Q2 2024 Earnings Summary
- Estée Lauder's expanded Profit Recovery Plan is expected to deliver incremental operating profit of $1.1 billion to $1.4 billion by fiscal year 2026, with more than half realized in fiscal 2025.
- The company is at an inflection point, poised to return to organic sales growth in the second half and sequentially stronger profitability, driven by strategic initiatives and exciting innovation in products, particularly in key markets like Mainland China and North America.
- Estée Lauder has made meaningful progress in reducing trade inventory levels in Asia travel retail, expecting normalized levels by the end of the third quarter, which should improve net sales and support profitability in the second half.
- Concerns about the ability to improve margins and execute the restructuring program amid slower growth in key markets such as China.
- Risk that incremental profits from the Profit Recovery Plan may be offset by additional costs over the next couple of years.
- Declining department store exposure in the U.S. and the need to diversify distribution channels may affect market share and pose challenges in stabilizing U.S. sales.
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China Prospects and Strategy
Q: How is Estée Lauder handling changes in China's beauty market?
A: Management remains optimistic about long-term opportunities in China despite recent soft consumer sentiment. They gained substantial market share in skin care—80 points—and in fragrances. Luxury brands like La Mer, Tom Ford, Jo Malone, and Bobbi Brown saw double-digit retail sales growth. They are investing in distribution, online channels, new city brick-and-mortar stores, and leveraging innovation through a new Shanghai lab. They acknowledge the rise of local brands and are focusing on differentiation and agility in the supply chain. -
Profit Recovery Plan and Financial Outlook
Q: Can you confirm the expected operating profit increase from the recovery plan?
A: The recovery program aims to add $1.1 to $1.4 billion in extra profitability by fiscal 2026, confirming an expected operating profit of $2.5 to $3 billion. Management emphasizes that this profit increase is after reinvesting in consumer-facing growth, ensuring that savings are not offset by new costs. -
Inventory Levels and Asia Travel Retail
Q: How confident are you about inventory levels in Asia travel retail?
A: Significant progress has been made in reducing trade inventory levels in Asia travel retail to healthier levels. By April, retail stocks should be aligned, enabling regular replenishment and supporting net sales as guided for the second half. Investments in the Asian supply chain allow for shorter lead times and better management of volatility. -
Performance Measurement over Next Two Years
Q: How will you measure progress amid mixed business conditions?
A: Management will focus on recovering profitability, returning to sustainable growth, and investing in brands. Key measures include restoring gross margins, executing the Profit Recovery Plan, and improving organizational agility. They are addressing pressure points like inventory alignment, cost structure, and skin care growth. -
US Distribution Strategy
Q: How are you diversifying US distribution to stabilize share?
A: Estée Lauder is increasing focus on high-growth channels like specialty retail and online, while continuing to support department stores where they hold high market share. They aim to tailor strategies for each channel and consumer segment, acknowledging the shift towards omnichannel shopping. -
Agility and Digital Engagement
Q: What are your priorities for agility and digital engagement?
A: The company is enhancing agility by shortening supply chains and reallocating resources faster. They are leveraging brands like Clinique and The Ordinary to respond to consumer trends like active derma. Efforts include embracing new platforms like TikTok, focusing on earned media value, and modernizing promotional models. -
Pricing and New Launches
Q: How are you approaching pricing for new and existing products?
A: Estée Lauder uses a sophisticated pricing model to ensure new product launches are margin accretive. They consider competitive benchmarks and product benefits when setting prices. Upcoming launches include MAC relaunching Studio Fix and MAC lipstick, and Estée Lauder's Re-Nutriv catering to the growing longevity focus. -
Unstructured Market in Asia
Q: What is your outlook on the unstructured market in Asia?
A: The focus is shifting towards travelers and improving conversion rates, which are getting better globally. The unstructured market is reducing due to regulations and efforts by governments and retailers. Estée Lauder expects the unstructured market to diminish gradually as traveler numbers increase over time.