Why Did Estee Lauder Shares Plunge 21% On Q1 FY2025 Results? 

TradingKey - Earnings season in the US is in full swing and one of the companies that is watched to get a gauge on the health of the Chinese consumer is global beauty and cosmetics company Estee Lauder Companies Inc (NYSE: EL).

That’s because the firm has a sizeable market presence in China, selling its cosmetics, skincare, perfume, and haircare products to consumers. The company’s share price has suffered so far this year on weakness in its China market and amid a CEO transition.

With this backdrop, the company released its Q1 FY2025 results – for the three months ending 30 September 2024 – before the market opened on Thursday (31 October). In response to the numbers, Estee Lauder’s stock plummeted as much as 27% before ending the trading day down 20.9%.  

Here’s why investors weren’t so impressed by Estee Lauder’s latest results and what investors should be watching going forward.

Guidance for FY2025 pulled, China weakness persists

The dramatic share price reaction to Estee Lauder’s latest results highlighted the challenges it’s facing. Overall revenue dropped 4% year-on-year for the period to US$3.36 billion while organic net sales declined by 5% year-on-year.

This decline was mainly driven by its Asia-Pacific region, where sales fell 11% year-on-year amid continued weakness in China. That was also an acceleration from the prior quarter’s (Q4 FY2024) 3% decline for Asia-Pacific. Meanwhile, sales in the Americas fell 2% year-on-year.

Estee Lauder cited a “softening in overall prestige beauty in mainland China and low conversion rates in Asia travel retail and Hong Kong SAR” in its earnings release as the main culprits for the poor top line results.

Meanwhile, sentiment took a further knock because the company withdrew its full-year FY2025 outlook, pointing to the difficulty in timing the market stabilisation and recovery in China and Asia travel retail. Management also highlighted the complex landscape that included the changes in leadership – primarily the CEO transition.

Outlook dims for Estee Lauder

The weakness in China is expected to persist in the short term for the firm. That was emphasised by CEO Fabrizio Freda, who didn’t help shareholders or investors by stating that “we anticipate still-strong declines near-term for the industry in China and Asia travel retail”.

Overall profitability was also down as the Estee Lauder reported a net loss of US$156 million, although this was mainly due to charges associated with its talc litigation. 

Just a day prior to earnings (30 October), the company also announced that Stephane de la Faverie, Estee Lauder’s current Executive Vice President, will take over the CEO role from Freda on 1 January 2025. He will have a big “in tray” to deal with, primarily its slumping sales in China. Investors don’t believe that the company has other engines of growth besides China, which management claims that it does.

That is likely the main reason why shares reacted so negatively to the earnings report – its biggest ever decline on record. Estee Lauder shares have now shed 52.6% of their value so far in 2024 (through Thursday’s close) and are down 63% over the past five years.