Even the best companies in the world go through cycles. Some ups and downs are related to internal factors, but often they're the result of external headwinds. Many great companies are experiencing this now, with one economic shakeup after the next. 

The market looks like it's weary of the continued volatility, and investors are showing that they're confident in the future. The S&P 500 is up more than 16% this year as of this writing.

Estee Lauder (EL 1.70%) is a top company that's struggling with the impact of the pandemic, inflation, and economic policy. The beauty industry has its own qualities, and Estee Lauder's position in this industry is adding to its problems right now. Let's take a look at what's going on.

Everyone can be beautiful

Estee Lauder has been around since the 1940s, but it only went public in 1995. That was a turning point for the company in other ways as well, since it began a string of acquisitions that led to the huge cosmetics company it is today.

The company's products and brands are in a range of price points, but they're mostly upscale department store brands. In times like these, when money's tight for many people, it's negatively impacted. Customers are likely to switch to cheaper, drugstore alternatives instead of paying for luxury brands. 

In the first quarter of 2023, sales declined 12% year over year, and earnings per share (EPS) dropped 72% to $0.43. As disappointing as that is, the results came in ahead of expectations. The company attributed the decreases to a slow rebound in travel in Asia.

"Nearly all developed and emerging markets grew organically, and outperformed our expectations," CEO Fabrizio Freda said. 

The weak Asia rebound is clearly a short-term headwind, and it's the flip side of what's typically a very strong market and an important contribution to high sales.

A McKinsey report on the beauty industry found that the highest expected channels of growth over the next few years are travel retail, which is expected to grow 10% annually through 2027, and e-commerce, which is projected to increase 12% annually.

What's currently a thorn in Estee Lauder's side should rebound as an important piece of its pie.

A more beautiful future

For a company like Estee Lauder, growth is heavily tied to the beauty industry overall. It's a mature company, so sales increases, for the most part, are going to come from industry growth. According to the McKinsey report, the cosmetics industry as a whole is expected to grow 6% annually through 2027. 

The acquisitions, including top names like MAC and Bobbi Brown, and the new brand strategy -- which has led to the development of brands like Clinique and Origins -- have been pivotal in creating new growth opportunities, and that gives Estee Lauder extra strength in generating higher sales. It recently acquired the Tom Ford brand, which should be valuable going forward.

Estee Lauder also services four categories: makeup, skin care, hair care, and fragrance, which provide some protection when the economy is volatile. They're all connected, but they still perform differently. In the first quarter, skin care bore the brunt of the declines, down 20% year over year in sales and 62% in operating income, while the other three categories held steady.

Is it uglier than it looks?

The company recently issued more debt as net income levels are at their lowest in years, leading to some of its lowest free cash flow as well. Even with the natural ebbs and flows of business cycles, Estee Lauder's in a worse position than it has been in a long time. It has raised its dividend for the past 20 years, and it yields 1.4% at the current price.

Estee Lauder has a popular, profitable business, and I don't think investors need to read anything else into this beyond a severely challenging operating environment. Shares are likely to rebound and eventually be a great stock for long-term investors.

However, given that the near term is going to remain pressured, there's no reason to jump into this right now. It's not even a bargain, trading at 63 times trailing-12-month earnings. Therefore, I say hold.