The Estee Lauder Companies Inc. EL is focused on transforming its business through the expanded Profit Recovery and Growth Plan ("PRGP"). Its "Beauty Reimagined" vision aims to broaden consumer reach, drive innovation and increase investments in digital channels. However, challenges remain, particularly with weak performance in key markets such as China and pressure on its travel retail sector.

Let’s explore how The Estee Lauder Companies plans to navigate these challenges and drive future growth.

EL’s Growth Initiatives on Track

The PRGP is a pivotal initiative designed to address the company's current profitability challenges and drive future growth. Through the second quarter of fiscal 2025, The Estee Lauder Companies realized greater net benefits from its PRGP than anticipated. However, these benefits were more than offset by sales volume deleverage and investments aimed at restoring sustainable growth and inflation. As a result, the company recently announced an expansion of its PRGP, which includes a restructuring program. The goal of the expanded plan is to transform EL’s operating model to drive sales growth, restore a solid double-digit adjusted operating margin over the next few years and manage external volatility.

The Estee Lauder Companies recently introduced "Beauty Reimagined," an ambitious strategic vision designed to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin in the coming years. This initiative aims to position it as the leading consumer-centric prestige beauty brand. The company’s priorities include expanding its presence in high-growth consumer channels and markets, delivering innovative products, increasing consumer-facing investments, driving sustainable growth through bold efficiencies and simplifying organizational structure.

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EL Strengthening Online Presence

The Estee Lauder Companies is expanding its footprint in high-growth digital channels, evident from the launch of nine brands in Amazon's U.S. Premium Beauty store. The company's ongoing investment in digital marketing and e-commerce capabilities underscores its commitment to driving growth in this channel. In addition, it is integrating AI across its organization to drive efficiencies, improve decision making and enhance creativity. By leveraging AI for demand forecasting and production planning, the company has achieved higher forecast accuracy and improved inventory management, and is scaling AI use in various areas, including product development, marketing and supply chain, to accelerate processes and support sustainable growth. These efforts to modernize the sales strategy position the company for growth in digital-first consumer environments.

Challenges in Key Markets Continue to Hurt EL

Despite these positive developments, The Estee Lauder Companies is battling a challenging environment marked by weaknesses across China and travel retail. These factors put pressure on its second-quarter fiscal 2025 results, wherein net sales in the Asia Pacific region fell by 11%, largely due to significant declines in Mainland China, Korea and Hong Kong SAR, due to weaker consumer sentiment. The drop in Korea was further impacted by the November 2024 exit of Dr.Jart+ from the travel retail sector, as well as the effects of recent political and social unrest. These declines in these critical markets are adding to the company’s difficulties, given their historical importance to its growth.

EL’s Cost Woes Persist

In the second quarter of fiscal 2025, The Estee Lauder Companies’ operating expenses rose by 500 basis points (bps) as a percentage of sales. This increase includes a 210 bps rise in advertising, promotion and innovation expenses. In addition, selling expenses increased by 130 bps due to higher costs supporting key activations, including holiday campaigns and distribution expansion. If these rising costs are not effectively managed, they could put significant pressure on the company's profitability moving forward.

Looking Ahead: Can EL Bounce Back?

Due to challenges across its Asia travel retail business, weak consumer sentiment in China and Korea, and ongoing global geopolitical uncertainty, the company expects continued volatility and limited visibility in the near term. As a result, the company offered a disappointing third-quarter fiscal 2025 outlook. Reported net sales are projected to decline 10-12% year over year, while adjusted organic net sales are anticipated to fall 8-10% in the quarter. The adjusted earnings per share (EPS) are likely to slump by 69-79%, ranging from 20 cents to 30 cents in the fiscal third quarter, reflecting challenges in the global travel retail business.

As the company navigates these challenges, its future growth will depend on how well it executes its strategic plans and manages rising costs. While it has solid initiatives in place, the ongoing volatility in key markets will likely continue to test the Zacks Rank #3 (Hold) company’s ability to achieve long-term success.

EL’s shares have slumped 52.3% in the past year compared with the industry’s decline of 53.3%.

Top Three Picks

Nu Skin Enterprises, Inc. NUS engages in the development and distribution of various beauty and wellness products worldwide. It delivered a trailing four-quarter earnings surprise of 38.6%, on average. NUS currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Nu Skin Enterprises’ current financial-year earnings indicates growth of 25% from prior-year reported levels.

Urban Outfitters URBN, a fashion lifestyle specialty retailer, currently sports a Zacks Rank of 1. URBN delivered an average earnings surprise of 28.4% in the trailing four quarters.

The consensus estimate for Urban Outfitters’ current financial-year sales indicates growth of 6% from the year-ago figure.

Deckers DECK, a footwear and accessories dealer, currently has a Zacks Rank #2 (Buy). DECK delivered an average earnings surprise of 36.8% in the trailing four quarters.

The Zacks Consensus Estimate for Deckers’ current financial-year sales indicates growth of 15.6% from the year-ago figure.

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