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The Estée Lauder Companies (ELC) has blamed a slower-than-expected recovery of travel retail in Asia for a 10 per cent slump in its fiscal 2023 net sales to $15.91 billion.
The US beauty giant, which owns Mac Cosmetics and Jo Malone, said it was also affected by the acquisition of Tom Ford, as well as the negative impact of foreign currency exchange rates. Organic sales were down 6 per cent in the period, ended 30 June 2023. Net earnings fell 57.7 per cent year-on-year to $1.01 billion.
“The [Tom Ford] acquisition was completed towards the end of our fiscal year so there was a little bit of impact from the fact that we no longer have to pay a royalty for our beauty business,” ELC executive vice president and CFO Tracey Travis told Vogue Business.
In China, slower resumption of international flights, granting of visas and organised group tours hindered recovery, ELC said. Reduced travel retail in Hainan, China and South Korea was only partially offset by growth in the rest of Asia, Europe and the Middle East and Africa. Beauty competitors like L’Oréal have also faced setbacks in North Asia, although it is less reliant on the market and reported sales growth of 10.9 per cent to €38.26 billion for the full year. China accounts for more than 30 per cent of ELC’s sales, according to analyst estimates, and the company’s performance in the first half of 2023 was hindered by low retail traffic as a result of Covid restrictions and a rise in cases in China.
However, signs of a recovery are evident as ELC returned to organic sales growth in the fourth quarter, driven by continued momentum in EMEA and acceleration in Asia Pacific, led by mainland China and Hong Kong SAR, said ELC president and CEO Fabrizio Freda in the earnings release.
Elsewhere, the company was also pressured by a strong US dollar, inflation, and recession concerns globally. Sales in the US remained flat.
“For full-year fiscal 2023, we delivered organic sales growth and prestige beauty share gains in many developed and emerging markets, but Asia travel retail pressured results, particularly in skincare, and we continued to experience softness in North America,” said Freda.
Bright spots and weaknesses
On a call with analysts, Freda explained that the diversity of ELC’s 25 brands would help with its “return to top and bottom line growth”. Among its $4 billion-plus brands, which includes Estée Lauder, Clinique and La Mer, Mac was the best performer in fiscal year 2023, he said. “Its unrivalled artistry, hero products, strong earned media value ranking and breakthrough innovation drove excellent results.” He hinted that 2024 would see another “big” makeup launch for the brand as it “aims to extend its winning streak in innovation”.
Freda also highlighted the opportunity of ELC’s tier of billion-dollar plus brands. “We expect Jo Malone and Tom Ford to cross the sales threshold. These two brands have accelerated over the last decade and are ideally positioned for the next decade given their positioning in the fast growing segment of luxury fragrance,” he told analysts. Tom Ford fragrance sales grew double digits in over 30 markets during the 2023 fiscal year, while the brand’s makeup saw double-digit sales growth in Asia, driven by “excellent” performance in lips. The launch of its liquid lip, which has had “great success” in China, said Travis. More new makeup and fragrance launches can be expected next year.
“This acquisition is a central building block to realise our aspirations in high growth luxury, couture and beauty,” Freda added.
On the whole, ELC’s fragrance category “excelled”, up double digits in every region, according to Freda. The 14 per cent increase in ELC’s strongest category was led by Tom Ford, Estée Lauder and Le Labo. Tom Ford’s Noir Extreme and Ombre Leather perfumes were highlighted as standout products. Le Labo also saw double-digit sales growth, driven by healthy sales of Santal 33 and Another 13. Revenues declined at Jo Malone, however, reflecting the aforementioned challenges in Asia travel retail.
Haircare was another bright spot, up 6 per cent, driven by new product launches from The Ordinary and Aveda. Makeup sales were flat compared to the previous year, although Freda said that the category’s performance “improved sequentially to double-digit growth in the fourth quarter” as “more markets emerged into the [post-lockdown] era”. Sales growth from Mac and Clinique, particularly in the face, lip and eye categories, offset declines in this area from Estée Lauder, Tom Ford and La Mer, the company said.
Skincare sales fell 14 per cent year-on-year, which ELC attributed to the challenges in Asia. However, while sales were down at its Estée Lauder, La Mer and Dr.Jart+ brands, there was double-digit growth at The Ordinary, Mac and Bobbi Brown Cosmetics. ELC attributed this to hero products and “successful” innovations such as The Ordinary’s new peptide serum range and the launch of Mac’s Hyper Real franchise.
Encouraging signs in the fourth quarter
While Estée Lauder’s results “disappointed” relative to consensus, “some level of softness was to be expected given the known headwinds to Asia travel retail”, wrote Dana Telsey, CEO of Telsey Advisory Group, in a note. The company’s fourth quarter results were more “encouraging” having topped expectations, said Telsey. She believes that both sales growth and margin expansion can improve sequentially through the upcoming fiscal year.
Oliver Chen, managing director and senior equity research analyst covering retail and luxury goods at financial services firm Cowen Group, is equally “encouraged” by the company’s growth in Asia, but notes that continued pressure on travel retail and ongoing struggles in the US market are potential blockers.
ELC expects to return to organic growth and deliver improved results in 2024, with full-year sales forecast to rise between 5 and 7 per cent. To analysts, Freda identified four “building blocks” that would “progressively expand” adjusted operating margin over the next few years. These include growing the direct-to-consumer ecosystem of its brands; maximising value through better “price realisations” along with creative innovation; leveraging the group’s recent strategic investments, including its new manufacturing facility in Japan; and unlocking “meaningful” cost efficiencies in its value chain, he said.
One approach to reestablish growth is by expanding the company’s consumer activations on social platforms like TikTok, to target younger consumers, Travis said. Top of the agenda is new customer recruitment. “Our brands are very sizable in North America, are broadly distributed across multiple channels [and] have a very strong repeat. But, there is a lot of competition from younger upstarts and indie brands,” she explained. In addition to finding ways to engage with new, younger shoppers, ELC’s brands are also focused on opening more freestanding stores for its fragrance and heritage brands.
In Asia travel retail, the aim is to “capture demand from returning individual travellers and continuing to reduce inventories as we navigate current market headwinds”, said Freda. “Volatility externally remains very high, particularly in the Chinese market and the transition in travel retail from daigous to regular travellers.”
“We’ve seen some big shifts in Korea and China travel retail, specifically in high-end, and that has impacted our margins and some of the excess inventory that we have ended up with and some of the under absorption of overhead and some of our plants as we pull back on production, as this shift occurs,” said Travis. “So, one of the big focus areas for us this year is continuing to balance our inventory levels with the current level of sellthrough, so that we can have less discounts and less excess. That will help our overall gross margin which will help our operating margins as well. The pace of recovery of travel retail is one of the things we are managing in order to help improve our operating margin.”
More luxury launches are coming, teased Freda. “At this time next year, we will be on the verge of launching Balmain Beauty with the namesake luxury fashion house.” He did not share more details but said that the “collaboration has been exceptional” and they “cannot wait to introduce this next luxury beauty brand to the world”.
Looking further ahead, the plan is to “set the stage for a stronger fiscal 2025 acceleration, with a very robust innovation pipeline planned across the two years and progressive margin rebuilding plans”, said Freda.
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