The Estee Lauder Companies Inc. EL is undergoing a transformation aimed at recovering profitability and fueling long-term growth through its expanded Profit Recovery and Growth Plan (PRGP). Alongside PRGP, the company has introduced its "Beauty Reimagined" vision with a goal to position it as the leading prestige beauty brand.
However, while these efforts hold promise, challenges persist, particularly in key markets like China and Asia travel retail, as well as in the form of increased cost pressure. As a result, EL’s shares have slumped almost 34% in the past six months compared with the industry’s decline of 35.5%.
Let’s delve deeper.
EL’s Restructuring for Recovery
The PRGP is a pivotal initiative designed to address the company's current profitability challenges and drive future growth. Through the second quarter of fiscal 2025, The Estee Lauder Companies realized greater net benefits from its PRGP than anticipated. However, these benefits were more than offset by sales volume deleverage and investments aimed at restoring sustainable growth and inflation. As a result, the company recently announced an expansion of its PRGP, which includes a restructuring program. The goal of the expanded plan is to transform EL’s operating model to drive sales growth, restore a solid double-digit adjusted operating margin over the next few years and manage external volatility.
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“Beauty Reimagined”: A Vision for EL’s Future
The Estee Lauder Companies recently introduced "Beauty Reimagined," an ambitious strategic vision designed to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin in the coming years. This initiative aims to position it as the leading consumer-centric prestige beauty brand. The company’s priorities include expanding its presence in high-growth consumer channels and markets, delivering innovative products, increasing consumer-facing investments, driving sustainable growth through bold efficiencies and simplifying organizational structure.
EL’s Robust Digital Market Growth
The Estee Lauder Companies is expanding its footprint in high-growth digital channels, evident from the launch of nine brands in Amazon's U.S. Premium Beauty store. The company's ongoing investment in digital marketing and e-commerce capabilities underscores its commitment to driving growth in this channel. In addition, it is integrating AI across its organization to drive efficiencies, improve decision making and enhance creativity.
Recently, the company partnered with Adobe Inc. ADBE to enhance its digital marketing efforts using Adobe Firefly, a generative AI tool. By integrating Adobe Firefly Services into its design tools, EL aims to automate repetitive tasks. This partnership with Adobe will accelerate campaign execution, boost efficiency and enable more creative exploration.
EL’s Set of Challenges
Despite these positive developments, The Estee Lauder Companies is battling a challenging environment marked by weaknesses across China and travel retail. These factors put pressure on its second-quarter fiscal 2025 results, wherein net sales in the Asia Pacific region fell by 11%, largely due to significant declines in Mainland China, Korea and Hong Kong SAR due to weaker consumer sentiment. The drop in Korea was further impacted by the November 2024 exit of Dr.Jart+ from the travel retail sector, as well as the effects of recent political and social unrest. These declines in these critical markets are adding to the company’s difficulties, given their historical importance to its growth.
In the second quarter of fiscal 2025, The Estee Lauder Companies’ operating expenses rose by 500 basis points (bps) as a percentage of sales. This increase includes a 210 bps rise in advertising, promotion and innovation expenses. In addition, selling expenses increased by 130 bps due to higher costs supporting key activations, including holiday campaigns and distribution expansion. If these rising costs are not effectively managed, they could put significant pressure on the company's profitability moving forward.
EL’s Disappointing Outlook
Due to challenges across its Asia travel retail business, weak consumer sentiment in China and Korea, and ongoing global geopolitical uncertainty, the company expects continued volatility and limited visibility in the near term. As a result, the company offered a disappointing third-quarter fiscal 2025 outlook.
For the fiscal third quarter, reported net sales are projected to decline 10-12% compared to the prior year’s level. The company’s adjusted organic net sales are anticipated to fall 8-10% in the quarter. Adjusted earnings per share (EPS) are likely to slump by 69-79%, ranging from 20 cents to 30 cents in the fiscal third quarter, reflecting challenges in the global travel retail business.
Final Words on EL Stock
The Estee Lauder Companies’ efforts to rebuild profitability through its expanded PRGP and "Beauty Reimagined" vision are promising. While the company’s focus on digital channels offers long-term potential, short-term challenges in China and Asia travel retail, and rising costs are creating a difficult environment. Investors will need to keep an eye on how the company navigates these issues in the coming quarters. At present, EL carries a Zacks Rank #3 (Hold).
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