Innovative Growth And Tactical Realignment Propel Skincare And Fragrance Opportunities

Key Takeaways

• Estée Lauder's Profit Recovery and Growth Plan focuses on cost savings and resource alignment, aiming to enhance earnings and gross margin expansion despite lower sales.
  
• Strategic initiatives in high-growth skincare and fragrance markets, online channels, and sustainability aim to boost revenue and improve long-term profitability.
  
• Sales declines in key markets, economic uncertainty in China, and inventory issues threaten Estée Lauder's revenue growth, margins, and financial stability.

Catalysts

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

• Estée Lauder Companies is implementing its Profit Recovery and Growth Plan (PRGP), which has shown initial positive results in gross margin expansion despite lower sales. This plan could drive future improvements in earnings through cost savings and better alignment of resources.
  
• The company is focused on innovating and driving consumer demand in high-growth categories like the skincare and fragrance segments, particularly with nighttime skincare and high-end fragrances, which could boost future revenues.
  
• The strategic expansion into high-growth channels such as online platforms (e.g., Amazon's U.S. Premium Beauty store) and freestanding stores in emerging markets may enhance consumer reach and drive future revenue growth.
  
• Estée Lauder is actively pursuing sustainability and cost-efficiency measures which, coupled with strategic business adjustments, aims to provide long-term profitability improvements impacting net margins positively.
  
• Upcoming leadership changes, with executives experienced in global market strategies, might steer the company towards a more agile and effective growth trajectory, improving overall financial performance, particularly earnings growth.

Estée Lauder Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Estée Lauder Companies's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $4.04) by about November 2027, up from $203.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.6 billion in earnings, and the most bearish expecting $928.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2027 earnings, down from 111.2x today. This future PE is lower than the current PE for the US Personal Products industry at 28.5x.
• Analysts expect the number of shares outstanding to decline by 2.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Estée Lauder Companies Future Earnings Per Share Growth

Risks

• The Estée Lauder Companies are experiencing significant sales declines in key markets such as Mainland China and Asia travel retail due to weakening consumer sentiment and conversion rates post-pandemic, which could negatively impact revenue growth and earnings.
  
• The uncertainty and timing of economic stimulus measures in China create further pressure, as they are expected to result in near-term strong sales declines, impacting both revenue and net margins.
  
• The withdrawal of the fiscal year 2025 outlook due to extensive macroeconomic headwinds and market volatility raises concerns about earnings predictability and long-term financial stability.
  
• The reduction in dividends to maintain financial flexibility reflects concerns about maintaining profitability and reinvestment needs, affecting investor sentiment and potential earnings growth.
  
• Inventory management challenges, particularly in Asia travel retail, are impacting cash flow and earnings as sell-through remains subdued and requires careful control of obsolescence and discounting.

Valuation

• The analysts have a consensus price target of $80.48 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 $162.0, 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 2027, revenues will be $16.7 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $62.86, the analyst's price target of $80.48 is 21.9% 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.