Estée Lauder earnings 'better than feared' amid China woes

Estée Lauder (EL) stock is soaring Monday morning after topping fiscal second-quarter earnings estimates. The cosmetics company announced a restructuring plan that would impact between 3 and 5% of its workforce.

Canaccord Genuity Managing Director Susan Anderson outlines what Estée Lauder and other makeup brands are indicating on consumer strength, particularly amid ongoing pressures in Chinese markets.

"We have a Hold rating on Estée Lauder mainly...due to the issues in China, which we don't really see improving much over the next couple quarters," Anderson says. "So that's mainly... going to be dragging down the business as they continue to try and improve things in that region, but given the macro issues in China, we think it's still going to be tough for a while."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

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- Shares of Estee Lauder companies skyrocketing after the beauty brand announced a restructuring plan reducing the company's workforce by 3% to 5%. The announcement coming in the company's second quarter earnings report, which showed a beat on the top and bottom line. Revenue coming in at $4.28 billion versus $4.23 billion that was estimated.

This still represents a 7% decline from the prior year adjusted earnings per share. In the second quarter, $0.88 versus the $0.55 that was estimated. For more on the results, let's turn to Susan Anderson, who is the Canaccord Genuity Managing director. Susan, I mean, you look across several different elements of this report. And it wasn't a standout report, but it seems like the market is just saying, better than expected, I guess. Relief, that it's not as bad as it could have been.

SUSAN ANDERSON: I think it's better than feared. They beat on the bottom line, which was nice to see. They did bring down the bottom line guide a little bit. But I think overall, investors may think that's conservative. So it looks like well, China is still not positive growth and travel retail. Is not positive growth. It does look like maybe on easy compares. But things are getting a little bit better there. They're starting to work through inventory and the travel retail channel. So I think on low expectations, all of that was a positive.

- Susan, when we come to or I guess when we dig down into some of the weaker parts of this report, clearly it shows that consumers are under pressure. They're struggling in some of their key regions. Is that going to be a trend that you think is going to continue to weigh on the company. To weigh on sales here for the remainder of 2024.

SUSAN ANDERSON: Yeah. Well, we have a hold rating on Estee Lauder. Mainly due to the issues in China, which we don't really see improving much over the next couple quarters. So that's mainly, I think going to be dragging down the business as they continue to try and improve things in that region. But given the macro issues in China, we think it's still going to be tough for a while. In travel retail, just on easy compares.

I think things could sequentially get better. But it's still pretty tough also in travel retail. So those are the main two issues. I think all the other regions are doing better. North America, they did note, though was down mainly due to the Department store channel. But beyond that everything else did see positive growth.

- So overall here, for investors that are trying to understand the strength of the little luxuries trade, how strong is that still and according to Estee Lauder? But plus all of the other top picks that you have in the industry?

SUSAN ANDERSON: Yeah. So we're still seeing strength in beauty. Particularly, prestige beauty continues to be very strong. Luxury beauty also continues to be strong. So I think the difference between luxury beauty and maybe some other luxury items such as handbags is that, you can buy a luxury beauty item or prestige item for a lot cheaper. So a lipstick for $50, $100. And typically in weaker macro times, consumers look to beauty and make them feel better.

So it does stand up well, even if consumers are pinched elsewhere. So we expect that to continue this year. We're not expecting the strong double digit growth we saw last year in prestige. But continued strength in beauty.

- Susan, when it comes to some of the trends that we've been seeing with Estee Lauder, they're losing some market share to their rival L'Oreal. You had these up and coming brands like ELF that are really connecting with a lot of the younger users, at least and people are no longer buying Estee Lauder products and instead are buying some of those cheaper products. What is or can Estee Lauder compete with some of these newer rivals that are out there. And what do you think they need to do in order to win back that market share?

SUSAN ANDERSON: Yeah. So they do own the ordinary, which still is very strong for them. It grew. The one of the fastest growing brands that they have. And it's more in that lower price point prestige category and it really caters to that younger consumer. So I think things like that where they can maybe snap up some of these brands that are resonating very well with the younger consumer.

And then also I think they're doing a good job with Mac. Rolling out new products they're really staying on top of the trends. So brands that I think still can resonate with the younger consumers such as Mac, I think they can really increase the innovation there to drive growth.

- All right. Susan, interesting. Great to get your thoughts here, your insight this morning and Estee Lauder shares jumping in premarket trading. Thanks Susan.

SUSAN ANDERSON: Thanks.