VALUATION HIGHLIGHTS

1. Skin Care constitutes 58% of the Trefis price estimate for Estee Lauder's stock.
2. Makeup constitutes 21% of the Trefis price estimate for Estee Lauder's stock.
3. Fragrance constitutes 19% of the Trefis price estimate for Estee Lauder's stock.

WHAT HAS CHANGED?

EL Stock Performance

EL stock has suffered a sharp decline of 75% from levels of $255 in early January 2021 to around $65 in early November 2024, vs. an increase of about 55% for the S&P 500 over this roughly four-year period.

However, the decrease in EL stock has been far from consistent. Returns for the stock were 40% in 2021, -32% in 2022, and -40% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that EL underperformed the S&P in 2022 and 2023.

Q1 2025 Earnings

Estée Lauder reported net sales of $3.4 billion in Q1 2025, down 4% from $3.5 billion in Q1 2024. The decline was seen across segments. Operating margin plunged to -3.6% in Q1. The company's adjusted EPS stood at $0.14, vs. $0.11 in Q1 2024.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Skin Care

Estée Lauder's Skin Care EBITDA margin: Estée Lauder's Skin Care EBITDA Margin fell from 33% in 2019 to 16% in 2024. We expect margins to rebound to over 30% by the end of our forecast period. There could be over 15% downside to our price estimate, if margins were to grow at a slower pace and hover around 20% over our forecast period.

Makeup

Estée Lauder's Makeup EBITDA margin: Estée Lauder's Makeup EBITDA Margin fell from 11% in 2019 to 9% in 2024. We expect it to gradually increase to over 20% in the coming years. There could be close to 10% downside to our price estimate if margins were to rise only to 12%.

BUSINESS SUMMARY

Estée Lauder manufactures and markets premium makeup, skin care, fragrance, and hair care products in the personal and beauty care segment of the market. Estée Lauder's main competitors consist of cosmetics companies such as L'Oréal, Shiseido Company, LVMH Moet Hennessy Louis Vuitton, Revlon, Coty, and Procter & Gamble Company.

Estee Lauder's major brands include Estée Lauder, Aramis, Clinique, M-A-C, Bobbi Brown, La Mer, and Aveda, along with fragrance and cosmetics sold under brands such as Donna Karan, Tommy Hilfiger, Micheal Kors, and Sean John.

Premium priced products that are not branded, yet relatively expensive, are sold through limited distribution channels consisting primarily of upscale department stores, specialty retailers, upscale perfumeries, pharmacies, prestige salons and spas. Other channels include freestanding company owned stores and spas, company websites, authorized retailer websites, stores on cruise ships, direct response television, and in-flight and duty-free shops.

Despite a global presence, about 30% of Estée Lauder's net sales come from the Americas, with Europe, Middle East and Africa contributing 40%, and Asia-Pacific constituting the remaining 30%. The company's increased focus on the Asia-Pacific market is expected to further increase in the future.

SOURCES OF VALUE

The Skin Care and Makeup segments have the highest contributions to Estée Lauder's value. Skin Care forms the priority category for the company, contributing ~50% of Estée Lauder's stock value, and Makeup contributes around 40%. The Skin Care segment is also the most profitable of all its beauty products.

KEY TRENDS

Booming Skin Care due to anti-aging creams

Anti-aging creams and anti-cellulite skin care products are in high demand among aging populations in developed countries, notably Japan (oldest demographic), the US, and Western Europe. Half of Estée Lauder's skin-care business comes from anti-aging products. The anti-aging market consists of those products that can treat multiple signs of skin aging at one time, and is a fast-growing segment under the anti-aging beauty products.

Growth of natural products categories and "Masstige" segment, as well as male product lines

There is a growing demand for natural / organic products in most countries, a trend led by the developed markets in the US and Western Europe. Additionally, there is an increased preference for less synthetic, eco-friendly, and more natural products and packaging.

There is a growing trend toward the so-called "Masstige," or premium brands sold at lower prices through mass distribution. In addition, beauty care products focused on men is the latest niche being targeted by most players globally. In developed markets, particularly in the US and Western Europe, the introduction and extension of the men's product lines is a major source of growth.