Estée Lauder undergoes a profit makeover to swoon investors

Key Points

• Estée Lauder is a global cosmetics company with over 20 prestige brands, including Clinique, La Mer, Bobbi Brown and MAC Cosmetics.
• The company's restructuring plan includes a 3% to 5% workforce reduction and charges of between $500 million to $700 million.
• The company raised its incremental operating profit forecast from its Profit Recovery Plan to $1.1 billion to $1.4 billion, up from $800 million to $1 billion in previous estimates.

Iconic prestige beauty products company Estée Lauder Co. Inc. NYSE: EL may be righting its ship, as evidenced by its latest earnings report. The consumer discretionary sector company offers skincare, fragrances, haircare and makeup products through over 20 well-known brands, including AVEDA, Aramis, Bobbi Brown Cosmetics, La Mer, Too Faced and DECIEM brands. 

Department stores like Macy’s Inc. NYSE: M and Nordstrom Inc. NYSE: JWN, specialty beauty stores like Sephora and Ulta Beauty Inc. NASDAQ: ULTA carry its beauty products, and consumers can purchase directly from various brand websites.

Iconic prestige brands 

Estée Lauder is known for its high-end prestige brands. Its namesake, Estée Lauder, is a luxury skincare and makeup brand. Clinique is a dermatologist-developed customized skincare and makeup line developed by Dr. Norman Orentreich 50 years ago. 

MAC Cosmetics is professional quality makeup. La Mer is a high-end luxury skincare line offering anti-aging, color makeup, and sun protection for women and men. It's known for its signature "Miracle Broth." 

Its Genaissance De Mer Essence Serum with Crystal Miracle Brother retails for $860. Bobbi Brown Cosmetics is an iconic, natural-looking, clean makeup brand. The company competes with Coty Inc. NYSE: COTY and e.l.f. Beauty Inc. NYSE: ELF. 

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Strong EPS beat 

On February 5, 2024, Estée Lauder reported fiscal Q2 2024 EPS of 88 cents, beating consensus analyst estimates by 34 cents. Net earnings fell to $313 million, compared to $394 million in the year-ago period. The effective tax rate was 37.6% versus 25.4% in the year-ago period. 

The higher tax rate was due to its foreign operations and geographical mix of earnings. Revenue fell 7.4% year-over-year (YoY) to $4.28 billion, beating analyst estimates of $4.19 billion. Organic net sales fell 8% YoY due to ongoing softness in Asia travel retail, notably in mainland China.

Sales forecast 

Estée Lauder expects fiscal Q3 2024 net sales to grow between 3% to 5%. It expects a 1% unfavorable impact from forex and a 1% headwind from potential business disruptions in Israel and parts of the Middle East. Organic net sales should rise from 4% to 6%. The company expects EPS of 39 cents to 49 cents and revenues of $3.87 billion to $3.94 billion.

Fiscal full-year 2024 EPS guidance should be between $2.15 and $2.30, with revenues expected to rise to 1% or $15.74 billion to $16.14 billion compared to $15.65 billion consensus analyst estimates. Get AI-powered insights on MarketBeat.

The makeover plan bolsters investor sentiment

While the EPS beat was impressive, the guidance was flat. However, shares gapped strongly on the company's Profit Recovery Plan, improved gross margin, reduced overhead expenses and lowered the cost base while rebuilding stronger and more sustained profitability. 

The restructuring plan and makeover will begin in fiscal Q3 2024 through the end of fiscal 2026. The company will cut 3% to 5% of its workforce. The company will take a restructuring charge between $500 million and $700 million upon full implementation.

Benefits to occur in fiscal 2025 to 2026

The program should yield annual gross benefits of $350 million to $700 million before taxes. Estée Lauder expects to drive incremental operating profits of $1.1 billion to $1.4 billion, from the original $800 million to $1.1 billion previously forecasted. 

The realization of benefits will materialize in fiscal years 2025 and 2026, with over half expected to benefit fiscal 2025 operating profitability.

Estée Lauder CEO Fabrizio Freda commented in the conference call, "In conclusion, we are at an inflection point, poised to return to organic sales growth in the second half and deliver sequentially stronger profitability than the first half, as well as expansion from the year ago."

Freda concluded, "We are well positioned to deliver stronger profitability in fiscal year 2025 and 2026, given the initial progress we have made from our profit recovery plan as well as its new restructuring program, and we are well positioned to invest in consumer-facing areas to capture exciting growth opportunities in global prestige beauty."

Estée Lauder analyst ratings and price targets are at MarketBeat. Look for Estée Lauder's peers and competitor stocks with the MarketBeat stock screener.

Weekly seed wave breakout 

The weekly candlestick chart for EL illustrates a bullish seed wave pattern. A seed wave is a rare pattern comprised of a market structure low No. 1 (MSL1) trigger at $118.41 and a higher MSL No. 2 (MSL2) trigger at $134.90. 

When they occur, it sets up three distinct price targets referred to as potential reversal zones (PRZs) based on three Fibonacci (fib) extension ratios of 1.27 at $175.31, 1.414 at $183.56 and 1.618 at $195.41 of the length of the MSL No. 1 bottom at $101.68 and the shooting star wick high of $151.19 at the top of the candle sequence.

The seed wave is activated when EL breaks out through the wick-high $151.19. The earnings gap to $159.75 initially attempted to trigger, but it eventually gap and crapped back down to close at $143.34. The weekly relative strength index (RSI) is slowly rising to the 50-band. Pullback support levels are $140.49, $134.90, $126.57 and $118.41.