We’re debating our next steps on Estee Lauder as the CEO struggles to turn things around

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We’re debating our next steps on Estee Lauder as the CEO struggles to turn things around

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18 November 2023

We’re debating our next steps on Estee Lauder as the CEO struggles to turn things around

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Estee Lauder (EL) has the dubious distinction as the worst-performing stock in our portfolio in 2023, and we’re growing less optimistic about CEO Fabrizio Freda’s ability to right the ship. We’re losing our patience and may act soon. We’re not alone. The family behind the iconic cosmetics and beauty company and the board are divided over whether Freda should stay or go, according to a Wall Street Journal report Friday. Internal and external CEO candidates are said to be under consideration as sales in key markets, such as China, have lagged post-Covid without much signs of improvement to date. On Nov. 1, shares of Estee Lauder sank nearly 19% after the company delivered an expectedly bad fiscal 2024 first quarter and disastrous guidance and announced an acceleration of its efforts to rebuild profitability in fiscal years 2025 and 2026. However, as we said at the time of the print, the recovery plan provided little comfort as it implied that the company’s current fiscal year 2024 would be a wash. In our analysis of the dismal financials, we downgraded the stock to a 4 rating and removed our price target. The stock has since recovered most of its post-earnings losses. “Fabrizio Freda is in a lot of trouble,” Jim Cramer said Friday. “[The CEO] made money for years and years but there are just too many mistakes, too many unforced errors, too much belief in China coming back and not having a backup plan on China not coming back.” Jim added he may consider selling Estee Lauder due to the uncertainty that lies ahead. EL YTD mountain Estee Lauder YTD The owner of Tom Ford, MAC cosmetics, and Jo Malone brands has suffered from weakness in Asia travel retail, which has struggled to recover after China abandoned its zero Covid policy earlier this year. Poor sales in other key regions, including Korean duty-free, have also weighed on Estee Lauder’s business due to excessive inventory levels that built up during periods of lockdowns and travel restrictions. Estee Lauder’s delayed comeback in what was once promising markets has been a major source of our frustrations. We believed Freda earlier this year when he said that there were just a few more quarters until investors saw a turnaround. However, it’s now clear that he may have underestimated the timeline of the recovery in China. Alongside fiscal Q1 results, Estee Lauder management cut its fiscal 2024 outlook suggesting the trajectory of getting back on track for China consumer demand growth will take longer than expected. Management also took down its guidance for fiscal year 2025, the fifth straight quarter it has done so. Jim believes the Club has been patient and has given Estee Lauder the time required for inventories in its Asia travel retail business to normalize. But it hasn’t delivered. With the near-term outlook for growth in key Asian markets murky at best, we may have to soon move on from the stock if conditions don’t start to improve or China fails to announce a significant consumer-focused stimulus program to jumpstart its economy. (Jim Cramer’s Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An Estee Lauder pop-up store is seen inside daimaru Department Store on Nanjing Road Pedestrian street in Shanghai, China, August 6, 2021.

Costfoto | Future Publishing | Getty Images

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