Estee Lauder’s performance pales in comparison to L’Oréal

Yesterday, Estée Lauder published quarterly results that were again poorly received by the market.

Despite an improvement in operating performance, the share price fell 13% after the publication. Investors were not happy with management’s very cautious forecasts, which were significantly revised downwards for the ninth time in a row.

On the business front, the improvement is notable in the cosmetics segment – ​​which accounts for half of sales – with operating margins returning to their historic highs, and an inventory adjustment finally freeing up cash.

This progress is directly linked to the success of La Mer – which continues unabated – and to the Asian travel retailer, the strategic pillar that truly keeps the entire company afloat.

In contrast, the makeup and fragrance segments continue to struggle, while growth in Asia is slowly recovering. At current exchange rates it is negative 1%, even though Estée Lauder generates a third of its sales in China.

Here the group is often compared with the French group L’Oréal, of which performance is much bettereven though it runs on twice the sales volume and uses much less leverage.

In addition to the Chinese risk and underperformance in recent years, there is also the recurring issue of massive share buybacks at excessively high valuations over the past cycle, recurring in the case of Estée Lauder.

Here the potential for value destruction remains maximum. As you will remember, this topic was discussed in our columns from last year.

For the first nine months of the fiscal year, sales fell 5% and operating profit fell 5%. Under these circumstances, it is not easy to justify a valuation multiple that is still very high.