Why Is Estée Lauder Stock Falling?

Estée Lauder stock (NYSE: EL) has had a tough year so far, with its stock declining 37%, while the broader S&P500 index has risen 18%. The company has been struggling with falling sales and profits lately. For perspective, its adjusted 2024 earnings of $2.59 per share were down 25% y-o-y, and down 64% from the $7.24 figure it reported in 2022.

Estée Lauder recently reported Q4’24 results (the fiscal year ends in June) with revenue and earnings exceeding the street expectations. The company’s revenues stood at $3.9 billion and earnings came in at $0.64, compared to the consensus estimates of $3.8 billion and $0.27, respectively. The upbeat performance can be attributed to higher Skin Care sales. However, the company’s guidance for fiscal 2025 was well below the street expectations. This can be attributed to weak consumer sentiment in China.

Estée Lauder’s revenue of $3.9 billion in Q4 was up 7% y-o-y. The company reported a 13% growth in Skin Care sales, 1% rise in Hair Care, no change in Makeup sales, while the Fragrance revenues were down 1%. Looking at sales by geography, EMEA was up 32%, while Americas was down 5%, and Asia Pacific down 7%. The decline in the America region can be attributed to the company’s distribution mix, while Asia was down due to lower demand in Mainland China.

The company reported an adjusted operating margin of 9% in Q4’24, reflecting a 700 bps rise y-o-y.  The adjusted EPS stood at $0.64, vs. $0.07 in the prior-year quarter. Looking forward, Estée Lauder expects its 2025 sales to fall between 1% and 2% versus 2024, and its adjusted earnings per share to be in the range of $2.75 and $2.95. This compares with the $3.97 figure the street was anticipating. This didn’t bode well for EL stock.

Even if we look at a slightly longer term, EL stock has suffered a sharp decline of 65% from levels of $255 in early January 2021 to around $90 now, vs. an increase of about 50% for the S&P 500 over this 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.

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 and weak demand in China, 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? We think EL stock will see higher levels over time. We estimate Estée Lauder’s Valuation to be $120 per share, reflecting around 30% upside from its current levels of $91.

While the fiscal 2025 outlook missed the street estimates, we think a gradual rebound in Asia travel as well as travel retail will likely result in robust sales growth going forward. This, clubbed with the company’s initiative of Profit Recovery Plan to boost margins, should bolster the overall earnings growth. From a valuation perspective, EL stock does look attractive. At levels of $91, EL stock is trading at just 2x trailing revenues, versus the average of 5x P/S ratio seen over the last three years. Although a decline in the valuation multiple seems justified given the fall in earnings lately, the gap between the current and average P/S seems wide in our view, and it should narrow over time. We think investors will likely be better off picking EL in the current dip for robust long-term gains.

While EL stock looks like it has ample 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 8/22/2024
[2] Cumulative total returns since the end of 2016

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