Estée Lauder: Bitter Medicine Outlined in Q2 FY25 Results
Company Update (EL US) (Buy): New CEO set out his turnaround plan, and investors seemed surprised by the short-term pain involved.
Highlights
China-related sales fell double-digits, but U.S. and EMEA sales were flat.
Further sales decline and large EPS fall are expected next quarter.
More importantly, the new CEO set out vision and expanded restructuring.
We see this as the start of a real turnaround and expects it to succeed.
At $69.47, we see mid-teens IRR in Base Case, 2x+ return in Upside Case.
Introduction
We review our Buy rating on Estée Lauder (“EL”) after the release of Q2 FY25 (October-December) results and an expanded restructuring plan yesterday (February 4); shares finished the day down 16%:
EL Share Price (Last 1 Year)
Source: Google Finance (04-Feb-25).
EL entered our “Select 15” model portfolio as a small position in September 2023 and was expanded into a mid-sized one in July 2024. We published our first Buy rating on EL in April 2020. This has been a disastrous investment, with the position showing a 43% loss in our model portfolio, though our real-life outcome has been partially mitigated by tactical trading. We added moderately yesterday and sold the incremental purchase at a profit near market close.
We believe yesterday’s news to be positive, signifying the beginning of a real turnaround under a new CEO, and the market was merely unprepared for the short-term pain this would involve. Q2 FY25 results were poor where Chinese consumers are involved but flat elsewhere. We see a solid low-teens annualized return by 2028 year-end on conservative assumptions, and a potential for investors to double their money in 3 year if EL makes a full recovery.
(The rest of this article is for paid subscribers only, but unlocking it costs just $10; you can see a free sample of our research here.)