Estee Lauder recently unveiled its disappointing fiscal 2025 guidance, which ultimately led us to make the decision to exit our position in the company. Despite topping revenue and EPS estimates for fiscal year 2024, the company’s outlook for the new fiscal year fell short of expectations. With organic net sales expected to decline by 1% to only increase by 2%, and adjusted EPS forecasted to be between $2.75 to $2.95, well below consensus forecasts, the challenges in the prestige beauty market are evident.
One of the key issues impacting Estee Lauder’s performance is its struggle in China and its Asian travel retail business. With low consumer sentiment and conversion rates expected to lead to another down year, the company faces significant obstacles in this crucial market. Additionally, the North American region presents challenges as well, with a softer growth outlook prompting management to adjust their expectations.
While some may view Estee Lauder’s conservative guidance as a potential strategy to under-promise and over-deliver, recent trends suggest otherwise. The company has a history of beating expectations but then adjusting its forecasts downward, leading to a decline in the stock price. As a result, we chose to sell our shares earlier in the year, anticipating potential disappointments in the future. The market’s response to the guidance reflects a similar sentiment, with the stock experiencing a slight increase, potentially due to the news of CEO Fabrizio Freda’s retirement at the end of fiscal 2025.
Despite Freda’s impending departure, the lack of a named successor and the extended timeline for the transition raise concerns about the company’s future leadership. While a new CEO could bring fresh perspectives and potentially positive changes, the uncertainty surrounding the succession process may delay any significant turnaround for the business. This uncertainty played a role in our decision to exit our position, as we believe there are better opportunities in the market with clearer growth prospects.
Our decision to exit our position in Estee Lauder was influenced by a combination of factors, including the company’s disappointing fiscal 2025 guidance, challenges in key markets, management decisions, and market uncertainty regarding CEO succession. While there is potential for a positive outcome with the selection of a new CEO, the risks and uncertainties associated with the company’s current trajectory led us to prioritize investments in stocks with stronger performance and outlooks. As investors, it is crucial to carefully evaluate the risks and rewards of each investment decision and make adjustments accordingly to align with our financial goals and risk tolerance.
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