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Estée Lauder Saw Sales and Earnings Decline in Second Quarter, but Beat Wall Street Expectations

“Our return to growth has shifted to the fourth quarter," said Fabrizio Freda, president and chief executive officer.

Rising COVID-19 cases in China continued to weigh on The Estée Lauder Cos. during the crucial holiday season, triggering declines on both the top and bottom lines (although it beat Wall Street expectations) and causing it to lower its full-year profit forecast.

The company’s stock closed down 4.4 percent to $268.41 following the news.

The beauty giant, which acquired Tom Ford in late 2022, saw net sales come in at $4.62 billion in its fiscal second quarter ended Dec. 31, a decline of 17 percent from $5.54 billion in the prior-year period. Analysts polled by Factset had predicted sales of $4.58 billion.

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“All told, our return to growth has shifted to the fourth quarter,” said Fabrizio Freda, president and chief executive officer. “We are encouraged by both our strong momentum in numerous markets globally and improving macro trends.”

The company cited the evolution of the COVID-19 environment, including restrictions in mainland China and the rising number of COVID-19 cases as causes of stronger headwinds as the quarter progressed. As a result, tourism and product shipments to Hainan remained largely curtailed and traffic in brick-and-mortar in the rest of China was limited.

At the same time, the business was also negatively impacted by the strong U.S. dollar, along with inflationary pressures and recession concerns, which caused certain retailers in the U.S. to tighten inventory.

Skin care net sales declined 20 percent, while makeup net sales decreased 3 percent. In the latter, net sales growth from MAC and Clinique was offset by declines from Estée Lauder and Tom Ford Beauty. While Smashbox was not broken out, the company said it has been somewhat challenged lately. Alongside Glamglow, it was pulled last year from the U.K. market.

On a geographic basis, net sales fell 3 percent in the Americas, 17 percent in Europe, Middle East and Africa and 7 percent in Asia Pacific.

There were some bright spots, however, including double-digit growth in fragrance, driven primarily by growth from Estée Lauder, Le Labo and Tom Ford Beauty, as well as strong holiday offerings and performance during the 11.11 Global Shopping Festival. Hair care net sales rose 4 percent, reflecting growth from both The Ordinary, due to the recent launch of the brand’s hair care products, and Aveda.

Net sales are forecast to decrease between 5 percent and 7 percent versus the prior-year period for the fiscal year. The company previously forecast a drop between 6 percent and 8 percent.

Lauder reported net earnings of $394 million, compared with $1.09 billion in the same period a year earlier. Diluted net earnings per common share was $1.09, down from $2.97 reported in the prior-year period. On an adjusted basis excluding one time items, they declined 49 percent to $1.54. This beat Wall Street estimates of $1.29. Adjusted diluted net earnings per common share are projected to be between $4.87 and $5.02, down from its previous forecast.

In November, Lauder said it had agreed to acquire Tom Ford, the luxury fashion, beauty and eyewear brand, in a deal valuing it at $2.8 billion.

During a call with analysts following earnings, Freda noted that Tom Ford Beauty is expected to achieve $1 billion in net sales annually over the next couple of years, “promising profitable growth opportunities ahead.” The acquisition, funded through a combination of cash, debt and deferred payments, is expected to close in the fourth quarter.

As for what this means for its M&A strategy this year, Tracey Travis, executive vice president and chief financial officer of the Estée Lauder Cos., told WWD the focus is now more on skin care and fragrance, as opposed to makeup.

“Our M&A strategy is really to look for mostly white space opportunities,” she said. “That allows us to really focus on brands that are accretive to our portfolio. The propriety categories are obviously skin care and fragrance,” adding that while hair care is a small portion of the business, it could also be of interest.