Estée Lauder Faces Continued Struggles as Stock Plummets Over 50%

Estée Lauder stock (NYSE: EL) has endured a challenging year, declining over 50% while the broader S&P 500 index has increased by 20%. The company is grappling with decreasing sales and profits. For context, the adjusted earnings for 2024 are forecasted at $2.59 per share, a 25% decrease year-over-year and a staggering 64% drop from the $7.24 reported in 2022.

In its recent Q1’25 report (the fiscal year concludes in June), Estée Lauder posted revenue of $3.4 billion and earnings of $0.14, aligning with consensus estimates for revenue but exceeding the earnings estimate of $0.09. Nonetheless, weak consumer sentiment in China poses a significant challenge, prompting the company to withdraw its outlook for 2025.

Analyzing Q1 2025 Performance

Estée Lauder’s revenue in Q1 reached $3.4 billion, reflecting a 5% decrease on an organic basis. The company reported an 8% drop in Skin Care sales, a 6% decline in Hair Care, a 2% decrease in Makeup sales, and a 1% fall in Fragrance revenue. By region, EMEA sales fell 4%, Americas dipped 1%, and Asia Pacific saw an 11% decrease. The downturn in EMEA can be attributed to lower global travel retail sales, while the ongoing decline in mainland China significantly affected overall results in the Asia Pacific region.

For Q1’25, Estée Lauder posted an adjusted operating margin of 4.3%, which is a 120 basis points increase year-over-year. Adjusted earnings per share came in at $0.14, compared to $0.11 in the same quarter last year. Looking ahead, the company has withdrawn its 2025 forecast, which previously anticipated a 1% to 2% decline in sales compared to those in 2024. Current projections estimate 2025 sales around $15 billion, which would signify a 4% year-over-year decline, with adjusted earnings per share expected to plummet to $1.86.

Implications for EL Stock

Following the Q1 results, EL stock experienced a notable 25% drop as investors expressed concern over the Chinese market’s impact on earnings. Demand for premium beauty products in China has weakened, particularly affecting international brands. Local competitors like Chicmax Cosmetics and Proya are performing better. We now estimate Estée Lauder’s valuation at $80 per share, which represents approximately 20% upside from its current value of $66.

Historically, EL stock has warranted higher valuation multiples, averaging a P/E ratio of 54x over the last five years. However, due to declining sales and profitability trends in the prestige beauty market in China, this valuation ratio is likely to remain subdued in the near term. Our prognostication of $80 for EL stock suggests a P/E ratio of 43x based on the anticipated earnings of $1.86 per share — a 20% reduction from its five-year average of 54x.

Moreover, EL stock has faced a drastic decline of 75% since peaking at $255 in early January 2021, now hovering around $65, in stark contrast to a 55% gain in the S&P 500 over the same timeframe. The stock’s annual returns were 40% in 2021, -32% in 2022, and -40% in 2023, while the S&P 500 showed returns of 27% in 2021, -19% in 2022, and 24% in 2023, underscoring that EL has underperformed compared to the S&P during the past two years.

Interestingly, maintaining superior performance against the S&P 500 has become increasingly challenging for individual stocks, even for giants in the Consumer Staples sector like CL and PG, as well as tech titans such as GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, which consists of 30 stocks, has consistently outperformed the S&P 500 annually over the same period. This portfolio has demonstrated superior returns with lower risks compared to the benchmark index, as reflected in its performance metrics.

While EL stock may hold future potential, evaluating Estée Lauder’s peers on crucial metrics can provide further context. For more insightful comparisons across various industries, refer to the Peer Comparisons.

[1] Returns as of 11/5/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.