A Rebound In Asia Travel Will Likely Drive Estée Lauder’s Q3 Performance

Estée Lauder (NYSE: EL) will report its Q3 fiscal 2024 ((the fiscal year ends in June) results on Wednesday, May 1. We expect the company to post sales of $3.9 billion and earnings of $0.46 per share, marginally below the consensus estimates. Estée Lauder expects a better performance in the second half of fiscal 2024, both in terms of sales and profitability. This can be attributed to an expected recovery in Asia travel and mainland China. Although we expect Estée Lauder to post Q3 results marginally below the street estimates, we believe there is some room for its stock to grow from its current levels of under $145. Our interactive dashboard analysis of Estée Lauder’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive Estée Lauder’s results?

Firstly, let us look at EL stock performance in recent years. EL stock has suffered a sharp decline of 45% from levels of $265 in early January 2021 to around $145 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the decrease in EL stock has been far from consistent. Returns for the stock were 39% in 2021, -33% in 2022, and -41% 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.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could EL face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think EL stock has some room for growth. We estimate Estée Lauder’s Valuation to be $163 per share, reflecting over 10% upside from its current levels of $145. Our forecast is based on 4x forward sales, aligning with the stock’s average P/S multiple over the last two years.

Looking at the previous quarter, Estée Lauder’s revenue of $4.3 billion in Q2 was down 7% y-o-y. The company reported a 10% fall in Skin Care sales, 8% decline in Makeup sales, 5% fall in Hair Care revenues, and Fragrance revenues were flat y-o-y. This can be attributed to a weakening consumer spending environment and continued softness in prestige beauty demand in China. The company reported an operating margin of 13.4% in Q2’24, reflecting a 140 bps rise y-o-y.  The adjusted EPS stood at $0.88, vs. $1.54 in Q2 2023, reflecting a sharp 43% decline.

Coming to the latest quarter, Estée Lauder is expected to benefit from a rebound in mainland China and Asia travel demand. The prestige beauty demand in China may see some improvement sequentially. The company expects 4% to 6% organic sales growth and adjusted earnings to be in the range of $0.36 and $0.46 per share in Q3.

While EL stock looks like it has little room for growth, it is helpful to see how Estée Lauder’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 4/26/2024
[2] Cumulative total returns since the end of 2016

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