Estée Lauder, a name synonymous with luxury and beauty for nearly eight decades, is facing a critical moment.
The company’s upcoming earnings report on Tuesday looms large, a potential turning point for a Fortune 500 giant that has seen its market value plummet by over $100 billion in just three years.
While the new CEO may be apprehensive, the only solace is that this week’s report is unlikely to match the staggering disappointment of the last.
The previous quarterly report in October was nothing short of disastrous.
Estée Lauder, boasting a portfolio of globally recognized brands like MAC, Aveda, Le Labo, and Clinique, stunned investors by slashing its dividend by nearly half to conserve dwindling cash reserves.
This move was further compounded by the withdrawal of financial forecasts, a move that sent shockwaves through the market, triggering a 21% stock plunge—the largest single-day drop in the company’s 79-year history.
The repeated downward revisions of financial forecasts over the past two years have fueled growing concerns that the company’s leadership was losing its grip.
A $100 billion loss and a family under pressure
The stark numbers bear out these criticisms.
Since reaching its peak at $374.20 in January 2022, Estée Lauder’s shares have plummeted by a staggering 78%, representing a market capitalization loss exceeding $100 billion.
This decline is particularly painful for the Lauder family, who control nearly 35% of the company’s shares (and 84% of voting power), adding immense pressure to navigate the crisis.
The company declined to comment on the matter.
From profit powerhouse to a sea of red ink
The fiscal year ending June 30, 2024, saw Estée Lauder’s revenue decline by 12% from its 2022 peak to $15.6 billion.
However, the bigger story was the freefall in profits, with net earnings plummeting by 60% year-over-year to $409 million.
The first quarter of the current fiscal year, the period covered by the dismal October report, revealed a net loss of $156 million, further fueling anxieties.
A failure to adapt to a rapidly evolving market
Beyond the financial figures, it’s evident that Estée Lauder failed to keep pace with the ever-changing luxury market.
The company’s current struggles stem from a failure to adapt strategies that worked well just three to five years ago.
A significant bet on China’s burgeoning luxury market under the leadership of former CEO Fabrizio Freda proved highly lucrative in the 2010s but has since become a major source of the company’s woes.
Meanwhile, the core skincare and cosmetics brands that once resonated with older generations have failed to connect with consumers under 40.
Adding to the company’s woes, a schism within the Lauder family emerged, as reported by the Wall Street Journal, regarding how to address the company’s decline.
This division pitted Jane Lauder, the company’s chief digital officer who advocated for bolder strategies to connect with younger shoppers, against her cousin William Lauder, the former executive chairman and CEO, who favored Freda’s existing strategies.
Can a new CEO revive Estée Lauder’s faded glamour?
Over the last three months, all three figures—Jane and William Lauder, and Freda—have departed from the C-suite, leaving longtime Estée Lauder insider Stéphane de La Faverie to take over as CEO.
This week’s investor call will be the first opportunity for de La Faverie to present an update on the company’s progress, or lack thereof.
He will be tasked with stopping the hemorrhaging of sales in China, streamlining the company’s supply chain, appealing to younger consumers through platforms like TikTok, and breathing new life into brands increasingly associated with older demographics, all while managing a founding family that remains firmly in control and determined to regain its status in the luxury space.
A golden era under Freda
For many years under Freda’s leadership, Estée Lauder was an undeniable force.
Freda, who joined from Procter & Gamble in 2008 and became CEO in 2009, brought his financial acumen and professional discipline from his prior experience, and was the first person from outside the Lauder family to lead the company.
He also benefited from the support of William Lauder, his immediate predecessor, in navigating family dynamics.
From Freda’s appointment in 2009 until the company’s all-time high in 2022, the company’s shares soared by a staggering 643%.
During this period, Freda streamlined the company’s portfolio, focusing on the higher end of luxury.
Revenue more than doubled from $7.8 billion in 2010 to a peak of $17.7 billion in 2022.
Under Freda, the company made strategic acquisitions aimed at attracting younger shoppers, including the fragrance brand Le Labo, makeup line Too Faced, and skincare brands Deciem and Dr. Jart.
However, while brands like La Mer have generated huge sales, they primarily cater to older clientele.
The China gamble: a bet that turned sour
One of Freda’s most significant moves was to place a big bet on the Chinese luxury market.
This decision initially propelled Estée Lauder to new heights but has since become a major obstacle.
Like many Western luxury executives, Freda was drawn to the promise of the Chinese market.
For years before the pandemic, China was projected to become the world’s top luxury market.
The numbers were compelling: between 2008 and 2014, the number of Chinese households buying luxury items doubled, and the country soon became dotted with luxury malls.
With the Lauder family’s blessing, Freda established stores and built a massive distribution network.
Estée Lauder was notably early in establishing itself in not just major hubs like Shanghai and Beijing, but also in smaller Tier 2 and Tier 3 cities.
They also developed a strong presence in travel retail, with duty-free shops in major airports that are very popular among Chinese shoppers.
The domino effect: a market overexposed
Initially, Freda’s strategy paid off handsomely.
From $2.23 billion in 2014, sales in the Asia Pacific region reached $5.49 billion in 2021, surpassing even the Americas region.
Asia accounted for around 34% of the company’s revenue in that year, a much larger exposure than most of its competitors, making the company vulnerable when China’s market conditions soured.
The Covid-19 pandemic was a major contributing factor.
While skincare sales initially increased during the early days of the pandemic, the market soon experienced a drastic downturn.
Travel restrictions hit travel retail sales hard, and a weakening Chinese economy and high youth unemployment led to a decline in demand.
Growing preference for local brands also played a role.
Estée Lauder’s Asia Pacific business has declined for three consecutive years.
In fiscal 2024, sales came in at $4.89 billion, 16% lower than their 2021 peak.
However, the story of the region is more complex than a mere decline in revenue.
While many Western companies, including Apple, Starbucks, and LVMH have faced similar challenges, Estée Lauder’s overly ambitious investments in anticipation of a continued boom have come back to haunt it.
For example, the company’s $1 billion investment in a manufacturing facility in Japan in 2018 now suffers from overcapacity due to weaker demand.
Additionally, supply chain issues have exacerbated the crisis, as the company sent inventory to Chinese duty-free shops months in advance, leaving the company with less flexibility.
When China finally reopened in 2023, much of the shipped inventory was stranded in stores due to a broader slowdown in China’s luxury market and economy.
The company has been working to clear out this unsold inventory at significant losses, which has taken longer than expected.
This ongoing issue is a major reason for Wall Street’s cautious stance on the company’s prospects.
According to Bain & Co, mainland China’s luxury market shrank between 18% and 20% in 2024.
They forecast flat sales for this year, until economic stimulus takes hold.
Losing ground to L’Oréal
Estée Lauder’s woes are not confined to China; the company has also lost market share in the United States to L’Oréal.
For years, the company’s US revenue depended on sales at department stores such as Neiman Marcus and Saks, and with the decline of traditional department stores, Estée Lauder expanded to more retailers like Ulta Beauty and Sephora.
While these moves broadened the company’s retail footprint, they haven’t protected sales from declining.
Despite a 7% rise in the overall US prestige market in the first nine months of 2024, Estée Lauder’s Americas sales, primarily comprised of the US, rose by a mere 1% in fiscal 2024.
A complex challenge for the new CEO
Addressing the company’s numerous challenges is a daunting task for the new CEO.
Since de La Faverie took the helm in late October, shares have risen about 25%, but still remain far below the all-time high from just a few years ago.
Additionally, the fact that de La Faverie was a major architect of Freda’s ultimately flawed strategy has tempered investors’ enthusiasm.
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