Estee Lauder's (EL 1.70%) fiscal 2023 financial results were, when you dig a little under the surface, not nearly as bad as they looked on the surface. But the top-line numbers were still pretty terrible. A closer look reveals that there was really just a single problem spot that spoiled the entire year.
The problem area makes sense when you examine the economy overall. It's also pretty clear that this issue isn't likely to be a lingering problem. That potentially spells an opportunity for long-term investors.
Here's what you need to know.
The reasons to like Estee Lauder's business
Cosmetics, perfume, and skin creams take on a new significance when you factor in the current broader concerns about an economic slowdown. Granted, a high-end brand of skin toner can cost a couple of hundred dollars, but that's actually not a huge sum of money for what is considered a luxury item. For example, a quality skin toner is still much less expensive than a brand-new diamond ring retailing for a couple of thousand dollars.
Image source: Getty Images.
It's this retail rationalization that allows Estee Lauder to remain somewhat resilient to economic ups and downs. That's not to suggest that it won't feel the pinch of a recession, just that the hit may not be as bad in comparison to other luxury retailers. Having a global business should generally help as well since some economies often perform well while others are struggling.
And yet the pandemic was a problem for Estee Lauder. At first cosmetics demand slumped, likely because people staying at home didn't feel as much need to spend much time (or income) focusing on their looks. Then, as the world started to open back up again, sales skyrocketed. Probably a revenge spending issue, as people stuck at home enjoyed the experience of going out into the world and buying stuff again.
Once that burst of spending faded, the cosmetics retailer's sales fell anew. No need to buy more if you already have the products you had put off buying. Estee Lauder stock has plunged, at least partly, because of this recent volatility in the business.
While revenue has dipped, a look at the company's fiscal 2023 financial results shows the full story is getting broadly better. For example, the company's sales grew in the fourth quarter and the growth was exactly what the company predicted. And, going into fiscal 2024, Estee Lauder management projects "progressive margin recovery." Basically, it looks like the company is about to turn an important corner. That suggests that there is material turnaround potential here.
The big problem Estee Lauder faced
And yet fiscal 2023 was a pretty rough year on the income statement. Top-line sales fell 10%. Bottom-line earnings declined by a huge 57%. It isn't surprising that investors are downbeat on the company's shares.
But again, a deeper dive into the situation tells a different story. For instance, this statement from CEO Fabrizio Freda seems at odds with those numbers, "We delivered impressive double-digit growth in the markets of [Europe, the Middle East & Africa] and returned to growth in Asia/Pacific, while the Americas held steady" The problem was largely confined to the global travel business, where sales were down 34% year over year. And yet, Freda also noted, "Our travel retail business in EMEA and the Americas soared..."
Freda is saying the main problem was the Asian travel business, which clearly did not rebound along with other regions. Global travel as a whole is about 20% of Estee Lauder's top line, so it is a pretty big deal. Asian travel is clearly an important part of that total. To understand the importance of the travel business just think about your own vacations. Do you spend money on things you wouldn't otherwise buy while you are on vacation? The answer is most likely yes. But the issue here isn't that people aren't spending so much as people just aren't traveling in Asia, with the lingering coronavirus impacts in the region and concerns about travel in China.
This too shall pass
So the bad news is that Estee Lauder's travel business was hit hard by reduced travel in Asia. The good news is that travel is likely to pick up in time, as it has elsewhere in the world. And when that happens, this sales headwind will ease, returning to more normal levels. Estee Lauder's growth engine will then be hitting on more cylinders, even if it isn't quite hitting on all cylinders. That should be enough to get the top and bottom lines moving in the right direction, spurring a turnaround in Estee Lauder's financial and, perhaps, stock market performance.
