Estée Lauder sales dip amid historically high inflation, recession concerns and slow recovery in Asia retail

04 May 2023 --- The Estée Lauder Companies has reported net sales of US$3.75 billion for its third quarter ended March 31, 2023, a decline of 12% from US$4.25 billion in the prior-year period. Company stocks fell 17.34% yesterday. However, its Fragrance category grew double digits.

Organic net sales fell 8%, primarily driven by Asia travel retail in Hainan and Korea. Partially offsetting the pressures affecting the company’s Asia travel retail business, organic net sales grew in nearly every market, including the developed markets of the US, the UK and Hong Kong and in emerging markets globally.

“In the context of a quarter which we anticipated to be challenging, we are pleased to have delivered the high-end of our outlook for the third quarter of fiscal 2023,” Fabrizio Freda, president and CEO. 

“Our developed and emerging markets grew strongly and exceeded our expectations to offset an even slower-than-expected recovery in Asia travel retail.”

Net sales from The Ordinary grew strong double digits compared to the prior-year period (Image credit: The Ordinary).The company’s business also continued to be pressured by the strong US dollar, historically high inflation and recession concerns. Estée Lauder reported net earnings of US$156 million, compared with net earnings of US$558 million in the prior-year period.

Lingering COVID-19 impact
During the fiscal 2023 third quarter, the phase and pace of recovery from the COVID-19 pandemic continued to vary across markets globally. In the West, in both developed and emerging markets, the momentum of post-COVID-19 recovery growth continued with strong organic net sales performance in The Americas and markets in Europe, the Middle East & Africa, excluding travel retail. 

In Asia/Pacific, markets emerged from COVID-19 restrictions more gradually and over a longer period of time, compared to the pace of recovery experienced in the West. These markets continued to recover during the fiscal 2023 third quarter, evidenced by strong organic net sales growth in nearly all Asia-Pacific markets.

“Each of the Americas and Asia-Pacific returned to organic sales growth, bolstered by increases in the US and China, while the markets of EMEA continued to prosper,” highlights Freda.

“Moreover, we continued to grow our prestige beauty share in many markets, including a sequential acceleration in gains in China and Western Europe.”

While the company saw recovery in many markets globally, its Asia travel retail business continued to be pressured by the slower than anticipated recovery from the COVID-19 pandemic.

Specifically, in Hainan, while traffic into the island exceeded prior year levels, conversion of travelers to consumers in prestige beauty lagged. This led to the slower than anticipated depletion of elevated levels of retailer inventory and, therefore, lower replenishment orders. 

In Korea, the shipments to duty free retailers were pressured owing to the transition to post-COVID-19 regulations as traveling consumers gradually return. In Korea, as well as in Asia more broadly, the travel retail recovery was challenged by the slower than anticipated resumption of international flights, granting of visas and organized group tours.

Net sales in Estée Lauder’s Skin Care category declined 17%, primarily reflecting the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic (Image credit: Estée Lauder).In mainland China, organic net sales grew in the fiscal 2023 third quarter. While January 2023 was pressured by low retail traffic and retailer destocking from the rise in COVID-19 cases that began in November 2022 and continued into January 2023, organic net sales returned to growth, rising double digits in February and March 2023. However, prestige beauty growth was slower than expected for the fiscal 2023 third quarter.

Skin Care
Net sales in Estée Lauder’s Skin Care category declined 17%, primarily reflecting the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic. 

This included lower shipments to retailers in Hainan due to lower conversion of travelers to consumers and the slower than anticipated depletion of elevated levels of retailer inventory, as well as lower shipments to Korean duty free retailers primarily due to the transition to post-COVID-19 regulations as traveling consumers gradually return. 

In Korea and Asia more broadly, the travel retail recovery was challenged by the slower than anticipated resumption of international flights, granting of visas and organized group tours. Net sales declined from La Mer, Estée Lauder and Dr.Jart+, partially offset by growth from The Ordinary and MAC.

Net sales from La Mer, Estée Lauder and Dr.Jart+ declined, primarily reflecting the aforementioned challenges in Asia travel retail.

Net sales from The Ordinary grew strong double digits compared to the prior-year period, primarily reflecting growth across every region and benefiting from continued strength from hero products, successful innovation, such as the Multi-Peptide Eye Serum and the brand’s launch into India and the Middle East in fiscal 2023.

MAC net sales more than doubled, fueled by the successful launch of the Hyper Real franchise line of products in the fiscal 2023 third quarter.

Skin Care operating income decreased, primarily reflecting the decline in net sales from Asia travel retail, an increase in cost of sales and the unfavorable impact from the change in fair value of acquisition-related stock options compared to the prior year, partially offset by the prior year other intangible asset impairments of US$216 million relating to Dr.Jart+ and Glamglow.

The increase in cost of sales included the unfavorable impacts from obsolescence charges and promotional items.

Makeup
Makeup net sales were virtually flat to the prior-year period, reflecting growth in most markets as they continued to evolve in recovery and as usage occasions increased, offset by the challenges and the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic. 

Net sales declined from Estée Lauder, partially offset by growth from MAC, Clinique and Tom Ford Beauty.

Net sales from Clinique rose double digits, benefitting from solid performance in the lip, concealer and eye subcategories (Image credit: Clinique).Net sales from Estée Lauder were negatively impacted by the aforementioned challenges in Asia travel retail.

MAC net sales growth reflected continued success from hero products and recent launches, particularly in the face and lip subcategories. The increase in net sales also reflected the benefit from changes to the brand’s take back loyalty program made in the fiscal 2023 second quarter.

Net sales from Clinique rose double digits, benefiting from solid performance in the lip, concealer and eye subcategories.

Double-digit net sales growth from Tom Ford Beauty reflected strength from products in the lip subcategory, including Lip Color Satin Matte and Soleil Lip Blush.

Makeup operating income decreased, primarily reflecting an increase in cost of sales, including obsolescence charges and the decrease in net sales from Asia travel retail.

Fragrance
Fragrance net sales grew double digits, reflecting strong growth in every region and double-digit growth from Tom Ford Beauty, Le Labo and Estée Lauder.

Net sales from Tom Ford Beauty rose double digits, reflecting growth in hero franchises like Ebene Fume and Ombre Leather and successful innovation, such as Tom Ford Noir Extreme Parfum and the fiscal 2023 third quarter launch of The Private Blend Cherry Collection.

Strong double-digit growth from Le Labo was fueled by growth in every region and virtually all channels of distribution, primarily due to the continued consumer demand for the brand’s hero product franchises, such as Santal 33 and Another 13, and high-touch services, as well as targeted expanded consumer reach.

Estée Lauder net sales grew double digits, driven by the success from existing product franchises, such as Beautiful and Estée Lauder Pleasures.

Fragrance operating income decreased, driven primarily by an increase in cost of sales, including the change in brand mix.

Hair Care
Hair Care net sales increased 3%, reflecting growth from The Ordinary’s hair care products, partially offset by a decline from Aveda.

Aveda net sales declined, driven by softness in North America, partially offset by the launch of the brand in mainland China and growth in Europe, the Middle East & Africa.

Hair Care operating results decreased, reflecting an increase in cost of sales, including obsolescence charges.

By Benjamin Ferrer