Estée Lauder Could Face the Same Fate as Ulta Beauty

Amit Singh - Author

Oct. 29 2019, Published 9:53 a.m. ET

  • Piper Jaffray has downgraded Estée Lauder stock, citing declining demand for makeup.
  • EL has corrected about 7% so far in October.
  • The company aims to announce its first-quarter earnings results on October 31.

On October 28, Piper Jaffray downgraded Estée Lauder (EL) stock, citing weakening demand for makeup. CNBC reported that Piper Jaffray had downgraded Estée Lauder stock to “neutral” from “overweight.”

Shares of beauty and skincare product manufacturers are taking a hit as softening demand for makeup and cosmetics are taking a toll on them. Notably, the demand shift toward skincare products from makeup and cosmetics is affecting these companies’ financials. Following the downgrade, Estée Lauder stock closed 1.6% lower. Moreover, it’s fallen about 7% so far in October.

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Earlier, Ulta Beauty (ULTA) disappointed with its second-quarter earnings results. Ulta Beauty missed analysts’ consensus estimate both on the sales and earnings fronts in the second quarter. Management blamed sluggishness in the makeup category behind the weaker-than-expected quarterly performance. Further, Ulta Beauty lowered its full-year guidance expecting soft demand for cosmetics and makeup. Ulta Beauty stock has cracked about 28% since the company announced its earnings on August 29.

We expect the weakening demand for makeup to hurt Estée Lauder stock. However, the impact on the stock won’t be the same as it is on Ulta Beauty. For instance, Estée Lauder generates the majority of its revenue from its skincare, haircare, and fragrance categories, which are seeing growth. However, makeup forms about 39% of its revenue, which is still a significant number.

As for Ulta Beauty, the company derives about 47% of its revenue from the makeup category, which is why a slowdown in demand affected its stock a lot.

Estée Lauder to announce earnings

Estée Lauder aims to report its first-quarter earnings results on October 31. We expect growth in the skincare and haircare categories to continue to drive its top line. Analysts expect the company to post revenue of $3.85 billion in the first quarter, up about 9% YoY (year-over-year).

Meanwhile, analysts expect the company to post adjusted EPS of $1.60, indicating YoY growth of about 13%.

Estée Lauder has a strong history of beating analysts’ sales and earnings estimates in the past several quarters. However, weakness in makeup sales in North America could hurt its revenue in the first quarter.

Estée Lauder stock is up about 43% YTD (year-to-date). Meanwhile, Ulta Beauty stock has fallen 1.3%.


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