Estee Lauder Stock Was Too Done Up

Estee Lauder Stock Was Too Done Up

Estee Lauder


EL -7.93%

looks and smells like an obvious beneficiary of the reopening economy. But beauty standards for the company may have been set at unattainable heights.

The global beauty brand giant, which also owns Clinique, Jo Malone and Dr. Jart+, saw sales grow 13% from a year earlier on a constant currency basis in its fiscal third quarter ended March 31, exceeding its guidance of 10%-11%. Still, both the top line and the bottom line were below Wall Street’s higher expectations. Estee Lauder’s shares dropped almost 8% after the call on Monday.

Makeup continued to sell poorly as consumers kept wearing masks. The segment’s quarterly sales were down 13% on a constant currency basis compared with a year earlier. Skincare and fragrances are faring better, with revenue in both segments up roughly 30%.

Some of last quarter’s weakness was due to the resurgence of Covid-19 cases in parts of the world. In-store sales were especially affected in parts of Europe, Latin America and Japan, which all had some closures during the quarter. Online sales have made up for some of the weakness, growing double-digit percentages across the world. That has carried some perks for Estee Lauder: Online sales growth and lower tester costs helped boost margins in the first quarter, the company noted on its earnings call on Monday morning.

Places that have a better handle on Covid-19 offer hope for future quarters. Free-standing stores in Israel, where masks are no longer mandatory outdoors, have seen sales return to pre-pandemic levels. Even lipstick sales are almost back to normal, the company said on an earnings call. In China, a fast-growing market for Estee Lauder, domestic travel to shopping hubs such as Hainan Island has more than offset the lack of international travel globally.

The pace of recovery going forward will continue to be something of a wild card as vaccination speeds vary across the world. Meanwhile, Estee Lauder’s valuation alone makes it something of a wild card: It is trading at roughly 45 times forward-12-month earnings, above the 30 times range seen pre-pandemic and the 10-year average of 28 times.

The global reopening will enhance Estee Lauder’s looks for sure, but as with makeup, it probably can’t perform a miracle.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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By Ankita Dixit

Hi, my name is Ankita Dixit. I started writing from young age and most of my writing skills and knowledge are self taught. Currently, I am working as a professional writer at Paisa.co. I have write on various topics including travel, motivation, finance, technology, credit cards, insurance and entrepreneurship etc.