Since hitting an all-time high in 2022, Estée Lauder's (EL -0.51%) stock has basically been crushed. The shares have lost roughly 80% of their value in two years. On top of that, the company just announced a dividend cut of about 47%.
There's no doubt that the news is bad today, but for a contrarian investor, this could be the time to start sniffing around at this perfume and makeup giant. Here are three reasons why.
1. Estée Lauder is an industry leader in an attractive niche
Estée Lauder doesn't make products that consumers need, like a consumer staples maker. It makes products that people want, which is why it is a consumer discretionary stock. Further, the products that Estée Lauder makes are expensive for their niche. But there's a nuance here, because the products it makes are affordable relative to other luxury items. This is an important point of differentiation.
Image source: Getty Images.
Good markets or bad ones, few people buy a BMW on a whim. But that fragrance you and your partner both love is something that might be worth dropping a hundred dollars on for a small bottle if you run out.
With brands across skin care, hair care, makeup, and fragrance, Estée Lauder has a broad and globally diversified portfolio. And with sales of nearly $3.4 billion in the fiscal first quarter of 2025, the company is substantial, noting that this top-line result has been achieved despite some ongoing headwinds in key Asian markets.
Ultimately, the massive stock price decline is highlighting some material near-term risks that the company is facing today. But Estée Lauder is addressing its problems from a position of strength, given the underlying fundamentals of its affordable luxury niche.
2. Estée Lauder is making things worse on purpose
The big problems facing Estée Lauder today include weak sales in China thanks to its slow recovery from pandemic shutdowns, slow sales in the travel retail channel (which are also related to Asian weakness), and the costs associated with litigation around talcum powder.
Fiscal first-quarter 2025 organic sales were down 5% year over year. The bottom line of the income statement fell into the red, with a loss of $0.43 per share. That's down from a profit of $0.09 per share in the prior year. But here's the interesting thing: Pull out some one-time items, and earnings rise to $0.12 per share, up from $0.11 in the fiscal first quarter of 2024.
The big one-time items impacting the first quarter of fiscal 2025 were talc settlement charges and restructuring costs. In the middle of this restructuring, the company is bringing in a new CEO. It looks like management is attempting to get as much bad news out as it can as quickly as it can, which is often called a kitchen-sink quarter (sometimes kitchen-sink periods can be longer than just a quarter).
The big giveaway here, however, was the reasoning for the dividend cut. According to the company, "We are reducing our dividend to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team." The new leadership team will also start with a clean slate on the guidance front, since longer-term guidance was withdrawn as well.
While you can argue this all sounds like bad news, from a contrarian point of view it suggests that Estée Lauder is attempting to set the stage for a turnaround by making the tough moves before the new CEO is in place.
3. Estée Lauder's news isn't all bad
There's definitely bad news around Estée Lauder's business, and that is clearly what investors are paying attention to right now. And yet the fiscal first-quarter update included some good news, too, which investors are largely ignoring.
For example, sales growth in Europe, the Middle East & Africa, and the Americas (basically everywhere but Asia) was a strong point in the skin care segment. In Makeup, Clinique put up a double-digit sales increase globally. In the fragrance business, where sales were down just 1%, Le Labo sales rose in the double digits. And in hair care, timing issues were a headwind that should be transitory and might even end up boosting future quarters.
To some extent, this is just cherry-picking good news out of the fiscal first-quarter 2025 earnings release. But that's not particularly different from what Wall Street appears to be doing, since it is simply focusing on the bad news instead.
Every company struggles through difficult periods, and Estée Lauder is no different. The point here is that the business isn't exactly falling off a cliff. And management is addressing its issues as best it can, including bringing in a new CEO that will reset market expectations for the future.
Estée Lauder's fire sale could end any day
Estée Lauder most certainly needs to execute on whatever plan gets laid out by the incoming CEO. Conservative investors should probably wait for that plan, and might even want to see some progress toward the goals that get laid out. However, the good news that's being hidden by the bad news today suggests there's still a vital business to work with here.
If you can handle some uncertainty, Estée Lauder and its iconic portfolio of affordable luxury brands is probably worth the risk for more aggressive investors. If you wait until some uncertain tomorrow, you could miss the opportunity in front of you today.
