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Bear of the Day: Estee Lauder (EL)

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The Estee Lauder Companies Inc. (EL - Free Report) is facing COVID restrictions in one of its biggest markets: China. This Zacks Rank #5 (Strong Sell) cut its full year earnings guidance in May.

The Estee Lauder Companies is one of the world's largest beauty companies whose products are sold in about 150 countries and territories.

It's brands include Estee Lauder, Aramis, Clinique, Lab Series, Origins, Tommy Hilfiger, MAC, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo Malone London, Bumble and Bumble, Michael Kors, Darphin Paris, TOM FORD BEAUTY, Smashbox, Ermenegildo Zegna, AERIN, Le Labo, Too Faced, Editions de Parfums Frederic Malle, GLAMGLOW, KILIAN PARIS, Dr. Jart+ and the DECIEM family of brands including The Ordinary and NIOD.

Estee Lauder Beats Again in the Third Quarter

On May 3, Estee Lauder reported its fiscal third quarter results which ended Mar 31, 2022. It beat on earnings again posting $1.90 versus the Zacks Consensus of $1.66.

It has one of the best earnings surprise records on the Street, with 7 beats in a row and just 1 miss in the last 5 years.

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Image Source: Zacks Investment Research

Organic net sales rose 9% in the quarter with growth in every product category and reflecting a continued recovery in brick-and-mortar retail stores. The Americas and Europe both saw double-digit growth.

But by mid-March, China was putting on bigger COVID-related restrictions in several cities. Those restrictions reduced consumer traffic and travel. Estee Lauder's distribution facilities in Shanghai operated with limited capacity to fulfill brick-and-mortar and online orders beginning in mid-March 2022.

Estee Lauder Cuts its Fiscal 2022 Earnings Outlook

The COVID restrictions continued in China to start the fiscal fourth quarter, so it wasn't a surprise that the company cut its fiscal 2022 earnings outlook when it reported earnings in May.

It now expects earnings of $7.05 to $7.15.

The analysts had to cut their earnings estimates, with 12 analysts cutting in the last 60 days. That has pushed the Zacks Consensus down to $7.15 from $7.53, which is still at the high end of the company's new range.

And it's still earnings growth of 10.9% over fiscal 2021 as Estee Lauder made just $6.45 last year.

Analysts have also cut for next year, with the Fiscal 2023 Zacks Consensus falling to $8.01 from $8.44 in the last 2 months. But that is still earnings growth of 12%.

Shares Sell-Off in 2022

Estee Lauder has been one of the big 5-year winners but in 2022, shares have taken a tumble. They are down 30.5% year-to-date.

And with earnings still expected to see double digit growth, shares have gotten cheaper.

Zacks Investment Research
Image Source: Zacks Investment Research

But even with the sell-off, Estee Lauder is still trading with a forward P/E of 37.

It is shareholder friendly with a dividend yielding about 1% and a share buyback program.

Beauty has been one of the big winners on the reopening and Estee Lauder is one of the top companies in the industry. Is the weakness in China from the COVID shutdowns already priced into the shares?

Investors interested in Estee Lauder might want to wait for the next earnings report, in August 2022, for further clarity on the China market before diving in.


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