Estee Lauder Exceeds Q4 Earnings Expectations, Registers YoY Sales Growth

Estee Lauder Stock

Estee Lauder Companies Inc. (NYSE:EL) has unveiled its financial results for the Q4 of fiscal 2023, surpassing both revenue and earnings forecasts from Zacks Consensus Estimates. Nonetheless, the company experienced a decline in its bottom line compared to the previous year. In pre-market trading today, Estee’s shares saw a decrease of over 6%.

In fiscal 2023, the company’s net sales experienced a 10% drop to reach $15.9 billion, while adjusted EPS stood at $3.46, marking a 49% decrease when analyzed on a constant currency basis. The performance was primarily impacted by challenges in the Asia travel retail sector, particularly in Hainan and Korea, but this was partially offset by improvements in most other regions. Throughout fiscal 2023, the company grappled with ongoing obstacles associated with the pandemic, particularly in Asian travel retail and mainland China, where the recovery was slower than anticipated.

Despite these challenges, Estee Lauder’s management remains optimistic about the future of the global prestige beauty industry. Bolstered by a strong brand position, the company is poised for diversified growth within its portfolio.

Quarterly Highlights 

The company reported adjusted earnings of 7 cents per share, outperforming the projected loss of 4 cents according to the Zacks Consensus Estimate. However, this figure marked a significant decline from the 42 cents earnings reported in the same period the previous year. Adjusted EPS stood at 11 cents on a constant currency basis.

Net sales amounted to $3,609 million, surpassing the Zacks Consensus Estimate of $3,479.5 million. This reflected a nearly 1% increase from the $3,561 million recorded in the corresponding quarter of the previous year. Organic net sales experienced a 4% growth, primarily attributed to robust growth in the Asia/Pacific region, where double-digit growth was witnessed across all categories as markets continued their recovery.

The growth in organic sales was driven by the Makeup, Fragrance, and Hair Care categories, along with a significant uptick in the company’s global emerging markets. However, the Skin Care category faced challenges due to issues in the company’s Asian travel retail business.

Adjusted gross profit totaled $2,467 million, reflecting a 3% decline compared to the previous year. Adjusted operating income stood at $71 million, marking a 66% decrease from the $207 million reported in the same period of the previous year.

Performance by Product Segment 

Skin Care sales experienced a 5% YoY decrease, amounting to $1,794 million. While makeup revenues increased by 12% to reach $1,108 million. The Fragrance category saw a 5% revenue increase, totaling $545 million. Hair Care sales also saw a 5% rise, reaching $164 million.

Other Developments 

Estee Lauder reported having $4,029 million in cash and cash equivalents, with long-term debt amounting to $7,117 million and total equity at $5,585 million.

For fiscal 2023, net cash flow from operating activities reached $1,731 million, while capital expenditures totaled $1 billion. Shareholders received a total of $1.2 billion through a combination of dividends and share repurchases. from the company. Looking ahead to fiscal 2024, net cash flow from operating activities is projected to be in the range of $1.7 billion to $1.8 billion, with capital expenditures expected to account for about 6% of forecasted sales.

Additionally, the company announced a quarterly dividend of 66 cents per share on Class A and Class B shares, payable on September 15, 2023, to shareholders of record as of August 31. The company intends to maintain its current quarterly dividend payout for fiscal 2024, but it has suspended its share buyback plan.

Acquisitions and Future Outlook 

On April 28, 2023, Estee Lauder completed the acquisition of the TOM FORD brand for approximately $2.28 billion.

In anticipation of the upcoming fiscal year 2024, the management team of Estee Lauder is dedicated to propelling growth across multiple regions, brands, product categories, and distribution channels. The company aims to achieve organic net sales growth and progressive margin recovery in the coming fiscal year. The strategy involves strengthening momentum in successful regions, re-accelerating growth in North America, and taking steps to improve the Asia travel retail business.

The company plans to continue strategic investments, including innovations, retail growth in Asian travel markets, advertising, expansion in emerging markets, and the establishment of its first manufacturing facility in Asia. These efforts are expected to support business recovery and drive market share gains.

However, management remains cautious due to economic challenges in China, volatile inflation levels, fluctuations in foreign currency exchange rates, and concerns about recessions in global markets.

For fiscal 2024, Estee Lauder anticipates a 3-5% year-over-year increase in net sales, accounting for a 1% unfavorable currency impact. The projection also includes expectations of sequential improvements in quarterly net sales growth, with organic net sales growth anticipated to be in the range of 6-8%.

Management envisions gross margin expansion for fiscal 2024, driven by prudent price adjustments, reduced discounts, and decreased obsolescence charges. While the first half of fiscal 2024 might see a contraction in gross margin, the second half is expected to more than offset this decline.

Furthermore, management predicts sequential improvement in the operating margin throughout fiscal 2024, particularly in the second half. This improvement can be attributed to the pace of recovery in the travel retail business in Asia.

Adjusted EPS, excluding restructuring and other charges, is projected to fall between $3.50 and $3.75, indicating growth compared to the $3.46 reported in fiscal 2023. Currency headwinds are anticipated to impact net EPS by approximately 11 cents. Adjusted EPS is expected to grow by 4-12% on a constant currency basis.

For the first quarter of fiscal 2024, Estee Lauder expects reported and organic net sales to decline by 12%-10% year over year. The expected outcome for the first quarter is estimated to range from a loss of 31 cents per share to a loss of 21 cents per share in terms of the bottom line. On a constant currency basis, the expected range for the bottom line is a loss of 29 cents to a loss of 19 cents per share.

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