Estée Lauder slumps the most after Asia trip disappoints

(Bloomberg) — Shares of Estée Lauder Cos. fell the most on record after the beauty company cut its forecast for the third time in six months as travel recovered more slowly than expected in key China market.

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The retailer now expects annual sales to decline by about 10% to 12% for the fiscal year ending in June, worse than its previous guidance of a 5% to 7% decline. A slower-than-expected return to travel shopping in Asia is causing “significantly greater headwinds” than expected just a few months ago, Chief Executive Fabrizio Freda said in a statement on Wednesday.

Shares of Estée Lauder fell as much as 21% in New York trading, the most since the company went public in 1995. Shares are trading at their lowest level since November.

The worse forecast surprised Wall Street as the owner of the Clinique, The Ordinary and Le Labo brands has struggled with weakness in Asia for months and executives were already bracing analysts for significant sales declines.

But “we did not assume another negative EPS revision for FY2023,” wrote Oppenheimer analyst Rupesh Parikh. “We incorrectly believed that management’s implied back-half guidance for earnings down more than 15% (at the bottom end) included a cushion and captured travel retail headwinds.”

Estée Lauder executives said in February they expected a recovery in the current quarter ending in June as more Chinese shoppers travel to local hotspots, including Hainan. The popular island province generates about 14 percent of Estée Lauder’s sales, according to estimates from analysts at TD Cowen.

But now the company says it won’t be able to meet even those low expectations.

Excluding certain items, earnings are now expected to be between $3.29 and $3.39 per share for the fiscal year, well short of the $4.97 estimated by analysts. The company had already cut its forecast twice due to continued weakness in China.

Estée Lauder said traffic to the popular tourist destination of Hainan exceeded the previous year’s levels, a sign that domestic Chinese tourism is recovering. But shoppers on the Chinese island aren’t buying as much of the high-end beauty products as the company expected. That raises the risk of discounts in the coming months, Bloomberg Intelligence analysts Deborah Aitken and Andrea Ferdinando Leghieri wrote in a research note.

“a common occurrence”

Estée Lauder will need another quarter or two to sell because of the oversupply of products in Hainan. The company’s outlook for the fiscal year “downgrades appear to be a common occurrence,” the analysts wrote. The company also cited weakness in travel retail sales in South Korea.

Estée Lauder’s unfavorable outlook contrasts with many of its competitors. Coty Inc., LVMH, L’Oréal SA and Kering SA said sales in China began to accelerate in the current quarter after a slow start to the year.

“Given that rivals have recently posted strong prints and provided a generally positive commentary on the outlook for China, Estée Lauder’s downgrade today comes as little surprise,” wrote RBC Capital Markets analyst Nick Mody. “However, we continue to believe that China’s reopening will be positive for Estée Lauder, although it may now be delayed until the end of calendar year 2023.”

The company also said the acquisition of the Tom Ford brand, which closed last week, would reduce full-year earnings by about 3 cents to 4 cents per share.

(Updates with analyst commentary, additional context beginning in the fourth paragraph.)

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