EL shares slide in pre-market on weak guidance, CEO transition

Estée Lauder (EL) reported its fourth-quarter results, posting adjusted earnings per share (EPS) of $0.64, which significantly exceeded the consensus estimate of $0.26. This represents a sharp decline from the $7.00 EPS reported in the same quarter last year, reflecting the challenges the company faced. Revenue for the quarter came in at $3.87 billion, up 6.8% year-over-year and slightly above the $3.81 billion consensus estimate. The company's gross margin stood at 71.8%, showcasing its ability to manage costs effectively despite a challenging macroeconomic environment.

Geographically, Estée Lauder’s performance varied significantly. The Americas region saw a decline in net sales by 5.3% year-over-year to $1.01 billion, missing the estimated $1.11 billion. This decline was largely driven by weakness in North America, where sales were negatively impacted by a downturn in the makeup category. In contrast, the EMEA region performed exceptionally well, with net sales rising by 32% year-over-year to $1.65 billion, far exceeding the estimated $1.44 billion. The growth in EMEA was broad-based across product categories, particularly in skin care, makeup, and luxury fragrances. However, the Asia-Pacific region continued to struggle, with net sales declining by 7.5% year-over-year to $1.21 billion, falling short of the $1.29 billion estimate. The weakness in this region was primarily driven by ongoing softness in the prestige beauty market in mainland China and the challenges in the travel retail sector.

In terms of product categories, Estée Lauder's skin care segment saw a 3% decline in net sales, reflecting the broader market trends in China and the Asia travel retail sector. The makeup category also experienced a 1% decrease in net sales, primarily due to challenges in the global travel retail business and a tough comparison with the prior year's figures. On a brighter note, the fragrance category grew by 2%, with strong performance in luxury brands, particularly in Asia-Pacific and the Americas. This growth underscores the continued demand for high-end fragrance products, even as other segments faced headwinds.

Looking ahead, Estée Lauder provided a cautious outlook for fiscal year 2025, guiding EPS in the range of $2.75 to $2.95, which is well below the consensus estimate of $3.96. The company also forecasted organic net sales growth of between -1% and +2%, reflecting continued uncertainty in key markets, particularly in China. The company cited persistent weak consumer sentiment in China as a significant factor impacting its outlook. Additionally, the company expects to see ongoing challenges in the travel retail sector, which has been a critical revenue driver in the past.

A major development highlighted in the report was the announcement that President and CEO Fabrizio Freda intends to retire at the end of fiscal year 2025. This news, combined with the conservative guidance, led to a 6% drop in Estée Lauder’s shares in pre-market trading. The board has stated that it is considering both internal and external candidates as part of its succession planning process, ensuring a smooth transition once Freda steps down. This leadership change comes at a critical time for the company, as it navigates through a challenging market environment.

The company’s Profit Recovery and Growth Plan remains a key focus for fiscal 2025. This plan is designed to offset some of the pressures on profitability, particularly those stemming from the prestige beauty segment’s softness in China. Estée Lauder aims to reignite growth in its skin care segment, capitalize on the strong momentum in its fragrance category, and enhance its marketing capabilities. The company also plans to continue simplifying its organization to become more agile and responsive to market changes, which it hopes will position it for a stronger performance in fiscal 2026.

In summary, Estée Lauder’s Q4 results and FY25 guidance reflect a company grappling with significant external challenges, particularly in China and the travel retail sector. While the company has managed to exceed expectations on profitability in the quarter, the outlook for the upcoming fiscal year is muted, reflecting ongoing market uncertainties. The planned retirement of CEO Fabrizio Freda adds an additional layer of uncertainty, although the board's succession planning should help mitigate any potential disruptions. Investors are likely to remain cautious, given the company’s conservative guidance and the macroeconomic headwinds it faces.