The Estee Lauder Companies Inc.’s EL stock has taken a hit in the past three months, dropping 18.4%. This decline has been steeper than the industry’s drop of 13.7%, and it is raising concerns among investors. The main factors contributing to this downturn are weak consumer sentiment in China and challenges in the Asia travel retail sector. These regions, which have historically been key to the company’s growth, are now proving to be substantial roadblocks.
Despite the company's efforts to navigate through a volatile market, its financial performance has not met expectations in first-quarter fiscal 2025. The global beauty giant is facing a combination of lower sales, particularly in Asia, and higher costs. Investors are now left wondering what’s next for The Estee Lauder Companies and whether the stock will recover anytime soon.
Image Source: Zacks Investment Research
What’s Behind EL’s Stock Slump?
The Estee Lauder Companies began fiscal 2025 on a challenging note marked by weaknesses in Mainland China and global travel retail during the first quarter. These factors put pressure on its first-quarter fiscal 2025 results, with organic net sales dropping 5% due to deteriorating consumer sentiment in China, which contributed to a slowdown in the prestige beauty sector in mainland China and reduced conversion rates across Asia travel retail and Hong Kong SAR. Reduced replenishment orders in Asia travel retail, including inventory challenges amid a slowing retail market, added additional pressure on organic sales.
In the fiscal first quarter, organic net sales in the Asia Pacific region dropped 11% due to continued softness in the prestige beauty sector, thanks to weakened consumer sentiment in Mainland China. In addition, net sales in Hong Kong SAR declined, impacted by reduced spending from traveling consumers and lower foot traffic at retail stores.
The company's global travel retail net sales fell by double digits owing to reduced replenishment orders in Asia travel retail in the quarter. This decline reflects the continued slowdown in the retail market and deteriorating consumer sentiment in China, leading to lower conversion rates. These declines in two critical markets are adding to the company’s revenue and profitability difficulties given their historical importance to its growth.
EL Faces Rising Costs
The Estee Lauder Companies is grappling with a challenging cost environment. In the first quarter of fiscal 2025, the company saw a 190 basis point (bps) increase in operating expenses as a percentage of sales. This rise is mainly due to higher selling expenses and increased advertising costs. If this trend persists, it could continue to pressure its profitability in the coming months.
More Pain Ahead for EL?
Due to the complex industry landscape, including difficulties in predicting market stabilization and recovery in China and Asia travel retail, as well as leadership changes, The Estee Lauder Companies withdrew its fiscal 2025 forecast and provided a disappointing outlook for second-quarter fiscal 2025. The quarterly outlook reflects significant headwinds in retail across China and Asia travel retail, as the company does not anticipate any immediate benefits from new economic stimulus measures in China. Management expects a reported organic net sales decline of 6-8% compared to the prior year’s level for the fiscal second quarter. Quarterly adjusted earnings per share (EPS) are likely to slump by 60-77%, ranging from 20 to 35 cents.
Final Thoughts on EL’s Stock
The Estee Lauder Companies is focused on implementing its Profit Recovery and Growth Plan, aiming to accelerate sales growth and recover profit margins. However, despite these efforts, EL's stock has experienced a significant decline, and its financial outlook remains bleak, leaving investors cautious. The company is facing challenges that may take time to resolve, especially with low consumer confidence in key markets. At present, EL holds a Zacks Rank #5 (Strong Sell), indicating analysts' lack of optimism about the stock.
Better-Ranked Stocks
Abercombie ANF, a leading casual apparel retailer, currently sports a Zacks Rank of 1 (Strong Buy). ANF delivered an earnings surprise of 14.8% in the last reported quarter. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for Abercrombie’s current financial year sales and earnings indicates growth of 14.9% and almost 69%, respectively, from the prior-year figures.
The Gap, Inc. GAP operates as an apparel retail company, which offers apparel, accessories and personal care products for men, women and children, presently flaunts a Zacks Rank #1.
The Zacks Consensus Estimate for The Gap’s current fiscal-year sales and earnings indicates growth of 0.8% and 41.3%, respectively, from the year-ago quarter’s reported numbers. GAP has a trailing four-quarter average earnings surprise of 101.2%.
Deckers DECK, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 41.1% in the trailing four quarters.
The Zacks Consensus Estimate for Deckers’ current financial year sales and earnings indicates growth of 13.6% and 12.6%, respectively, from the prior-year figures.
5 Stocks Set to Double
Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. While not all picks can be winners, previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Today, See These 5 Potential Home Runs >>Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
Deckers Outdoor Corporation (DECK) : Free Stock Analysis Report
The Estee Lauder Companies Inc. (EL) : Free Stock Analysis Report
The Gap, Inc. (GAP) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
