UBS said shoppers are switching to cheaper, mass market cosmetics from higher priced products as the economic downturn bites into consumer spending.
Impact of trading down
This recessionary trend is hurting Estee Lauder but playing into the hands of companies such as Avon which is often the trade down option.
Modi also said Estee Lauder was suffering from the weakness of the travel retail market and warned that further deterioration might weigh on margins.
“Travel retail has seen significant declines over the past six months as consumers cut down on international air travel,” Modi wrote, cutting his rating on the stock to “Sell” from “Neutral”.
Since the start of the year shares in Estee Lauder have fallen 13 percent. For the second quarter, Estee Lauder reported a 30 percent fall in net income and a 6 percent decline in net sales.
Chief Executive Fabrizio Freda said consumers were delaying purchases or simply going without for a while, especially in the fragrance category.
In response the company announced a restructuring program in February involving the loss of 2,000 jobs, 6 percent of the workforce.
Prospects for Avon
Avon also announced restructuring plans in February that include even more extensive job cuts. The direct seller plans to reduce the size of its workforce by 2,500 to 3,000 people worldwide over the next four years.
Despite these job cuts and a 9 percent fall in net sales in the latest quarter, Caris & Co analyst Linda Bolton Weiser rated Avon shares as "Buy" in a recent note saying that the company is benefiting from consumers choosing cheaper cosmetics.
Weiser said Avon will roll out value products this year priced under $4.99 and launch brochures that promote a "cost-saving" shopping experience to target budget-conscious shoppers.