The Estee Lauder Companies Inc. EL has experienced notable volatility in its stock performance. Over the past six months, the stock has slumped 39.2%, underperforming the industry’s decline of 36.5%. The Zacks Consumer Staple sector and the S&P 500 registered increases of 4.3% and 13.9%, respectively, highlighting EL’s underperformance during this period. This downward trend reflects persistent challenges in China and Asia travel retail.

China Weakness Hinders EL’s Momentum

The Estee Lauder Companies began fiscal 2025 on a challenging note marked by weaknesses in Mainland China and global travel retail during the first quarter. These factors put pressure on its first-quarter fiscal 2025 results, with organic net sales dropping 5% due to deteriorating consumer sentiment in China, which contributed to a slowdown in the prestige beauty sector in mainland China and reduced conversion rates across Asia travel retail and Hong Kong SAR. Reduced replenishment orders in Asia travel retail, including inventory challenges amid a slowing retail market, added additional pressure on organic sales.

In the fiscal first quarter, organic net sales in the Asia Pacific region dropped 11% due to continued softness in the prestige beauty sector, thanks to weakened consumer sentiment in Mainland China. In addition, net sales in Hong Kong SAR declined, impacted by reduced spending from traveling consumers and lower foot traffic at retail stores.

The company's global travel retail net sales fell by double digits owing to reduced replenishment orders in Asia travel retail in the quarter. This decline reflects the continued slowdown in the retail market and deteriorating consumer sentiment in China, leading to lower conversion rates. These declines in two critical markets are adding to the company’s revenue and profitability difficulties given their historical importance to its growth.

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Dividend Cut Reflects EL’s Financial Strain

In light of the complex prestige beauty landscape and the challenges in forecasting market stabilization and recovery in mainland China and Asia travel retail, The Estee Lauder Companies recently reduced its dividend to align with a more suitable payout ratio. The quarterly dividend was reduced from the previous quarterly dividend of 66 cents per share to 35 cents per share on its Class A and Class B Common Stock, marking a significant reduction.

Challenging Road Ahead for EL

Thanks to a dynamic operating environment, The Estee Lauder Companies recently withdrew its fiscal 2025 forecast and provided a disappointing outlook for second-quarter fiscal 2025. Management expects an organic net sales decline of 6-8% compared to the prior year’s level for the fiscal second quarter. Quarterly adjusted earnings per share (EPS) are likely to slump by 60-77%, ranging from 20 to 35 cents. The outlook reflects significant headwinds in retail across China and Asia travel retail, as the company does not anticipate any immediate benefits from new economic stimulus measures in China.