Estée Lauder: Turnaround Progressing in Q4 FY24, with Baby Steps
Company Update (EL US) (Buy): Shares are on 33x depressed FY25 guided EPS, and news of CEO change outweighs the downturn in China.
Highlights
China market has sharply deteriorated, but Q4 FY24 had positive datapoints.
EBIT up ~400% on ~8% sales growth shows how much margins can recover.
EL is growing in EMEA markets, and heading in the right direction in the U.S.
CEO Fabrizio Freda is finally leaving, opening the way for a real turnaround.
With shares at $93.70, we see an 41% return (13.5% annualized) by Jun-27. Buy
Introduction
We review our Buy rating on Estée Lauder (“EL”) after Q4 FY24 (April-June) results last Monday (August 19). Shares fell 4.2% in the subsequent two days but recovered partially thereafter; they are down 40.0% from a year ago:
EL Share Price (Last 1 Year)
Source: Google Finance (25-Aug-24).
EL has been part of our “Select 15” model portfolio since September 2023, and has been expanded into a mid-sized position last month (July). We have been significantly wrong on the stock, with the position currently showing a 0.24x loss in the model portfolio and similar losses in real life. EL’s share price has fallen by 26.4% since our last review in May, and by a total of 42.6% since we first published our research on EL in April 2020 (though we only held the stock for parts of this period and had realized profits, notably between July 2020 and January 2023). We were far too early.
Nonetheless, we believe EL shares are a compelling opportunity because of the long-term structural growth of the Beauty market and the natural advantages of incumbent franchises. Recent weakness can largely be attributed to a sharp deterioration in the Chinese market, likely temporary in nature. There were positive datapoints from EL’s Q4 FY24 figures, notably in margin recovery and EMEA markets, and the U.S. business is heading in the right direction. Just as importantly, management change is finally at hand. EL shares have a ~33x P/E relative to the mid-point of FY25 guidance, which implies little sales growth and an EBIT margin far below pre-COVID levels and the current figure at L’Oréal, thus likely materially below EL’s real potential. On relatively modest sales growth assumptions, but assuming the EBIT margin recovers, EL shares can return 41% (13.5% annualized) by June 2027. Upside can be much bigger with a strong outsider CEO and a real turnaround. We reiterate our Buy rating.
(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; for a recap of our original investment case, see our first Substack article on Estée Lauder in May 2023.)