The Estee Lauder Companies Inc. (EL Quick QuoteEL - Free Report) reported fourth-quarter fiscal 2024 results, wherein the top and bottom lines increased year over year and beat the respective Zacks Consensus Estimate even amid a tough landscape.

For fiscal 2025, management expects continued sluggishness in the prestige beauty segment in China, mainly due to ongoing weak consumer sentiment. In other areas of the business, the company plans to deliver improved performance across both developed and emerging markets.

Quarter in Detail

The company posted adjusted earnings of 64 cents per share, which surpassed the Zacks Consensus Estimate of 25 cents. The bottom line increased significantly from earnings of 7 cents reported in the year-ago quarter. Adjusted EPS was 67 cents at constant currency or cc.

The Estee Lauder Companies Inc. Price, Consensus and EPS Surprise

Net sales of $3,871 million surpassed the Zacks Consensus Estimate of $3,833 million. The top line advanced 7% year over year despite sluggishness in core business areas, especially mainland China, Asia travel retail and North America.

Organic net sales rose 8%, courtesy of increases in all product categories, led by Skin Care, which was backed by EL’s global travel retail business. The growth in organic net sales also shows strength across markets in the EMEA, offset by declines in the Americas and Asia/Pacific.

The gross profit came in at $2,778 million, up 14% year over year. The gross margin came in at 71.8%, up from 67.8% reported in the year-ago quarter.

The adjusted operating income came in at $349 million, up significantly from $71 million reported in the year-ago period. The operating income margin soared to around 9% from nearly 2% reported in the year-ago quarter.

Product-Based Segment Results

Skin Care’s sales were up 13% year over year to $2,035 million. Makeup revenues remained flat year over year at $1,105 million. In the Fragrance category, revenues of $539 million dipped 1% from the year-ago quarter’s figure. Hair Care sales totaled $165 million, up 1% year over year.

Regional Results

Sales in the Americas fell 5% year over year at $1,014 million, resulting from company-specific hurdles, an intensified competitive landscape and a general slowdown in prestige beauty growth in North America.

Revenues in the EMEA region grew 32% to $1,652 million, mainly driven by the Makeup category. In the Asia-Pacific region, sales tumbled 7% to $1,205 million, largely due to weakness in mainland China.

Other Updates

The Estee Lauder Companies exited the quarter with cash and cash equivalents of $3,395 million, long-term debt of $7,267 million and total equity of $5,314 million.

The net cash flow provided by operating activities for the 12 months ended Jun 30, 2024 was $2.36 billion. Capital expenditures during this time amounted to $0.92 billion. For fiscal 2025, net cash flow from operating activities is likely to be in the band of $1.8-$2.0 billion. Capital expenditures are expected to be nearly 5%-5.5% of the forecasted sales.

The Estee Lauder Companies returned $0.95 billion to shareholders through dividend payouts in fiscal 2024. In a separate press release, the company has declared a quarterly dividend of 66 cents per share on Class A and Class B shares. The dividend will be paid out on Sep 16, 2024 to shareholders of record as of Aug 30.

The Estee Lauder Companies acquired the multi-brand company DECIEM Beauty Group Inc. in May 2024.

Fiscal 2025 Outlook

Management anticipates global prestige beauty growth of 2%-3% in fiscal 2025, driven by sustained strength across many developed and emerging markets worldwide. However, this growth will be moderated by more subdued performance in key markets like North America and offset by continued declines in mainland China and Asia travel retail, where consumer sentiment and conversion rates remain low. For fiscal 2026, the company expects global prestige beauty to regain momentum, returning to historical mid-single-digit growth.

For fiscal 2025, the company projects a more restrained performance compared to the industry average, largely due to its substantial business presence in mainland China and Asia travel retail. Nevertheless, EL anticipates accelerated net sales growth in other regions, fueled by strategic initiatives aimed at revitalizing Skin Care, leveraging the growth drivers of high-end Fragrance, rapidly capitalizing on successful channels, launching innovative and accretive new products and enhancing precision marketing capabilities.

The company is committed to executing its Profit Recovery and Growth Plan (“PRGP”), previously known as the Profit Recovery Plan, which has been renamed to better reflect its dual focus on accelerating sales growth and recovering profit margins. The PRGP is structured to enhance the gross margin, reduce EL’s cost base, establish expense leverage even at lower sales growth levels, and boost agility and speed-to-market.

The PRGP initiatives are likely to generate operating profit net savings in the band of $1.1-$1.4 billion in fiscal years 2025 and 2026, with slightly more than half of these savings anticipated to be realized by the end of fiscal 2025. However, the strong challenges in mainland China and Asia travel retail are likely to partially offset the initial net benefits of the PRGP.

Additionally, management is carefully monitoring potential risks, such as retailer destocking, which may be influenced by factors like weak consumer sentiment, causing ongoing declines in the prestige beauty market in mainland China and Asia travel retail. Additionally, changes in traveler behavior, with more people spending on experiences instead of products, are affecting Asia travel retail. The company also faces the challenge of adapting to shifts in sales channels and navigating tough competition, particularly as the prestige beauty market slows down in North America.

All said, for fiscal 2025, management projects net sales and organic sales growth in the range of 1% decrease to 2% growth.

The adjusted operating margin for the fiscal is envisioned in the band of 11-11.5%, including gains from PRGP. Adjusted EPS is expected to grow 7-5% to the $2.78-$2.98 band at cc.

Q1 Guidance

For the first quarter of fiscal 2025, The Estee Lauder Companies anticipates reported and organic net sales to decline 5-3% year over year. Adjusted EPS, on a cc basis, is expected to slump 89-17% to 1-9 cents.

This Zacks Rank #4 (Sell) stock has tumbled 27.6% in the past three months compared with the industry’s decline of 21.3%.

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