Since reaching an all-time high in 2022, Estee Lauder‘S (NYSE:EL) The stock has essentially been crushed. The shares have lost about 80% of their value in two years. Additionally, the company just announced a dividend cut of approximately 47%.
There’s no doubt that the news is bad today, but for a contrarian investor, now could be the time to shop around at this perfume and makeup giant. Here are three reasons why.
Estée Lauder does not make products that consumers need, like a consumer goods manufacturer. It makes products that people want, which is why they are durable consumer stocks. Furthermore, the products that Estée Lauder makes are expensive for their niche. But there is a nuance here, because the products it makes are affordable compared to other luxury items. This is an important point of differentiation.
Good or bad markets, few people buy one BMW on a whim. But that scent that you and your partner both love is something that might be worth spending a hundred bucks for a small bottle if you run out.
With brands in skin care, hair care, makeup and fragrance, Estée Lauder has a broad and globally diversified portfolio. And with revenues of nearly $3.4 billion in fiscal first quarter 2025, the company is substantial, noting that this revenue performance has been achieved despite some lingering headwinds in key Asian markets.
Ultimately, the massive drop in share prices highlights some of the near-term material risks facing the company today. But Estée Lauder is addressing its problems from a position of strength, given the underlying fundamentals of its affordable luxury niche.
The major issues currently facing Estée Lauder include weak sales in China thanks to the slow recovery from the pandemic shutdown, sluggish sales in the travel retail channel (which are also linked to weakness in Asia) and the costs are accompanied by lawsuits surrounding talcum powder.
Organic revenue in fiscal first quarter 2025 declined 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 last year’s earnings of $0.09 per share. But the interesting thing is, if we take out some one-time items, earnings rise to $0.12 per share, up from $0.11 in fiscal first quarter 2024.
The major one-time items impacting the first quarter of fiscal 2025 were talc settlement costs and restructuring costs. In the midst of this restructuring, the company appoints a new CEO. It seems like management is trying to get out as much bad news as possible as quickly as possible, which is often called a counter quarter (sometimes counter periods can be longer than just a quarter).
However, the big giveaway here was the reason for the dividend cut. According to the company, “we are reducing our dividend to a more appropriate payout ratio, which will also create greater financial flexibility for our new leadership team.” The new leadership team will also start with a clean slate on the guidance front, as longer-term guidance was also withdrawn.
While you can argue that this all sounds like bad news, from a contrarian perspective it suggests that Estée Lauder is trying to pave the way for a turnaround by taking the difficult steps before the new CEO is appointed.
There’s definitely bad news surrounding Estée Lauder’s business, and that’s clearly what investors are paying attention to right now. And yet the first quarter fiscal update also included good news, which investors are largely ignoring.
For example, sales growth in Europe, the Middle East and Africa and the Americas (basically everywhere except Asia) has been a strong point in the skincare segment. In the field of make-up, Clinique achieved double-digit sales growth worldwide. In the fragrance sector, where turnover fell only 1%, Le Labo’s turnover increased by double digits. And in hair care, timing issues were a headwind that should be transitory and could even ultimately boost future quarters.
To some extent, this is just the good news from Q1 2025 earnings. But that’s not really different from what Wall Street seems to be doing, as it’s simply focusing on the bad news.
Every company struggles through rough patches, and Estée Lauder is no different. The point here is that the company isn’t exactly falling off a cliff. And management is addressing the issues as best they can, including appointing a new CEO who will reset market expectations for the future.
Estée Lauder should certainly implement the plan laid out by the new CEO. Conservative investors should probably wait for that plan and might even want to see some progress toward the goals it sets. However, the good news being hidden by the bad news today suggests that there is still a crucial business to work in.
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 an uncertain tomorrow, you could miss the opportunity in front of you today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy.
3 Reasons to Buy Estée Lauder Stock Like There’s No Tomorrow was originally published by The Motley Fool
