Estée Lauder results underlines weakness in key Asian businesses

The results reflected how the company is struggling in the all-important Chinese market, where it has seen a continued deterioration in its market share. Concern over this has led to a succession of stock market rating agencies downgrading their outlooks for the company.

Berenberg chose to downgrade its rating for Estée Lauder from a buy to hold, citing concerns over general headwinds and that consumers in China are starting to slow their spending on a range of CPG categories.

"Most concerning to us, however, is the deterioration in market share trends for Estée Lauder (​EL​​) in China in Q1 FY 2024, which suggests the company may be struggling to capture its fair share of repatriated sales that were previously channeled through Daigou shoppers,"​ analyst Fulvio Cazzol said.

The company reported that sales were down from $3.93 billion in the corresponding quarter last year to $3.52 billion, stating that the decline was primarily down to expected pressures in the Asia travel retail business, on top of the headwinds in China.

The US and most of Asia Pacific were still strong​

However, the results were not all gloomy, partially offset by stronger performances reflecting net organic sales growth in the U.S., many other markets in the Asia Pacific region, and most markets in the EMEA region.

"In the context of a quarter which we anticipated to be challenging, we delivered our organic sales outlook and exceeded expectations for profitability,"​ said Fabrizio Freda, President and Chief Executive Officer.  

"Momentum continued in many developed and emerging markets around the world, where our organic sales grew strongly and we realized prestige beauty share gains. Encouragingly, we returned to growth in the U.S., with Fragrance, Makeup and Skin Care all contributing. This performance partially offset the pressures of Asia travel retail and a slower recovery of overall prestige beauty in mainland China."​

Results by category​

Looking at the results by category, the largest area of the business, skincare, saw some significant declines, while the performance of the haircare business was also weak. However, this was counterbalanced by a positive result from the fragrance business and, to a lesser extent, a steadier performance for makeup, too.

Skincare sales accounted for $1.63 billion in revenue during the quarter, representing a 21% dip in sales compared to the previous quarter. This was primarily down to declines in revenues from the company's Asia travel retail business and headwinds in China but was partially offset by a good performance from The Ordinary and MAC.

Makeup sales decreased by 1% to $1.06 billion, impacted by negative results in the EMEA region, partially offset by the Asia Pacific and Americas region. Increases in net sales were seen for MAC, Too Faced, Tom Ford, and Clinique, while a decline was seen for the Estée Lauder brand.

Fragrance was the one category bright spot, with sales increasing by 5% during the quarter to reach $637 million. The result was driven by double-digit growth for Le Labo and Tom Ford in Asia Pacific and the Americas. 

Haircare sales also took a hit, falling 6% to $148 million, which was impacted by slower sales for Aveda and Bumble and Bumble, mainly in the North American market. 

Forecast is lowered but longer-term looks brighter​

Reflecting the slower growth seen in both the Asia travel retail business and the China market, the company said that it was lowering its forecast for the rest of the year. However, it expects to see a return to net sales growth by the second half of fiscal 2024. 

To propel this future growth, the company said it aims to maintain its investment pipeline in several areas, including innovation, advertising, and expanding its emerging markets. It is also eyeing the completion of its first manufacturing facility in Asia, located in Japan, which will support the development of the supply chain in the Asia/Pacific region.