It used to be a common rom-com trope that a jaw-dropping makeover required little more than a swipe of makeup and swapping glasses for contacts. In real life, the process is much more arduous.
Just ask Estée Lauder. The upscale beauty giant has still to recover from its postpandemic decline, and the stock has lost nearly three-quarters of its value since peaking in early 2022. With fewer people buying its products at department stores and airports, lackluster Chinese demand, and slower product innovation, earnings have stalled.
Management has ramped up turnaround efforts, which are finally starting to bear fruit, even as the stock remains priced for clearance.
"Estée Lauder is the New York Yankees of luxury retail," says Burns McKinney, managing director and portfolio manager at NFJ Investment Group, which owns the stock. Estée has "some significant structural advantages," including loyal customers and financial resources, but the stock has been out of favor. "This is an opportunity to get on board with a proven champion."
Much like the Yankees' World Series drought, Estée Lauder's dry spell has led many investors to lose faith. The shares trade for about 30 times forward earnings, ranging around 15% to 20% more than the S&P 500's multiple, whereas over the past decade it averaged a nearly 50% premium, McKinney says. "It's only ever been this cheap about 5% of the time," he adds.
Bears will argue it's cheap for a reason, given its long losing streak. But that may finally be changing. In August, the company delivered much better-than-expected fiscal fourth-quarter results, with earnings and organic growth of 5% coming in ahead of expectations. Management likewise provided upbeat guidance for sales growth of 3% to 5% with margin expansion. Gross margins rose to more than 75%, with more growth expected to come.
"This company has better visibility, but it's underappreciated," says Stephanie Link, chief investment strategist at Hightower Advisors, also a shareholder. "The stock has had a recovery, but it's still well below its highs. But I think we're only in the fourth inning of the turnaround story."
She's optimistic that CEO Stephane de La Faverie, who took over at the start of 2025, is making the necessary changes to boost growth through the company's Beauty Reimagined strategy, after "the last CEO missed so many things."
Analysts are feeling hopeful, too. Consensus calls for earnings per share to climb more than 34% year over year in the just-started fiscal 2027, and to rise 19% the following year. Even skeptics like HSBC analyst Jeremy Fialko, who is still sidelined on the stock, were impressed. "Estée Lauder has delivered a combination of exceptional margin expansion combined with steadily improving top-line trends," he wrote in a note. "A full pipeline of innovations should enable Estée Lauder to deliver a strong first quarter and we project organic growth of 6%."
Of course, the company is a show-me story after years of underperformance, and ongoing weakness in China may not resolve very quickly. Likewise, although travel has recovered since the pandemic, travel shopping hasn't, with some data suggesting millennial and Gen Z shoppers aren't splashing out at the terminal. And there is always the fear that the prestige beauty could be on the chopping block in the event of an economic downturn.
Those are valid concerns, but they don't tell the whole story. Estée Lauder doesn't "necessarily need phenomenal revenue growth to still be able to drive both increases in earnings and free cash flow," McKinney says. "If you have gross margins of 75%, that tells me you're able to sell your products for four times what they cost you; you can only do that if you have really solid customer loyalty." He also points to market share gains in areas like Western Europe, Japan, and Korea that can offset any ongoing softness in China.
The company is also doing well in terms of innovation and improving its digital platform, which can pick up the slack from dwindling airport sales, and its niche at the higher end of the market means it serves consumers who are less likely to feel the pinch of higher gasoline prices.
Moreover, makeup -- which has largely underperformed since 2019 -- may finally be on the cusp of an inflection point, bolstered by valuable younger consumers who are ponying up for pricier brands.
"Gen Z consumers are buying more makeup, with sales growing high-teens per [consumer data company] Numerator and contributing most of category growth," says Evercore ISI analyst Robert Ottenstein. "That acceleration, coupled with share gains by louder, 'glam' brands such as Estée's MAC -- up nearly 50% with Gen Z, its only accelerating cohort -- signals to us that a makeup cycle is starting" and could be "quite significant." He says shares should trade to $125, about 19% above current levels.
Estée Lauder has weathered tough times, but with good news on the horizon, bulls aren't just putting lipstick on a pig.
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