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Estée Lauder (EL) is trading roughly flat after wrapping up FY24 on a mixed note. The cosmetics giant beat handily on EPS for Q4 (Jun) with more modest upside on the top line. However, the main problem was the guidance as EL guided EPS and revs well below expectations for Q1 (Sep) and FY25, reflecting ongoing softness in overall prestige beauty in mainland China and a decline in Asia travel retail. In addition to earnings, EL also announced that CEO Fabrizio Freda will retire at the end of FY25.

• The company has been struggling over the past couple of years. However, organic net sales growth, which excludes F/X impacts and royalty revenue from the acquisition of the TOM FORD brand, returned to growth in the second half of FY24 after a challenging first half. In Q4, organic revenue grew a healthy 8% yr/yr to $3.87 bln, despite a slowdown in key geographic areas, primarily mainland China, Asia travel retail and North America. EMEA was very strong in Q4.
• What stood out to us was that EL saw organic sales growth in all product areas, led by Skin Care which jumped 15% yr/yr, driven by its global travel retail business. This represented an acceleration from the 6% growth in Q3 (Mar). Skin Care growth was clearly the main growth driver as its other segments (Makeup, Fragrance, Hair Care) were all up only +1-2%. The good thing here is that Skin Care is by far EL's largest segment, so it's always good to see the strongest growth there.
• In terms of its outlook, the company expects global prestige beauty to grow 2-3% in FY25, reflecting strength in many developed and emerging markets, albeit with more tempered growth in certain markets, such as North America, partially offset by continued declines in mainland China and Asia travel retail due to low consumer sentiment and conversion rates. EL then expects global prestige beauty to re-accelerate to historical mid-single-digit growth in FY26.
• With a decent industry outlook in FY25 and even better in FY26, why was EL's guidance so weak? That is mainly because it has significant exposure to mainland China and Asia travel retail. Asia Pacific represented 31% of total sales in FY24. EL says consumer confidence remains subdued in China.
• North America is not great either as consumers continue to face inflationary pressures. EL also noted an ongoing intensely competitive environment as well as an overall slowdown in growth in prestige beauty. This is especially in brick and mortar channels in North America, which has particularly impacted its skincare and makeup categories.

Despite some very weak guidance, especially for Q1, the stock is holding up better than we initially thought it would. The trading action tells us that a lot of negativity appears to be priced in already. The stock had been holding up fairly well in the early months of 2024, but has steadily declined from around $150 in early April to around $95 currently. It seems investors were expecting a bleak outlook. China is a real problem area and US consumers appear to be trading down to lower priced cosmetics. The gudiance gives us that feeling that a turnaround is going to take some time. Finally, we think a new CEO would help to offer a fresh perspective, but even that is not going to happen until the end of FY25.