Beauty Reimagined Will Leverage AI And Restructuring To Improve Agility And Decision-Making

Key Takeaways

• Expanding into high-growth channels and markets is key to restoring sustainable sales growth and enhancing revenue through the Beauty Reimagined strategic plan.
  
• Organizational restructuring and increased AI integration aim to boost agility and efficiency, enhancing operating leverage and profitability.
  
• Subdued consumer sentiment, organizational complexity, and lack of on-trend innovation could pressure Estée Lauder's growth, net margins, and competitive standing.

Catalysts

Manufactures, markets, and sells skin care, makeup, fragrance, and hair care products worldwide.

• The Estée Lauder Companies' strategic plan, Beauty Reimagined, aims to restore sustainable sales growth by rapidly expanding into high-growth channels and markets, which is expected to improve revenue.
  
• The company is focusing on fast-to-market innovation and expanding its product offerings across dynamic subcategories and price tiers, which is likely to drive revenue growth and improve net margins through a diversified portfolio.
  
• By increasing consumer-facing investments and optimizing marketing programs, the company plans to accelerate new consumer acquisition, potentially boosting revenue and improving market share.
  
• The expanded Profit Recovery and Growth Plan (PRGP) involves cost reductions and operational efficiencies, expected to improve margins and enhance overall profitability.
  
• Integration of AI and significant organizational restructuring aim to improve agility, efficiency, and decision-making, which could lead to better operating leverage and stronger earnings.

Estée Lauder Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Estée Lauder Companies's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.6% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $3.66) by about March 2028, up from $-700.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $928 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, up from -35.0x today. This future PE is lower than the current PE for the US Personal Products industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Estée Lauder Companies Future Earnings Per Share Growth

Risks

• Subdued consumer sentiment in China and political and social unrest in key Asian markets like Korea could lead to a reduction in revenue growth, impacting net sales and earnings.
  
• The increased complexity of the organization and a narrow focus on too few markets could continue to hinder the company’s agility and ability to capitalize on growth opportunities, potentially affecting revenue and net margins.
  
• The company's lack of on-trend innovation and slow time to market could result in missed opportunities and lower competitive standing, affecting revenue and earnings.
  
• A large expense base, combined with a decrease in sales in higher-margin areas, could pressure profit margins and net income growth.
  
• The significant expansion in restructuring could incur high upfront costs while benefits take time to materialize, impacting short-term profitability and net margins.

Valuation

• The analysts have a consensus price target of $76.48 for Estée Lauder Companies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $61.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.3 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.9%.
• Given the current share price of $68.04, the analyst price target of $76.48 is 11.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.