Estée Lauder Outlook Misses as Duty-Free Sales Lag in Asia

Estée Lauder Cos. gave a profit outlook that fell short of estimates on Friday, a sign the beauty company expects continued struggles in its crucial travel retail business in Asia.

(Bloomberg) — Estée Lauder Cos. gave a profit outlook that fell short of estimates on Friday, a sign the beauty company expects continued struggles in its crucial travel retail business in Asia. 

The owner of the MAC and Tom Ford brands said it sees those struggles causing a net loss as well as a sales decline of 10% to 12% in the current three-month period. Those would be the second-worst quarterly results on record, according to Raymond James analyst Olivia Tong. 

Estée Lauder expects its duty-free sales to recover in the second half of the current fiscal year, which began in July. This means the company’s oft-pushed-back forecast for a recovery in travel retail will come later than expected. The cosmetics maker had already cut its outlook in each of the previous three quarters because executives repeatedly misjudged shoppers’ demand for duty-free products in China and South Korea. 

The “reset was more substantial than we and the market had anticipated,” Tong wrote in a research note on Friday. 

Estée Lauder shares fell as much as 7.8%, the most since May 3, when trading began on Friday in New York, before paring most of the loss. The stock is down 35% this year through Thursday, worse than the 2.1% decline of the S&P 500 consumer-staples index.

Read More: Estée Lauder Is Falling Behind Rivals, Even on Home Turf

The company’s travel retail business represented a fifth of total sales in its last fiscal year, which ended in June. During that time, revenue in the unit plunged by a third. Duty-free sales are particularly profitable, so the delayed recovery is one reason Estée Lauder executives said they expect margin contraction in the first half of the current fiscal year. Margins are then expected to expand in the second half. 

Hainan Slump

Executives told analysts on Friday that duty-free sales slumped in May and June, particularly in the hugely popular Chinese duty-free destination of Hainan, an island in the South China Sea. Some of the slump was because travel retailers are seeing fewer sales to “daigou” shoppers — those who purchase large quantities of a product for resale in the mainland — as Chinese authorities attempt to clamp down on the practice. Traffic from tourists hasn’t offset that decline. 

“Our expectation is that travelers — regular, individual travelers — will return to Hainan,” Chief Financial Officer Tracey Travis told analysts. “It’s a timing issue for us right now.” 

French beauty giant L’Oréal SA also said duty-free sales in Hainan deteriorated in May, with Chief Executive Officer Nicolas Hieronimus estimating that the current policy, if unchanged, “could lead to a couple of months of inventory reduction.” He added that revenue generated in Hainan represents less than 3% of the company’s business. 

Estée Lauder, however, is much more reliant on Hainan and travel retail in general. 

The company added that a slower-than-anticipated recovery at US retailers contributed to a decline in sales there last quarter. It has been pivoting away from struggling American department stores in recent years and seeking to sell more at specialty retailers such as Ulta Beauty Inc. and LVMH’s Sephora.

That shift hasn’t been enough to stave off a decline in Estée Lauder’s US market share as rivals such as L’Oréal pick up customers. Chief Executive Officer Fabrizio Freda said Estée Lauder is focused on “reaccelerating growth in North America” in the current fiscal year. To help achieve this, the company plans to boost its advertising budget, market more on TikTok and expand its prestige offerings. 

Outpacing Estimates

Fourth-quarter earnings beat expectations on stronger sales in Europe and Asia, despite the drag from travel retail. The beauty company reported adjusted earnings of 7 cents a share for the period ended June 30, compared with the Wall Street estimate for a loss. Revenue also beat expectations.

The company expects fiscal 2024 adjusted earnings of $3.43 to $3.70 a share, below the consensus compiled by Bloomberg. Sales are expected to rise 5% to 7%.

Estée Lauder said a cybersecurity attack last month will lower earnings by 7 cents a share in the fiscal first quarter and for the full year. Hackers infiltrated Estée Lauder’s computer network, forcing the company to shut down its email for several days, delaying some orders. 

(Updates with new details in second through seventh paragraph)

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