Updated Aug. 18 at 1:37 p.m.
The Estée Lauder Cos.’ full-year forecasts fell short of Wall Street estimates as the company’s struggles to regain footing in the Asia travel market continue, despite a better than expected set of fourth-quarter results.
Lauder, which has a much bigger travel retail business than some of its competitors, has seen Asia travel retail pressured by the slower-than-anticipated recovery from the COVID-19 pandemic, especially in the popular vacation resort area Hainan. This in turn led its overall global travel business’ organic sales to slide 34 percent in its 2023 fiscal year.
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At the same time, U.S. sales have yet to climb back to pre-pandemic levels, while its California brands — Smashbox, Too Faced and Glamglow — have all initiated layoffs in the past year as those businesses face challenges.
Fabrizio Freda, president and chief executive officer of the Estée Lauder Cos., said, “For Asia travel retail, the pressure in Hainan intensified over the course of the fourth quarter. In May and June, retail sales trends deteriorated and turned steeply negative following the enforcement actions to control the activity. The implication of these are favorable for sustainable, long-term growth but certainly create significant short-term headwinds through the transition.”
As a result of all these factors, the global beauty giant, which last year acquired Tom Ford, forecasted net sales to increase between 5 and 7 percent in fiscal 2024 versus the prior year, below analysts’ estimates for 8.8 percent.
Diluted net earnings per common share are projected to be between $3.50 and $3.75. Analysts had penciled in $4.83.
The news weighed on Lauder’s share price, which was down 3.3 percent to $156.69 on Friday. At the beginning of the year, it stood at around $253.
Mark Astrachan, an analyst at Stifel Financial Corp., said the guidance reflected “Lauder’s underperformance relative to many prestige beauty peers, reflecting the company’s over-reliance on China/Asia travel retail, U.S. weakness and mix to skin care.”
In the fourth quarter ended June 30, net sales came in at $3.61 billion, a 1 percent increase compared with $3.56 billion in the prior-year period and above Wall Street expectations for $3.48 billion.
Organic sales were down 15 percent in EMEA, a figure that includes the global travel retail numbers, while Asia Pacific was up 36 percent. Mainland China’s fourth-quarter organic sales were up by double-digit compared to both one and two years ago, the company said. The Americas were flat compared with the same period a year earlier.
In an interview with WWD, chief financial officer Tracey T. Travis put the slower U.S. recovery in part down to the delayed recovery in makeup, which is Lauder’s largest category in the country.
Net loss, meanwhile, was $33 million, and diluted net loss per share was 9 cents. On an adjusted basis, it was 7 cents per share, compared with Wall Street forecasts for a loss of 4 cents per share.
For the full fiscal year, net sales were $15.91 billion, a decrease of 10 percent from $17.74 billion in the prior year. Net earnings were $1.01 billion, compared $2.39 billion in the prior year.
Skin care, which makes up 50 percent of the business, saw net sales fall 14 percent over the year, primarily reflecting the challenges in Asia travel retail. Makeup net sales were virtually flat, but fragrance net sales rose 14 percent, reflecting double-digit growth across every region and led by Tom Ford, Estée Lauder and Le Labo. Hair care net sales rose 6 percent.
Diluted net earnings per common share was $2.79, compared with $6.55 reported in the prior year.
Freda added: “For full-year fiscal 2023, we delivered organic sales growth and prestige beauty share gains in many developed and emerging markets, but Asia travel retail pressured results, particularly in skin care, and we continued to experience softness in North America. Fragrance excelled, up double digits in every region, and makeup improved sequentially to double-digit growth in the fourth quarter as more markets emerged into the post-pandemic era.”
The Estée Lauder Cos. also gave an update on the cybersecurity attack that caused it take take some of its systems down in July. The company said it had identified a cybersecurity incident that involved an unauthorized third party gaining access to some of its systems, and afterward, Lauder began an investigation with a third-party cybersecurity expert. The company said it was also coordinating with law enforcement.
Travis said she believes the incident has been contained. “After becoming aware of the incident, we proactively took down some of our systems. We began bringing our systems back online within days, which limited the incident’s impact on the company’s operations. Based on the information available to-date we believe the incident is contained.”
As for its financial impact on the business, she stressed that the cybersecurity incident is not expected to have a material impact to net sales, but it is expected to be approximately 7 cents dilutive to earnings per share.
On the company’s M&A strategy amid these challenges, Travis said: “We are always looking at where we have whitespace opportunities within a portfolio, but I would say that’s a bit slower right now. We have the Tom Ford acquisition that we’ve just done and the Deciem upcoming pending acquisition.”