Since reaching an all-time high in 2022, Estee Lauder's (NYSE:EL) basically crushed stock. The shares have lost around 80% of their value in two years. Furthermore, the company has just announced a dividend cut of around 47%.
There is no doubt that the news is not bad today, but for a contrarian investor, this may be the time to start sniffing around this perfume and cosmetics giant. Here are three reasons why.
Estée Lauder does not make products that consumers need, like a manufacturer of consumer staples. It makes products that people want, and that's why it is consumer preferred stock. Furthermore, the products Estée Lauder makes are expensive for their niche. But there is a nuance here, because the products it makes are affordable compared to other luxury items. This is an important differentiating point.
Image source: Getty Images.
Good markets or bad, few people buy a BMW on a whim. But that perfume you and your partner love is something that might be worth dropping a hundred dollars on for a small bottle if you run out.
With brands across skin care, hair care, cosmetics, and fragrance, Estée Lauder has a broad and diverse portfolio globally. And with sales of nearly $3.4 billion in the first quarter of fiscal 2025, the company is significant, noting that this top-line result was achieved despite some continued headwinds in key Asian markets.
Ultimately, the massive drop in stock prices highlights some material near-term risks the company faces today. But Estée Lauder is tackling its problems from a position of strength, given the basic fundamentals of its affordable luxury enclave.
The major issues facing Estée Lauder today include weak sales in China thanks to its slow recovery from pandemic shutdowns, slow sales in the travel retail channel (also linked to Asian weakness), and the costs associated with litigation over talcum powder.
Organic sales for the first quarter of fiscal 2025 were down 5% year over year. The bottom line of the income statement fell into the red, with a loss of $0.43 per share. That's down from a profit of $0.09 per share in the previous year. But here's the interesting thing: Take out some one-time items, and earnings rise to $0.12 per share, up from $0.11 in the first quarter of fiscal 2024.
The major one-time items impacting the first quarter of fiscal 2025 were talc settlement charges and restructuring costs. In the midst of this restructuring, the company is bringing in a new CEO. It looks like management is trying to get as much bad news out as fast as they can, often called the kitchen sink quarter (sometimes kitchen sink periods can be longer than just a quarter).
The big giveaway here, however, was the rationale for the dividend cut. According to the company, “We are reducing our dividend to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team.” The new leadership team will also start with a clean slate ahead, as longer-term guidance has also been withdrawn.
While you can argue that this all sounds like bad news, from a contrarian perspective it suggests that Estée Lauder is trying to set the stage for change by making the tough moves before the new CEO is in place.
There is definitely bad news surrounding Estée Lauder's business, and that is clearly what investors are paying attention to right now. Yet the first quarter fiscal update also contained some good news, largely ignored by investors.
For example, sales growth in Europe, the Middle East and Africa, and the Americas (basically everywhere but Asia) was a strong point in the skin care segment. In Make-up, Clinique posted double-digit sales growth globally. In the fragrance business, where sales were down just 1%, Le Labo sales rose in the double digits. And in hair care, timing issues were a headwind that should be short-lived and could even boost future quarters.
To some extent, this is only good news arising from the fiscal first quarter 2025 earnings release. But that's not particularly different from what Wall Street seems to be doing, as it's focusing on the bad news instead.
All companies struggle through difficult times, and Estée Lauder is no different. The point here is that the business doesn't exactly fall off the cliff. And management is addressing its issues as best they can, including bringing in a new CEO who will reset market expectations for the future.
Estée Lauder certainly needs to act on whatever plan is set by the new CEO. Conservative investors should probably wait for that plan, and maybe even want to see some progress towards the goals being set. However, the good news being overshadowed by today's bad news suggests that there is still vital business to work with here.
If you can handle some uncertainty, Estée Lauder and its iconic portfolio of affordable luxury brands are probably worth the risk for more aggressive investors. If you wait until some uncertain tomorrow, you could miss the opportunity in front of you today.
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Brewer Reuben Gregg does not have a position in any of the stocks mentioned. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy.
