Digital Expansion And Lean Transformation Will Unlock TikTok Market Opportunities

Key Takeaways

• Estée Lauder's transformation initiatives aim to improve operational efficiency, leading to enhanced margins and sustainable sales growth.
  
• Expanding market share in key regions and digital platforms, along with product innovation, is expected to boost revenue and diversify income sources.
  
• Declining sales, earnings challenges, geopolitical tensions, weak consumer sentiment, and restructuring risks threaten Estée Lauder's revenue growth and profitability.

Catalysts

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

• Estée Lauder Companies is committed to transforming its operating model to become leaner and more agile, with the goal of restoring sustainable sales growth and achieving a solid double-digit adjusted operating margin over the next few years. This transformation is likely to positively impact net margins and earnings as efficiencies are realized.
  
• The company is focusing on expanding share gains in key markets, such as the U.S., China, and Japan, where they have already started to see positive results. Successful market penetration in these areas is expected to increase revenues and drive overall sales growth.
  
• Initiatives like the Beauty Reimagined strategic vision include the launch of new products across price tiers to reach a wider audience and an increased focus on innovation. These efforts are designed to drive consumer acquisition and increase future revenues.
  
• Estée Lauder is implementing significant cost-saving measures through its PRGP restructuring program, which includes reducing the workforce, streamlining operations, and leveraging outsourcing and procurement efficiencies. These actions are anticipated to improve net margins by reducing operational costs.
  
• The company is enhancing its online presence by expanding into new e-commerce platforms such as Amazon Premium Beauty and TikTok Shop and focusing on regions with high-growth potential. This digital expansion is expected to contribute to sales growth and diversify revenue streams.

Estée Lauder Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Estée Lauder Companies's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.9% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $3.56) by about May 2028, up from $-871.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, up from -24.2x today. This future PE is lower than the current PE for the US Personal Products industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Estée Lauder Companies Future Earnings Per Share Growth

Risks

• The decline in Estée Lauder's organic sales, notably a 9% drop in the third quarter, and the sharper downturn in travel retail sales, which fell 28% organically, present significant pressure on revenue growth.
  
• A 33% decrease in diluted earnings per share compared to the previous year, despite cost-cutting measures, underscores potential challenges in restoring profitability and improving net margins.
  
• Ongoing geopolitical issues, such as tariffs and their impact on trade, may result in increased expenses and could materially affect future profitability should these issues remain unresolved by fiscal 2026.
  
• Consumer sentiment remains weak in critical markets like China and segments of Europe, posing risks to gaining market share and aligning shipments with consumer demand, which could negatively affect revenue and inventory dynamics.
  
• The company's ambitious restructuring program, including job reductions and a shift toward regionalized manufacturing, carries execution risks that might impact operational efficiency and margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $68.736 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 $56.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $58.53, the analyst price target of $68.74 is 14.8% 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.