Estée Lauder slashes outlook on slow China recovery and Israel-Hamas war

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Estée Lauder shares plunged after the US cosmetics group slashed its profit outlook due to a slow recovery in Asia and warned of an almost $80mn hit to earnings from disruption caused by the Israel-Hamas war.

The maker of Aveda shampoo and MAC make-up has cut its outlook several times over the past year and reported a string of weak quarterly results owing to the weakness in China, as the world’s second-largest economy struggles with its post-pandemic recovery.

The company cut its adjusted earnings per share forecast for fiscal 2024 by more than 35 per cent, with chief executive Fabrizio Freda citing “slower growth in overall prestige beauty in Asia travel retail and in mainland China” as well as “the risks of business disruption in Israel and other parts of the Middle East”.

Shares were down almost 17 per cent to a six-year low in afternoon trading on Wall Street on Wednesday, in what was shaping up as their biggest one-day drop in six months. Earlier in the session, the stock had fallen more than 20 per cent.

Sales growth in the US and other markets throughout the July to September period were not enough to offset Estée Lauder’s weakness in Asia, which accounts for almost one-third of the company’s revenue.

Estée Lauder has not been alone on that front, with cosmetics peer L’Oréal feeling the effects in its latest quarter of a muted recovery in China and a fall in travel retail in Asia.

Travel retail, which encompasses duty-free shopping done primarily in airports, made up about 40 per cent of Estée Lauder’s sales to Chinese consumers before the start of the Covid-19 pandemic, Freda said. That business stream has recovered more slowly than the company expected as China lagged behind the rest of the world in easing travel curbs.

Estée Lauder is betting that consumers will now buy more beauty products on the Chinese mainland instead of while travelling. “We’re not counting on travel retail to get back to prior levels,” chief financial officer Tracey Travis told analysts during an earnings call on Wednesday.

However, Freda conceded that demand for beauty products on the mainland had also recovered more slowly than expected, citing pre-sale figures for China’s annual Singles’ Day shopping festival.

Estée Lauder now expects adjusted earnings per share of between $2.17 and $2.42 in its 2024 fiscal year, down from its previous outlook of $3.50 to $3.75 a share. Wall Street had forecast adjusted EPS of $3.59.

The company forecast a hit to earnings from the Israel-Hamas war to be about 22 cents a share for the fiscal year, or around $78.7mn. It also anticipates the conflict to trim sales growth by 1 per cent.

Currency effects were forecast to reduce full-year EPS by 16 cents, or $57mn overall, Travis said, and the company is also wary of “weakening consumer confidence in certain markets”.

Estée Lauder sales in the three months to September fell 10 per cent from the prior year to $3.5bn, while net income plunged more than 90 per cent to $36mn.