Why Estée Lauder Stock Dropped 21% in the First Half of 2023

What happened 

Shares of Estée Lauder (EL 1.70%) fell 21% during the first half of the year, according to data provided by S&P Global Market Intelligence. Sales and earnings have been declining, and the company seriously lowered its full-year outlook.

So what

Besides its own eponymous brand, Estée Lauder owns a huge collection of top-name cosmetics and skincare lines including Bobbi Brown, MAC, Clinique, and many others. These range from midprice to expensive.

It typically demonstrates steady growth, but after a strong rebound from the pandemic, it's now dealing with general retail woes that are hampering progress.

In the 2023 third fiscal quarter (ended March 31), sales declined 12% from last year, and earnings per share (EPS) were down from $1.53 last year to $0.43 this year. That dramatic decrease was partly due to a much higher tax rate in some of its global locations, and unfavorable foreign currency rates. Estée Lauder sells mostly upscale brands and does a hefty business in travel and in affluent Asian communities, and these markets were pressured during the quarter.

As bad as the quarter was, it came in on the higher end of management's guidance. The worse part of the report was that management lowered full-year guidance. Sales are expected to drop 10% to 12%, down from previous guidance of 5% to 7%. The EPS outlook is $2.62 to $2.76, revised down from $4.25 to $4.44.

Now what

Estée Lauder is a highly profitable company with incredibly valuable brand names that are popular with its customers. It has decades of operational excellence behind it, and it was building up high net income after the early pandemic drop. Its stock price reflected all of this -- up until last year.

As it deals with headwinds, it's experiencing challenges. But it's a healthy business overall with tons of potential. It also pays a dividend. 

Even down 22%, it's not at a cheap valuation. Shares trade at 64 times trailing-12-month earnings as EPS as plunged. 

If you can ignore that -- knowing that Estée Lauder is usually a profit-making machine, and the valuation will rebalance when net income increases -- you could consider buying this stock now. But the near term is going to be pressured, and it makes sense to wait until there's more improvement or a bigger pullback in the stock price.