Estee Lauder Shares: On Track to a Favorable Long-Term Outlook, Now a Buy (NYSE:EL)

Challenged performance in the year 2024…

In 2024, Estée Lauder faced significant challenges, particularly due to weaker-than-expected performance in China and volatility in the Asia Travel Retail market, which affected global sales growth. In addition, the company faced a changing consumer landscape where the continued transition to online shopping and intense competition from indie brands in key categories such as makeup put pressure on its traditional channels. That said, for fiscal 2024, Estée Lauder reported revenue of $15.6 billion, down slightly from the previous year. The company reported net income of $0.39 billion (adjusted EPS of $2.59), down from $1.01 billion in the previous year.

… With some upside in FY2025

Starting in FY2025, while China and travel retail remain areas of concern due to their recent volatility, management’s revised guidance for FY2025 reflects a more measured and realistic approach. Indeed, Estée Lauder’s assumption of steady to modest growth in China and a stabilization in travel retail sales suggests the company is prepared for potential downside scenarios, while positioning itself for recovery should conditions improve . In the note, the company set an implied revenue target of $15.7 billion for fiscal 2025 and claimed that its “Profit Growth and Recovery Plan” will drive cost savings and improve margins. Specifically, the company aims to save between $1.1 billion and $1.4 billion by fiscal year 2025. A significant portion of these savings is expected to come from reducing cost of goods sold and optimizing its supply chain and footprint retail. This could bring Estee Lauder’s FY2025 operating margin to 11.0% to 11.5%, up >100bps from FY2024.

Structurally well positioned for expansion and strategic pivot

A significant component of Estée Lauder’s turnaround is its focus on expanding into high-growth markets and changing its product mix. I point out that the company has regained market share in China, particularly in its luxury skin care segment, with brands such as La Mer and Re-Nutriv showing strong performances. In addition, the renewed focus on emerging markets such as India, Mexico and Brazil offers substantial growth potential. These markets, which currently account for about 10% of Estée Lauder’s sales, offer higher profit margins compared to the more mature Chinese market. In North America, the company is strategically targeting skin care, a higher-margin category compared to makeup. This move aligns with broader consumer trends and aims to mitigate the challenges posed by the highly competitive makeup segment. Furthermore, Estée Lauder is aggressively expanding its digital and e-commerce presence, including a recent push to list more of its brands on Amazon, which should further support topline growth while optimizing costs. Now, while many of the benefits of these decisions are expected to materialize in the coming quarters, the adjusted strategy positions the company good for a stronger-than-expected finish for FY24 and beyond (long-term upside risk).

Note on Leadership Transition: A New Beginning

The upcoming retirement of CEO Fabrizio Freda at the end of 2025 and the appointment of a new CEO marks a potential turning point for Estée Lauder. A new leadership perspective is expected to inject new strategic thinking into the organization that could accelerate growth and innovation initiatives. Consequently, in my view, this change in leadership can be viewed positively by investors, as the change could provide the momentum needed to more aggressively capitalize on the changing market opportunities and address persistent challenges.

Valuation Update: TP at $117

I am updating my EPS forecasts for Estée Lauder through 2026. I now expect the company’s EPS for 2024, 2025, and 2026 to grow to approximately $2.9, $4.05, and $4.8, respectively. At the same time, I continue to assume a terminal growth rate of 3.5%, a slight premium to estimated nominal global GDP growth, as well as a 7.5% cost of equity assumption. With these revised EPS forecasts, we now estimate an implied fair share price of $117.

Also below the updated sensitivity table.

Investor Takeaway

I have always considered Estée Lauder to be a high quality business. But in 2022, the stock was trading too expensive for me to justify buying the stock. Today, however, after a 65-70% drop in valuation, I think the time has come to buy shares in this leading (beauty) category. In my view, while downside trade risks remain, particularly in Asia, I argue that the company’s expansion into high-margin markets, focus on digital channels and operational cost-cutting measures contribute to a favorable long-term outlook. Based on my revised residual earnings model, we estimate a fair value stock price of around $117, which indicates that Estée Lauder stock is currently trading at a 35-40% discount to its fair value. “Buy”.