Estée Lauder's Operational Overhaul and Currency Tailwinds: A Recipe for Rebound?

The beauty giant Estée Lauder (NYSE: EL) finds itself at a crossroads. Plagued by currency headwinds, sluggish demand in China, and the lingering effects of post-pandemic market shifts, the company's stock has slumped 25% in the past year. Yet beneath the surface, a strategic restructuring effort and shifting macroeconomic conditions could position EL for a comeback. Let's dissect how operational discipline and currency dynamics might unlock its valuation upside—and whether investors should bet on it.

The Restructuring Play: Cutting Costs to Fuel Growth

Estée Lauder's Profit Recovery and Growth Plan (PRGP) is its blueprint to tackle inefficiencies and reallocate capital. The goal is to generate $1.1–1.4 billion in annual savings by 2025 through streamlining operations, reducing overhead, and optimizing inventory. This isn't just about cost-cutting—it's about redirecting resources to high-margin categories like skincare and fragrance, which have historically driven its growth.

The stock's decline mirrors broader industry struggles, but the PRGP could catalyze a reversal.

Critically, the plan addresses structural challenges. For instance, non-cash impairments—most notably the $471 million write-down for the Dr.Jart+ brand due to inventory overhang in China—highlight past missteps. However, the PRGP's focus on inventory management and brand portfolio optimization aims to prevent such issues. While restructuring charges rose to $124 million in 2024, these are likely one-time hits, with long-term savings expected to boost margins.

Currency Dynamics: A Double-Edged Sword

The U.S. dollar's strength has been a relentless headwind for EL, dragging down earnings by translating foreign sales into fewer dollars. In 2024, currency effects shaved $50 million off EPS and reduced reported net sales in Asia/Pacific and EMEA. Yet this is a double-edged sword: if the dollar weakens, EL's results could rebound sharply.

A sustained decline in the USD index could reverse the currency drag, adding a tailwind to EL's reported sales and profits.

Consider this: In constant currency terms, EL's adjusted EPS fell only 22%, versus a 25% decline under GAAP. This implies that 80% of the earnings drop was due to currency, not underlying business performance. Meanwhile, regions like Hong Kong (up 30% in sales) and Japan (up 10%) are outperforming, and EMEA's fragrance category is thriving. A weaker dollar could amplify these gains in the U.S. financials.

However, historical data reveals that during periods when the USD Index declined by ≥3% over 30 days, a buy-and-hold strategy for EL over the next 60 days underperformed significantly. Between 2020 and 2025, such a strategy delivered an average return of -56.7%, while the benchmark gained 108.5%. The strategy's maximum drawdown of -88.06% and negative excess return of -165.2% underscore its high risk and poor performance, suggesting that even favorable macro conditions may not translate into stock outperformance without strong operational execution.

Strategic Shifts: Betting on High-Growth Categories

EL's restructuring is paired with a strategic pivot toward its most profitable segments:

1. Skincare Dominance:
2. La Mer and The Ordinary are growth engines. La Mer's expansion into new markets and prestige skincare's premium pricing power are key. The Ordinary's push into Amazon's U.S. Premium Beauty store signals a move to capture direct-to-consumer demand.

3. Despite a 3% sales dip in skincare due to China's slowdown, the category grew in EMEA and the Americas.

4. Fragrance as a Growth Lever:

5. Luxury brands like Le Labo and Jo Malone London delivered 2% fragrance sales growth in 2024. Fragrance is less cyclical than makeup, with strong appeal in travel retail and specialty stores.

6. Geographic Diversification:

7. EL is rebalancing away from China (still a drag) toward Mexico, Brazil, and Japan. Hong Kong's 30% sales surge shows the potential of travel recovery and affluent markets.

Risks to the Rebound Thesis

• China's Prestige Beauty Stagnation: Mainland China's sales are projected to decline further in 2025 due to weak consumer sentiment and inventory resets. While EL is hedging with other markets, China's recovery timeline is uncertain.
• Travel Retail Recovery Lag: Asia travel retail sales remain below 2019 levels, with inventory overhangs still being cleared.
• Competition Intensifies: Luxury beauty is a crowded space, with rivals like LVMH (owner of Fenty Beauty) and Coty (Burberry Fragrances) upping their game.
• Historical Underperformance During USD Weakness: Backtests show that periods of significant USD declines (≥3% over 30 days) have historically led to poor EL performance, with an average return of -56.7% over the subsequent 60 days.

Investment Thesis: A Buy on Dips, But Mind the Risks

Estée Lauder's valuation is at a multi-year low, trading at just 9.5x 2025E EPS estimates. This discounts most of the restructuring pain and currency headwinds. If the dollar weakens and skincare/fragrance growth accelerates, EPS could rebound to $6–$7 by 2026, implying a 40%+ upside from current levels.

Actionable Idea:
- Buy: Accumulate shares if the stock dips below $140 (a 20% discount to recent highs), with a 12-month price target of $180–$200.
- Avoid: If China's prestige beauty market remains stagnant, the dollar strengthens further, or if historical underperformance during USD declines repeats.

Final Take

Estée Lauder's turnaround hinges on executing the PRGP flawlessly, capitalizing on its premium brands, and riding a weaker dollar. While risks linger—including volatile currency dynamics and the ghost of past underperformance— the combination of operational discipline and a favorable macro backdrop makes EL a compelling contrarian play for long-term investors.

A successful restructuring and currency tailwind could lift EPS to pre-pandemic levels by 2026.

Disclaimer: This analysis is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.