DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.

RIIQ Pro Newsletter

More robust content and deep insights & analysis related to Investing reserved for Raising InvestorIQ premium subscribers

In Today’s Newsletter

• Estee Lauder’s investment in artificial intelligence and its AI Innovation Lab.

• Clues about EL’s promise from insider moves.

• A closer look at the challenges stemming from both Estee’s internal struggles and from formidable competitors.

• How the rise of new consumer expectations is pushing established brands to innovate faster than ever.

• Estee Lauder’s recently rolled out “Profit and Growth Recovery” plan.

Deep-Dive

INTRO

When we think of iconic beauty brands, Estée Lauder undoubtedly stands out. Founded in 1946, this company has grown from mixing cosmetics in a kitchen to becoming a global luxury leader.

But even giants face storms, and Estée Lauder is currently navigating some rough seas. With its stock price tumbling and the Chinese market slipping away, the question is: can Estée Lauder reinvent itself, or is this the start of a decline?

THE SHINE FADES

An investment of $10,000 in Estée Lauder’s (EL) stock back in December 2016 would have compounded at a rate (CAGR) of 47.4% over the next four years, growing to a value of $69,580. 

But Estée Lauder’s stock peaked at $370.20 per share on Dec 20, 2021. And let’s not beat around the bush—Estée Lauder's stock has taken a serious hit since then. Over the past year, the stock has dropped by a staggering -43%, which is a far cry from the +18% gain seen by the broader S&P 500 index.

So, what’s behind this dramatic fall from grace? Well, it all boils down to a mix of underwhelming financial performance, the sluggish Chinese market, and a challenging global environment.

For starters, Estée Lauder's earnings have been on a downward spiral. In 2024, the company’s adjusted earnings per share fell to $2.59, a -25% drop from the previous year and a staggering -64% decline from the $7.24 per share it boasted in 2022. These figures are alarming for investors who have long seen Estée Lauder as a reliable blue-chip stock.

Let’s have a first look on the earnings from operations from the last 5 years, compared to L’Oréal, the main competitor:

But why such a drastic drop? The answer lies largely in China—a market that has been both a blessing and a curse for Estée Lauder.

China has been a goldmine for luxury brands, with its growing middle class and high demand for premium products. However, in recent months, the Chinese luxury market has cooled significantly, and the impact on Estée Lauder has been severe.

The once-booming travel retail sector in places like Hainan has seen sales plummet, dragging down Estée Lauder’s overall performance. In fact, the company’s sales in Asia Pacific dropped by -7% in the most recent quarter, a trend that has been worsening since last year.

The downturn in China has also been exacerbated by the broader economic slowdown and shifting consumer behaviors. 

With the Chinese economy facing headwinds, luxury spending has taken a hit, and Estée Lauder, heavily reliant on this market, has felt the impact. The company's optimistic forecasts from previous years now seem overly ambitious, as it struggles to meet even modest growth expectations.

For fiscal year 2025, Estée Lauder has revised its growth projections to a range of -1% to +2%, far below the 5% growth that was initially anticipated.

A Closer Look at the Competition

Let’s dive into the competition, because Estée Lauder isn’t just dealing with internal struggles—it’s up against some serious heavyweights in the beauty world.

At the forefront is L’Oréal, the global cosmetics leader, which has been on a winning streak, thanks to its diverse portfolio and balanced global presence. Unlike Estée Lauder, which has leaned heavily on the Chinese market, L’Oréal's wider reach has helped it navigate regional downturns with ease.

But L’Oréal isn’t the only one keeping Estée Lauder on its toes. Newer players like Fenty Beauty by Rihanna and even The Ordinary—a brand under Estée Lauder's own umbrella—are shaking things up with innovative products and strong social media game. We also have Shiseido in Japan, and Beiersdorf; these brands are not only capturing the attention of younger consumers but also setting trends that leave traditional giants scrambling to keep pace.

And let’s not forget about the tech titans like Amazon, making bold moves into the beauty space. Armed with vast data and direct-to-consumer models, they’re challenging the old guard and forcing established brands to rethink their strategies. 

While Estée Lauder faces its challenges, it’s clear the beauty industry is still thriving. L’Oréal remains dominant across skincare, makeup, and hair care, while niche brands and indie labels are carving out their own spaces with creative products and savvy marketing.

The rise of clean beauty, vegan options, and sustainable packaging has further shifted consumer expectations, pushing established brands to innovate faster than ever. Estée Lauder has the resources and history of innovation to keep up, but the big question is whether it can do so quickly enough to stay in the game!

Now let's take a look at the indicators and compare our company with the competition, and start with the classic P/E ratio. As you may know, a high P/E means that investors are willing to pay a higher price in relation to the company's current earnings, which may reflect high expectations of future growth or a perception of superior intrinsic value.

On the other hand, in the case of Estée Lauder and Shiseido, the high ratio seems to be the cause of falling earnings (see the first graph below), due mainly to the Chinese market, also for Shiseido. L'Oreal seems unaffected, with a stable P/E ratio.

But if we look closer, the gross profit margins are quite similar for the three competitors, meaning that Estée Lauder doesn’t mess around:

A Ray of Hope?

In response to these challenges, Estée Lauder has rolled out its "Profit Recovery and Growth" plan. The goal? To turn things around by focusing on efficiency, innovation, and digital transformation. The plan aims to boost net profits by $1.1 billion to $1.4 billion over fiscal year 2024 levels, which sounds impressive on paper. But will it be enough?

The success of this plan hinges on several factors, including how well Estée Lauder can adapt to new market realities. The company has acknowledged the need for modernization, particularly in how it engages with consumers.

The rise of e-commerce and social media has shifted the beauty industry’s landscape, and brands that fail to innovate risk becoming irrelevant. Estée Lauder is trying to catch up by investing in digital marketing and direct-to-consumer channels, but it’s a race against time.

The AI Innovation Lab: Betting on the Future

One of the most exciting aspects of Estée Lauder’s future plans is its partnership with Microsoft to create an AI Innovation Lab. 

Read more below..

For more robust and meaningful Investing insight & analysis, consider subscribing to RIIQ Pro, our premium newsletter:

• A company-specific Deep-Dive Analysis (provided weekly)

• A detailed write-up of a RIIQ Key Investing Insight (provided weekly)

• RIIQ Top 10 Watchlist - a list of the top 10 companies being monitored and evaluated heavily due to varying factors, along with details of why they may be in our top 10 (provided monthly)

• BONUS: A FREE download of Legendary Investor Insights. 10 pieces of practical wisdom from legendary investors like Warren Buffett, Peter Lynch, Charlie Munger, and many more.

Sign-up now for a limited-time offering of only $9.99 per month!

Subscribe to RIIQ Pro to read the rest.