Estee Lauder (EL) reported mixed fiscal 2023 third-quarter results before the opening bell Wednesday. However, what’s really pressuring shares and troubling the Club as shareholders was a very weak outlook for Q4. Shares of prestige beauty giant plunged more than 20% at their worst levels of the session. Revenue fell about 12% year-over-year to $3.76 billion, beating analysts’ expectations for $3.71 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) sank more than 75% to 47 cents, missing analyst forecasts of 51 cents. However, EPS did match the upper end of management’s prior guidance. The results included a 3% drag due to foreign currency dynamics in key international travel retail locations. Bottom line This was not a good release and we are deeply disappointed. The magnitude of the management’s guidance revision is about as bad as we have ever seen, especially with only one quarter left in the company’s fiscal year. You have to wonder why the team decided not to preannounce this update. Contributing to the terrible guidance, Estee Lauder said the post-Covid recovery for its Asia travel retail business is proving “far more volatile” and “more gradual” than management had previously expected, given the quicker recoveries previously seen in other regions of the world after the lifted their pandemic restrictions. The team believes this trend in Asia will only be temporary, but that’s of little comfort Wednesday, as the stock plunged. While management only spoke to the remainder of its fiscal year 2023, it’s quite clear that fiscal year 2024 estimates are going to need to come down materially. The momentum seen elsewhere, in both developed and emerging markets, is encouraging and may indeed support management’s view that the recovery in its Asia travel retail business is a question of when not if. However, we must recognize that the company did not have the visibility it thought it had, and that any forward commentary on the timing of a recovery in Asia must be taken with a grain of salt. While displeased with Estee Lauder’s fiscal Q4 guide, we think the magnitude of the selloff represents something of a rush to the exits, no matter the price. To us, that’s an emotional knee-jerk reaction and at these levels, we think selling would be unwarranted. Instead, we are currently working to determine if shares are a buy — as they were the last time we saw them under or around $200 — or if the uncertainty relating to the Asia travel retail recovery timing means more patience is warranted. With fiscal 2024 estimates set to be revised lower, it’s likely there’s little urgency to step in right here and now and allocate additional capital to our EL position until investors have some time to absorb the reset and shares consolidate. Our price target and rating are currently under review as we debate this internally, and we’ll have more to say on the quarter later Wednesday on the Homestretch, which will be up on the site a little later than normal due to the Federal Reserve’s post-meeting interest rate decision and Chairman Jerome Powell’s news conference. Quarterly commentary The recovery in Asia travel retail is the primary issue now plaguing Estee Lauder. As a result of a differentiated approach to reopening, the Asia/Pacific region appears to be realizing a much more gradual recovery than what was seen in the West — and as a result, management has been forced to reevaluate the timing of a full recovery here. Last time Estee Lauder reported, in fiscal Q2, the team said that travel disruptions in the Chinese province of Hainan, often referred to as the Hawaii of China, were slowing the timing of inventory normalization. But they added that tourism in Hainan was starting to bounce back. While the team this time around in Q3 did note that traffic in Hainan has now surpassed prior-year levels, the conversion of travelers to consumers was not up to expectations. Duty-free sales in Korea in fiscal Q2 were also under pressure from Covid restrictions. That remained the case in the fiscal third quarter as management’s update Wednesday indicated that in Korea, as well as in Asia more broadly, “the travel retail recovery was challenged by the slower than anticipated resumption of international flights, granting of visas, and organized group tours.” As you can in the above table in the Geographic Results section, Asia/Pacific sales in fiscal Q3 of $1.19 billion were slightly lower than a year ago but above estimates. While areas to monitor, the strength seen elsewhere is supportive of the notion that management’s disappointing near-term outlook is more a function of issues outside their control and an issue of timing, rather than a radical shift in consumer preferences or underlying business fundamentals. To this point, mainland China realized organic sales during the quarter. Though there was pressure in January resulting from “low retail traffic and retailer destocking from the rise in Covid cases that began in November 2022 and continued into January 2023,” this trend reversed intra-quarter with double-digit organic growth on a percentage basis being realized in February and March. Management also said that continued growth in both emerging and developed markets “continued with strong organic net sales performance in The Americas and markets in Europe, the Middle East & Africa (EMEA), excluding travel retail.” The reported results, as seen in the table, were $1.09 billion for The Americas — better than expected and higher than last year. Reported Q3 sales for EMEA were $1.47 billion — below estimates and nearly 26% lower than a year ago. Outlook Full-year fiscal 2023 sales are now expected to be down 10% to 12% versus 2022, significantly worst than the 6% decline that the Street has been modeling. Organic net sales are expected to be down 5% to 7%, also far worse than the 1% shortfall analysts were expecting. Management now expects adjusted EPS in the range of $3.29 to $3.39. That’s much lower than the $4.87 to $5.02 range previously provided, and nowhere near the $4.98 we were looking for. Given that Estee Lauder’s earnings to date — through fiscal Q3 — amount to $3.38 per share, this guide implies a loss of 4 cents per share at the midpoint, a horrible quarterly guide versus expectations coming into the print for a profit of $1.55 per share. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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An Estee Lauder pop-up store is seen inside daimaru Department Store on Nanjing Road Pedestrian street in Shanghai, China, August 6, 2021.
Costfoto | Future Publishing | Getty Images
Estee Lauder (EL) reported mixed fiscal 2023 third-quarter results before the opening bell Wednesday. However, what’s really pressuring shares and troubling the Club as shareholders was a very weak outlook for Q4. Shares of prestige beauty giant plunged more than 20% at their worst levels of the session.
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