Estee Lauder (NYSE: $EL) Q2 Profits Fall Despite Earnings Beat

The Estee Lauder Companies (NYSE: $EL) is a multinational cosmetic company that manufactures skincare, hair care, and makeup products. Its headquarters are in Midtown Manhattan, New York City.

The company released its fiscal year 2024 second-quarter results on Monday, February 5, 2024.

Second Quarter Results in Detail

The results were impacted negatively by a decline in sales in Asia travel retail and softening demand in mainland China. Considering the existing global macroeconomic challenges, management has revised fiscal 2024 net sales and adjusted EPS outlook downwards.

Estee Lauder reported an adjusted earnings per share of 88 cents, above Zacks’s Consensus Estimate of 55 cents. However, it was a 47% decline from the previous year’s Q2 EPS of $1.54. The adjusted EPS was 89 cents on an FX-neutral basis.

It reported net sales of $4.28 billion for Q224, above analysts’ estimate of $4.1 billion. However, it was a 7% decline from the previous year’s $4.62 billion. Organic sales slumped by 8% compared to the prior year. 

Estee Lauder attributed the decline to a decline in demand in the Asia travel retail sector and weaknesses in the prestige beauty market in mainland China. Additionally, a 1% decline resulted from business interruptions due to the ongoing Israeli conflict. 

The company’s net earnings were down 20.56% to $313 million compared to the previous year’s net earnings of $394 million. The effective tax rate was reported at 37.6% in the second quarter compared to 25.4% last year. 

This increased rate led to a higher effective tax on foreign operations due to the change in the geographic earnings mix in fiscal 2024. Additionally, it suffered from the unfavorable impact of its previous share-based compensation. 

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CEO’s Comments

Commenting on the results, CEO and President Fabrizio Freda said, “For the second quarter of fiscal 2024, we delivered our organic sales outlook and exceeded expectations for profitability. The Ordinary and La Mer in Skin Care, Clinique in Makeup, and Le Labo and Jo Malone London in Fragrance performed strongly. Many developed and emerging markets around the world continued to grow organically and at retail. While mainland China and Asia travel retail declined, our retail sales trended ahead of organic sales, and these businesses are poised to return to organic sales growth in the second half.”

He added, “We made progress in the first half across several strategic priorities, including reducing inventory in the trade of Asia travel retail, improving working capital, realizing higher levels of net pricing, and managing expenses with discipline. We are, encouragingly, at an inflection point. In the second half of fiscal 2024, we are positioned to return to strong organic sales growth and expand our profitability from the first half.”

Product Category Performance

Skincare product sales declined 10% year over year, amounting to $1.2 billion, while makeup products net sales fell 8% year over year, amounting to $1.1 billion. In the Fragrance category, revenues remained consistent at $737 million compared to the same quarter last year. Hair Care net sales were $173 million, a 5% decline year over year.

Estee Lauder Recovery Plan

In its Q224 results, Estee Lauder revealed it had reduced its workforce by 3-5% as of June 30, 2023. The cuts entailed eliminating some positions, retraining, and redeploying others in select areas. 

The cuts are part of a broader restructuring program. Estee Lauder added it plans to eliminate up to 3,000 positions. Once complete, the company expects to incur restructuring costs of $500-$700 million. It projects that the program will yield $350-$500 million in annual gross benefits. 

With approximately 62,000 employees globally, the company anticipates that its cost-reduction initiatives will increase its annual operating profit by $1.1 billion to $1.4 billion. The full benefits of the program are projected to be realized in fiscal years 2025 and 2026.

Dividend Payout 

Estee Lauder announced a dividend payout of $0.66 per share for its Class A and Class B common stock for the second quarter. Payouts will be made to shareholders of record as of the close of business on February 29, 2024, on March 15, 2024. 

Estee Lauder Outlook For Q323 And FY24

For the upcoming quarter, the company forecasts a 3-5% increase in net sales year-over-year. Organic net sales are forecast to grow 4-6% in the quarter. Q3 EPS is projected to be $0.35-$0.46, while adjusted EPS is forecast to be $0.36-$0.46. The company estimates that the ongoing conflict in the Middle East will have a dilutive impact on EPS of $0.03. 

For FY24, Estee Lauder forecasts organic net sales growth will decline 1% or increase 1% year over year. Its diluted PES forecast for the full year is $2.04-$2.20. It expects adjusted diluted net EPS to decline 38%-34% on an Fx-neutral basis. 

Stock Update: $EL

$EL closed trading on February 5, 2024, at $150.28 per share, a gain of 12.05% from its previous close of $134.12. At the time of writing, the market cap is 53.871 billion, with a volume of 12,158,516. The stock price has declined 42.46% in the past 12 months. However, it has been on an upward trend since December 31, 2023, indicating a bullish signal.

Estee Lauder (NYSE: EL)

Should you Invest in $EL?

The company’s recent quarterly results were a considerable decline year-over-year. Its product category has also witnessed a downfall in the year-over-year period. However, it performed better than expected. 

The stock gained up to 14% on Monday when the company announced it plans to lay off its employees. Monday’s gains signal that investors approve of the cost-cutting program. With the current bullish momentum and a robust restructuring plan, EL stock is an excellent long-term hold. 

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