The Estee Lauder Companies (EL) Down Despite Q1 Earnings Beat
The Estee Lauder Companies Inc. EL reported first-quarter fiscal 2023 results, with the top and bottom lines declining year over year. However, both the metrics came ahead of the respective Zacks Consensus Estimate. Shares of the company tumbled 8.1% on Nov 2.
COVID-19 continued affecting the company’s operating environment throughout the quarter, which included curbs in China that weighed on travel retail in Hainan and retail traffic in mainland China. Results were affected by increased inflation and concerns surrounding the recession, which led certain retailers to tighten the inventory.
Management expects the rest of fiscal 2023 to remain pressurized by temporary hurdles stemming from pandemic-led curbs in China, foreign currency headwinds, heightened inflation, supply-chain bottlenecks and the risk of sluggishness in certain markets globally. However, The Estee Lauder Companies remains optimistic about opportunities in the global prestige beauty space.
Quarter in Detail
The company posted adjusted earnings of $1.37 per share, which surpassed the Zacks Consensus Estimate of $1.29. However, the bottom line slumped 28% (down 24% at constant currency or cc) year over year. This includes an adverse currency impact of 4% on core international travel retail locations.
The Estee Lauder Companies Inc. Price, Consensus and EPS Surprise
The Estee Lauder Companies Inc. price-consensus-eps-surprise-chart | The Estee Lauder Companies Inc. Quote
Net sales of $3,930 million beat the Zacks Consensus Estimate of $3,917 million. However, the metric declined 11% (down 7% at cc) from $4,392 million reported in the year-ago quarter. Organic net sales fell 5% in the quarter.
Management highlighted that the company battled challenges related to pandemic-led curbs in China, partly compensated by solid organic sales growth in certain markets in the Asia/Pacific and many emerging and developed markets in the West. Category-wise, fragrance and hair care witnessed double-digit organic net sales growth.
The gross profit came in at $2,907 million, down 13% year over year. The gross margin contracted to 74% from 75.9% reported in the year-ago quarter.
The adjusted operating income declined 26% at cc, mainly due to reduced net sales.
Product-Based Segment Results
Skin Care’s sales were down 14% year over year (down 11% at cc) to $2,104 million. Makeup revenues fell 10% year over year (down 6% at cc) to $1,052 million.
In the Fragrance category, revenues remained flat year over year (up 5% at cc) at $607 million. Hair Care sales totaled $158 million, up 7% (up 11% at cc).
Regional Results
Sales in the Americas tumbled 6% year over year (down 7% at cc) to $1,123 million. Revenues in the EMEA region decreased 10% (down 6% at cc) to $1,682 million. In the Asia-Pacific region, sales declined 15% (down 7% at cc) to $1,130 million.
Other Updates
This Zacks Rank #3 (Hold) company exited the quarter with cash and cash equivalents of $2,938 million, long-term debt of $5,107 million and total equity of $5,517 million.
Net cash flow used for operating activities for the three months ended Sep 30, 2022 was $650 million. The company returned $0.33 billion in cash to shareholders through dividend payouts and share repurchases.
In a separate press release, the company declared a quarterly dividend of 66 cents per share on Class A and Class B shares, reflecting a 10% hike from the previous rate. The dividend will be paid out on Dec 15, 2022, to shareholders of record as of Nov 30.
Guidance
Management’s guidance for fiscal 2023 assumes ongoing inventory tightening by certain retailers in Asia travel retail and the United States. It further expects greater productive distribution to retailers, offering new customer reach and entry into new countries.
The Estee Lauder Companies anticipates mitigating inflationary pressure through pricing, saving and mix optimization. Further, the company assumes greater savings from the Post-COVID Business Acceleration Program.
For fiscal 2023, management projects net sales to increase in the band of 6-8% year over year, which includes an unfavorable currency impact of 6%. The view includes tougher inventory management in travel retail due to the reduced traffic stemming from pandemic-led curbs.
The guidance includes an unfavorable impact of 1% from the termination of its license agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines, effective Jun 30, 2022. The view also reflects a 1% adverse impact associated with returns related to restructuring and other activities.
Organic net sales growth is anticipated to be flat to increase 2% in fiscal 2023. Adjusted earnings per share (EPS) are expected in the band of $5.25-$5.40, suggesting a 25-27% decline from the year-ago period. The bottom line is expected to decline 19-21% at cc.
For the second quarter of fiscal 2023, management expects net sales to decline in the band of 17-19% year over year. The guidance includes the adverse impacts of the abovementioned inventory management, currency headwinds and the termination of certain license agreements.
Organic net sales are anticipated to decrease in the range of 9-11% in the second quarter. The quarterly adjusted EPS is anticipated in the band of $1.19-$1.29, indicating a 57-60% decrease from the year-ago period. The adjusted EPS is likely to decline 50-54% at cc.
EL shares have declined 30.5% in the past three months compared with the industry’s drop of 27.7%.
Staple Stocks to Consider
Some better-ranked stocks from the sector are Lamb Weston LW, TreeHouse Foods THS and Lancaster Colony LANC.
Lamb Weston, a frozen potato product company, currently sports a Zacks Rank #1 (Strong Buy). LW has a trailing four-quarter earnings surprise of 47.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Lamb Weston’s current financial-year sales and earnings suggests growth of 14.6% and 45.7%, respectively, from the year-ago reported numbers.
TreeHouse Foods, which manufactures and distributes private label food and beverages, sports a Zacks Rank #1 at present. TreeHouse Foods has a trailing four-quarter earnings surprise of 45.2%, on average.
The Zacks Consensus Estimate for THS’ current financial-year sales and earnings suggests growth of 16.8% and 15.1%, respectively, from the year-ago reported numbers.
Lancaster Colony, which manufactures and markets food products for the retail and foodservice markets, currently carries a Zacks Rank of 2 (Buy). LANC delivered an earnings surprise of 170% in the last reported quarter.
The Zacks Consensus Estimate for Lancaster Colony’s current financial-year sales and EPS suggests growth of 9.6% and 38.3%, respectively, from the corresponding year-ago reported figures.
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