Estée Lauder (EL) was one of the hottest stocks going into 2022 and then it took a turn for the worse and has been in a bear market since the beginning of 2022. It faced several lawsuits at the end of 2023 and early 2024 alleging that the management had misled investors.

Quite a ride for shareholders, right? There was another derivative lawsuit to the one mentioned above. Refer to 2024 EL’s 10K (PDF Page 126) for full details.

Since the litigation is pending, we can only wonder what the truth is. However, it doesn’t look good. But, is there any material weakness in EL’s performance?

Revenue started falling, however, EL managed to maintain its gross margins. What is alarming is the sharp fall in operating margins and total destruction of EPS growth. So, what happened here?

1. Revenue growth was impacted by a slowdown in China and a travel-related slowdown in Asia.

2. A slowdown in the Americas’ saloon and direct-to-consumer haircare.

3. A slowdown in the Americas due to competitive pressures in prestige beauty brands.

4. Israel and the Middle East continue to perform poorly for EL. This region accounts for 2% of sales.

5. Tax rate impact due to non-deductible goodwill and intangible asset impairment charges, higher foreign taxes, and previously issued stock-based compensation. This pushed EL’s effective tax rate to 47%.

Restructuring Programs

No point regurgitating on this, however, as I have maintained, everybody is doing this. Before we get to some of the details, judge for yourself if these are recurring or nonrecurring charges. Depending on your answer, go ahead and adjust the margins and cash from operations. I will let you play around with it as it can be controversial.

Personally, I would move these above the line as this doesn’t look nonrecurring to me. Operating Income would tank hard if we did that. Again, this is subjective. One person’s recurring item can be another person’s nonrecurring item. All of us have the right to an opinion, we may agree to disagree.

Profit Recovery and Growth Plan

The previous restructuring or operational efficiency program was started during COVID-19 and those are the charges you see above.

As announced on November 1, 2023, the Company launched a Profit Recovery Plan, now known as the Profit Recovery and Growth Plan ("PRGP"), to help progressively rebuild its profit margins in fiscal years 2025 and 2026.

The PRGP is focused on rebuilding stronger, more sustainable profitability, supporting sales growth acceleration, and increasing speed and agility. The plan is designed to improve gross margin, lower the cost base, and reduce overhead expenses while increasing investments in key consumer-facing activities.

So, EL will be taking more restructuring charges? Nonrecurring? No prizes for the answer. Also, this program will not be over till the end of fiscal 2026 (June 30, 2026), hence, net income will continue to be under pressure. Analysts will point to a possible benefit of 1.1 billion to 1.4 billion, however, that will not start showing up until well into 2026.

Account for this when referring to analysts’ EPS targets for FY2025 which ends on June 30, 2025.

Income Tax Rate

EL’s statutory tax rate is 21% (refer to EL’s 2024 10K - pdf page 101). However, as I mentioned earlier, the effective tax rate for FY2024 was 47%. Now there is an interesting rule that will impact EL in FY2025 and beyond:

Inventory and Accounts Receivable

We will be looking for a few things here:

1. Is inventory growing faster than normal compared to revenue growth?

2. Are accounts receivable growing faster than revenue growth?

3. Are finished goods piling up, i.e. are they higher than the sum of raw materials and work-in-progress items?

So, we can see that inventory has fallen more than revenue. This implies that the business growth outlook is not that great. The quarter ending September 30, 2024, should be weak.

Also, while inventory has come down, the “Finished Goods” plus the “Promotional Merchandise” is higher than “Work in Progress” plus “Raw Materials”. This again is a sign of a potential bad quarter. Yes, they moved some stuff but now pay attention to the “Accounts Receivable”.

Wait a second, why did it grow 18.9% when everything is falling? Who is not paying? Is it this guy?

Just a subjective guess, I don’t know. But based on the troubles highlighted above about China and Asia’s travel market, it sure seems like it. And now here is an important risk factor:

Outlook

Here is management’s outlook (Refer to EL’s 2024 10K - PDF Page 33).

Now do you consider all of that we discussed as one-time nonrecurring charges? What about valuations?

With EBIT/EV of 3.53% (less than 10-year yield), trailing P/E of 78.9 for a company that is hardly growing, and Debt/Equity of 1.8 (way more than 0.8; too much leverage), I would build a position over time and hope for a turnaround in 2026. I would expect EL to continue to underperform the market. Mind you, underperform, not crash.

Until next time. Have fun!!!

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