Shares of Estee Lauder popped more than 13% Monday after the cosmetics company delivered better-than-expected results for its fiscal second quarter. More important in driving the market action, however, was CEO Fabrizio Freda’s comment that “we are, encouragingly, at an inflection point.” Revenue fell 7% year over year to $4.28 billion, outpacing the Street consensus of $4.19 billion, according to estimates compiled by LSEG. Sales were down 8% on an organic basis, slightly better than the 9% organic decline expected by analysts. Adjusted earnings-per-share (EPS) fell 43% to 88 cents per share, beating the Street estimate of 55 cents. Bottom line The worst appears to be behind Estee Lauder and management is confident the company’s performance will improve from this quarter, so long as management delivers on its marks and restores confidence. It’s true that overall sales were mixed and the earnings guidance outlook came in short, but the Street is looking past this as the sales guide for both the current quarter and full year — along with the positive outlook for organic growth — signal sequential improvement as we move through 2024. Moreover, earnings should start to recover in fiscal year 2025 (starting in July 2024) as management’s “profit recovery plan” kicks in. The plan is now expected to increase operating profit by $1.1 billion to $1.4 billion, up from a prior target of $800 million to $1 billion. In terms of timing, management noted on the call that more than half of this should be realized in fiscal 2025. The increase comes from the inclusion of a new restructuring program that is focused on “rightsizing” certain areas of the company and simplifying processes. Management expects to realize a 3% to 5% reduction of positions versus end of June 2023 level. The plan is expected result in a better gross margin, lower operating costs and reduced overhead expenses, resulting in improved operating leverage. “While this is a difficult decision, we believe it is now this larger plan that will better position the company to restore stronger and more sustainable profitability while also supporting sales growth acceleration and increasing agility and speed to market,” Freda told investors during the post-earnings call. Meanwhile, the company continues to make progress in correcting inventory levels in Asia travel retail and reiterated its expectations to hit a normalized level exiting the current quarter (fiscal year third quarter of 2024). The key takeaway is that Estee Lauder has bottomed out. Given how far the stock has fallen in recent years, that’s all that was needed for the relief rally we are seeing today. We would caution investors from chasing the move. At least some of the buying activity is likely the result of shorts closing out positions. After all, if things are only set to get better, that’s when you would close out a position. It’s similar to selling a stock if you think the path ahead is only going to get worse. Monday’s price action aside, we feel much better about Estee Lauder and believe management may be back on track to regaining some of the credibility it lost in recent quarters. Still, one quarter isn’t enough for us to fully trust that we’re out of the woods. We are sticking with the stock for now, with our focus on the promised sequential improvement in the coming months. As a result, we are maintaining our 4 rating until we can really confirm the bad times are in the rearview mirror. Guidance Starting with the fiscal third quarter outlook, sales are expected to increase 3% to 5%, better than the 3% estimate by analysts. On an organic basis, sales are expected to increase 4% to 6% versus last year, significantly better than the 0.3% growth expected by the Street. Sales are the focus at the moment because they tell us more about the end market status than earnings do, which is more about operating efficiency and execution. With a restructuring plan in the works — including one-time charges that hit the bottom line — Estee Lauder gets a pass on weak earnings so long as it can hit sales targets and demonstrate decent operating profit margins. Management expects adjusted earnings in the range of down 18% to up 3% on a constant currency basis. That represents a sizable miss versus the greater than 70% growth expected by analysts. Again, it’s the idea that we’ve hit an inflection point on sales (which speaks more to demand, the key focus for investors at the moment), that is causing the Street to look past the earnings outlook. About that inflection point: On the post-earnings conference call, Freda said the company is positioned to return to organic sales growth for the total company in the third quarter and organic sales growth to sequentially accelerate in the fourth quarter. In addition, he expects stronger profitability in the second half of this fiscal year compared to the first half. He also said the company is preparing to “meaningfully accelerate the rebuild of our profitability” in fiscal years 2025 and 2026. For the full fiscal year 2024, management is guiding for sales (both reported and organic) in the range of down 1% to up 1%. That’s a slight downward revision versus the down 1% to up 2% range previously forecast, but still better than the 2.3% decline anticipated by analysts. Management’s diluted earnings range was cut to a range of $2.08 to $2.23 per share, down from the $2.17 to $2.42 per share previously forecast due to an increase in the effective tax. However, the team maintained its operation profitability outlook. On adjusted basis, the full-year earnings forecast also missed, with management guiding for a decline of 38% to 34%, versus the 33% decline expected. (It’s sales guide that investors care most about). Quarterly commentary Skin care, Estee Lauder’s highest-margin category, was pressured by persistent challenges in Asia travel retail and weakness in Mainland China. However, as noted above, we will be looking for sequential improvement as inventory levels start to reach more normal levels. Asia travel retail weakness was also a key source of pressure in the makeup business. Management reported a gross margin contraction of 60 basis points thanks to higher promotional costs and foreign currency translation that more than offset the benefits of sales mix and strategic price increases. Operating margin performance also took a hit on lower sales (less operating leverage) and the impact of Asia travel retail destocking. We’ll be looking for the team to recover this lost profitability as we work our way into and through fiscal year 2025. Geographically, on an organic basis, sales in EMEA (Europe, the Middle East and Africa) were down 14%, again hit by the challenges in Asia travel retail. The team also said about 2 percentage points of the overall net sales decline was the result of business disruptions in Israel and other parts of the Middle East. The Asia/Pacific region had a 7% organic sales decline on continued weakness in Mainland China. More specifically, a decline in online sales more than offset sales growth in brick-and-mortar locations. Outside of China, however, management reported strong organic net sales growth led by double-digit growth in [Hong Kong] and Korea as well as high single digit growth in yeah Japan. Lastly, in the Americas organic sales were down 1% due to changes in the MAC loyalty program that benefited the year-ago quarter. Excluding this prior year benefit, North America was largely unchanged year over year. A double-digit organic sales increase in Latin America reflected “continued growth in nearly every market and strong performance during holiday and key shopping moments.” (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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A sales assistant arranges lipsticks at an Estee Lauder store.
Qilai Shen | Bloomberg | Getty Images
Shares of Estee Lauder popped more than 13% Monday after the cosmetics company delivered better-than-expected results for its fiscal second quarter. More important in driving the market action, however, was CEO Fabrizio Freda’s comment that “we are, encouragingly, at an inflection point.”
