To The Moon

$Estee Lauder(EL)$ $DJIA(.DJI)$ $NASDAQ(.IXIC)$  $Invesco QQQ Trust-ETF(QQQ)$  

The Estee Lauder Companies Inc. manufacturers, markets and sells skin care, makeup, fragrance and hair care products. The Company's merchandises are sold in approximately 150 countries and territories under various renowned brands, including Estee Lauder, Aramis, Clinique, Lab Series, Origins, M.A.C, Bobbi Brown, La Mer, Aveda, Jo Malone London, Bumble and bumble, Darphin, Smashbox, Le Labo, Editions de Parfums Frederic Malle, GLAMGLOW, Kilian Paris, Too Faced, Dr.Jart+, DECIEM and The Ordinary. It also offers fragrances, cosmetics and/or related products under the brands of Tom Ford, Dr. Andrew Weil, and AERIN.

Investment Overview

Challenges persist in Asia travel retail and Mainland China. EL’s performance in the near term could still be impacted by these persistent challenges in Asia travel retail and Mainland China. Negative sales growth in the last couple of quarters was due to ongoing actions by the company to reset retailer inventory levels in the Asia travel retail business in response to recent changes in government and retailer policies related to unstructured market activity. Consequently, EL has been pulling back on shipping and production, taking obsolescence charges, and assisting retailers in moving this excess inventory through additional promotions. This excess inventory draw-down in the Asia travel retail business will continue in 3Q FYE Jun 24 before the company starts to rebuild inventory from 4Q FYE Jun 24. In addition, EL’s sales were impacted by the softer-than-expected recovery of overall prestige beauty in Mainland China and some business disruptions in Israel and other parts of the Middle East.

Profit Recovery Plan to restore profitability in fiscal year ending Jun 2025 and 2026. EL’s ongoing Profit Recovery Plan and restructuring program will support the company in restoring profitability in fiscal years 2025 and 2026. This effort is expected to deliver incremental profits of $1.1-1.4bn, with all benefits realized in fiscal year 2025 (more than 50% of savings) and 2026. The company’s Profit Recovery Plan will include addressing manufacturing cost pressures resulting from lower production and inventory clearance, reducing headcount globally, and implementing efficiencies in procurement and operational expenses. Additionally, the company will focus more on higher-priced and more profitable segments, including larger margin-accretive innovations.

Innovation pipeline, investments in digital capabilities, better distribution channel mix, and improved supply chain to regain market share and accelerate growth. EL is intensifying its efforts in innovation and launching new products across categories to better cater to local consumers. Moreover, it is enhancing its investments in digital capabilities and bolstering its presence on social media platforms to ensure more successful product launches and to engage with younger consumers effectively. EL is also actively transitioning its distribution channel mix from traditional department stores to specialty retailers and online platforms, particularly in the US, to counter market share losses. In addition, the establishment of a new manufacturing plant in Japan and an R&D center in China will not only reduce lead times for Asian retailers but also minimize obsolescence and stockouts while enhancing agility in responding to evolving consumer trends and demands. These concerted efforts are expected to serve as significant drivers for the company's sales recovery, leading to strong positive growth across markets and categories.

Key downside risks include prolonged weakness in China's growth trajectory, extended headwinds from Asia travel retail, persistent market share erosion, deteriorating macroeconomic conditions, escalating competition, and adverse foreign exchange fluctuations.

We expect its near-term performance might still be affected by ongoing challenges in Asia travel retail and mainland China, as well as escalating macroeconomic volatility and geopolitical tensions in the Middle East. However, we remain constructive about the company's long-term profitability outlook, particularly with the implementation of its Profit Recovery Plan. Furthermore, we foresee an improvement in sales trends in the coming quarters as EL endeavors to regain market share through accelerated innovation, enhanced digital presence, a refined channel mix, and an optimized supply chain.

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