Estee Lauder shares collapse after weak profit forecast due to duty pressure

Shares of cosmetics maker Estee Lauder fell sharply after the publication of quarterly reports and a weak profit forecast for the new fiscal year. The company warned that the U.S. duties will cost it about $100 million, and the recovery of sales will largely depend on the U.S. market and China, where competition from L'Oréal and new players is intensifying. Despite the difficulties, analysts are in no hurry to turn away from the company: some still see potential for growth, while others advise caution.

Shares of Estee Lauder, which owns the brands La Mer and Clinique, on the pre-market on August 20 declined by almost 15%, but at the main trades the fall was less dramatic: at the time of publication of this text securities were losing about 4%. The reason - the company gave a weak profit forecast for the new fiscal year, partly because of the rising costs of duties, writes Bloomberg. The company estimates that U.S. import duties will reduce its profit in fiscal 2026 by about $100 million.

Estee Lauder expects adjusted earnings per share in the range of $1.9 to $2.1 for the fiscal year ending next June. The midpoint of that forecast is notably below analysts' consensus of $2.2 per share, Barron's writes. The company also forecast organic annual revenue growth - that is, through its own sales, excluding mergers and acquisitions (M&A) and currency effects - of 0-3% versus 1.9% in analysts' estimates, according to a Bloomberg survey. But even that pace would be a reversal after sales fell 8% in the previous fiscal year.

For the quarter ended June 30, adjusted earnings came in at 9 cents per share on revenue that fell 12% year-over-year to $3.41 billion. Analysts surveyed by FactSet had matched the forecast for earnings but assumed slightly lower revenue of $3.39 billion.

Sales of skin care products decreased by 12%, makeup by 5% and hair care by 10%. At the same time, perfumery showed a 2% growth due to high demand for luxury brands Le Labo and Jo Malone.

Ahead of the report Canaccord Genuity raised the target price of the shares from $62 to $85, keeping the recommendation to hold the securities (rating Hold). The new target, despite the increase, still implies the quotations falling by about 6% compared to the current level.

Last week Deutsche Bank reaffirmed its Buy recommendation, increasing the target from $95 to $98, which implies growth of 9%. In its turn, Telsey Advisory Group raised its share price forecast from $66 to $99, which implies growth of the securities by about 10%, leaving Market Perform neutral.

Since the beginning of the year, the stock has gained 13%. Of the 22 analysts tracking the company's securities, the majority (13) advise to Hold, seven recommend Buy, and two believe they should Sell or Underweight.

CEO Stéphane de La Favery is cutting costs through layoffs and outsourcing some services, while investing in expanding sales of cosmetics and skincare products through Amazon, TikTok and other online platforms. This means a gradual shift away from the traditional department store-based model, Bloomberg writes.

However, the company's long-term success depends largely on recovering demand in China and strengthening its position in the U.S. market, where Estee Lauder is losing ground to new players and competitor brands, including L'Oréal, the agency said.

Another task is to reduce dependence on duty-free stores in China and South Korea, which immediately after the pandemic provided up to a third of the company's revenue. Now sales in this segment have dropped sharply as Chinese tourists have returned to traveling abroad, Bloomberg writes.

This article was AI-translated and verified by a human editor