It’s no secret: Estee Lauder (EL) has lost its way. However, HSBC believes the luxury cosmetics company can be saved if the right changes are made. We’re willing to stick around to find out. With a blueprint in mind, the HSBC analysts started coverage with a buy rating and a $180-per-share price target, which represents a roughly 45% premium to Tuesday’s levels. The HSBC analysts like the fundamentals of the business given the company’s strong brand equity and high-quality product portfolio, which includes La Mer, Bobbi Brown, Clinique, and Jo Malone. But, they said the company’s culture must evolve — either through a management overhaul or mergers and acquisitions — in order for a business turnaround to show signs of progress. Fabrizio Freda, the CEO of Estee Lauder since July 2009, was once an industry “wunderkind,” Jim Cramer acknowledged Tuesday. However, the now-66-year-old Freda is now fighting for his job after he “made a terrible bet on China that looked great; terrible bet on Korea that looked great; terrible bet on duty-free that looked great,” Jim said. “Three strikes you’re out,” he added. While HSBC believes now is the time to buy Estee Lauder, we’re hesitant to put any more money to work in the stock until there’s a clear transition out of its track of underperformance. For a while, we had faith in Freda’s leadership and believed that he could turn around the business by capitalizing on the China trade, a key long-term growth market for the beauty brand. However, there’s considerable uncertainty about when the Chinese consumer will recover and when the Asia travel retail business will normalize. Those dynamics challenge the heart of our investment thesis — forcing us to reevaluate our position in the stock. Shares of Estee Lauder have fallen 50% year to date and lost two-thirds of their value over the past two years. EL YTD mountain EL stock performance year to date. HSBC believes that management teams of luxury brands should “refresh” every seven years even if things are going well. Freda has been CEO of Estee Lauder for double that. He has a service period that ends in June 2024. If he chooses to step aside, HSBC analysts said, “An external candidate could be best placed to take the company in a different direction.” Alternatively, HSBC speculates the founding Lauder family, who control the company, could merge New York City-based Estee Lauder with either French beauty leader L’Oreal or French luxury powerhouse LVMH . We have been expecting consecutive poor quarters from Estee Lauder since China’s post-Covid economic rebound has stalled. But, we thought the company’s fiscal 2024 first quarter was going to be the last bad one. However, management’s shocking downward revision for full-year fiscal 2024 was very disappointing, causing us to rethink the timing of China’s recovery. Estee Lauder now expects sales performance in the range of between a 2% decline to a 1% gain year over year, which was well below the prior forecast for growth of 5% to 7%. This compelled us to downgrade the stock to our 4 rating and remove our price target. Still, HSBC said future outlook cuts may not matter for two reasons. First, the worse the outlook gets for fiscal year 2024, the greater the likelihood shareholders (including the Lauder family) see a larger overhaul of the business, management, and strategy as necessities. This, in turn, could be a positive catalyst. According to analysts, this would be the “bad is good” scenario. Second, the market already understands this is a transition fiscal year so “missing or beating consensus by 10% is close to irrelevant” in HSBC’s view. Rather, the investment case is more about how Estee Lauder can right the ship. The analysts dub this the “cry wolf” scenario. Bottom line We agree with HSBC that things need to change at Estee Lauder. But we don’t want to see the company continue to miss targets and continue to cut guidance. So, at this point, we can’t see any reason to buy this year’s sharp stock decline until we see a clear action plan that outlines how the company will grow in key markets. If that plan doesn’t materialize, it might be time to consider moving on from the stock and putting the money to better use in companies with brighter growth prospects. (Jim Cramer’s Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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American multinational skincare and beauty products brand Estée Lauder’s logo is seen in Hong Kong.
Budrul Chukrut | Lightrocket | Getty Images
It’s no secret: Estee Lauder (EL) has lost its way. However, HSBC believes the luxury cosmetics company can be saved if the right changes are made. We’re willing to stick around to find out.
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