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Estee Lauder (EL) Prospects Look Bleak: Time to Sell?

Zacks Equity Research

Cosmetics giant, Estee Lauder Companies Inc. EL has been in troubled waters lately. The shares of the company plunged 9.8% in the past one year, underperforming the Zacks categorized Consumer Staples sector which has showcased a gain of 6%. Lackluster retail growth in Hong Kong and China, lower tourist rates in New York and Florida, declining footfall at the company’s mid-tier department stores and high promotional environment in the cosmetic sector have been hurting the stock lately.

What’s Wrong with Estee Lauder?

Downward Estimate Revision

Estee Lauder has seen significant downward estimate revision in the past 30 days. For the third-quarter fiscal 2017, Estee Lauder has witnessed 10 downward estimate revisions as a result of which the estimate declined 14.3% to 72 cents. Further, 11 estimates were revised downward for fiscal 2017 in the past 30 days which in turn led to a earnings estimate decline of 1.8% to $3.32 during the period.

Lower Fiscal Guidance

Estee Lauder expects continued volatility and economic challenges to slow the pace of market growth in Hong Kong and several emerging markets. Further, the company has lowered earnings guidance for fiscal 2017 and expects adjusted earnings in the range of $3.29–$3.33 per share, compared with $3.38–$3.44 per share estimated earlier.

On a constant currency basis, adjusted earnings are expected to grow 8–9%, narrower than the earlier guidance of 8–10%. We believe the lowered guidance can be attributed to unfavorable currency headwinds and increasing promotional environment in emerging markets.

Slow Growth in Emerging Markets

Though Estee Lauder is strategically focusing on expanding in Asia and expects long-term growth, soft macroeconomic conditions in Greater China and Korea are slowing the company’s growth in the region. Further, the company is witnessing stock market volatility in China.

Moreover, continued political unrest in Hong Kong has caused a sharp drop in Chinese tourists traveling to other countries. Though the company is attempting to strengthen business with local consumers in Hong Kong, there is no possibility of a significant pickup in consumption in the near term.

Domestic Market Also Fails to Provide Respite

The company has also been facing lower sales in America. Declining footfall in the mid-tier department stores is primarily responsible for the soft top-line results. Additionally, fewer number of tourists visiting the country is leading to slow growth in the travel retail sector. Tourist-driven freestanding stores are reporting lower sales in the past few quarters.

Moreover, the M.A.C. brand, which constitutes a significant portion of total sales, has been underperforming in the past few quarters due to increased competitive pressure and ongoing challenges faced in North America.

Nevertheless, in order to combat lackluster retail growth and tough competitive environment in the retail sector, Estee Lauder consistently undertakes product innovation in order to enrich portfolio of globally recognized flagship brands. Further, the company is undertaking several strategic acquisitions to expand in the makeup category evident from the acquisition of brands like Becca and Too Faced in Dec 2016. But, the headwinds outweigh the initiatives taken up by the company and the chances of recovery seem slim in the near future for this Zacks Rank #4 (Sell) company.

Stocks to Consider

Better-ranked stocks in the consumer staples sector worth considering include Helen of Troy Ltd. HELE, Pinnacle Foods Inc. PF and Con Agra Foods Inc. CAG. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Helen of Troy has an expected earnings growth rate of 10.8%. Pinnacle Foods has an expected earnings growth rate of 8.3% and Con Agra Foods has an expected earnings growth rate of 8%.

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