Estee Lauder's ‘Catastrophic' Outlook Blamed on China Lockdowns

(Bloomberg) -- Estee Lauder Cos. shares tumbled after pandemic lockdowns in China contributed to what one analyst called a “catastrophic” forecast cut.

The fragrance and beauty company now sees earnings per share, excluding some items, in the range of $7.05 and $7.15 for the fiscal year ending this summer, according to a statement on Tuesday. The prior forecast in February called for earnings of $7.43 to $7.58. The outlook for organic sales growth this year was cut to 5% to 7%, down from a prior view of 8% to 10% growth.

Estee Lauder attributed the bleaker guidance to store closures and supply-chain disruptions in China, higher costs, and disruptions in Europe due to Russia's invasion of Ukraine. In particular, the company cited the lockdown in Shanghai, which limited capacity at distribution facilities beginning in the middle of March. Chief Executive Officer Fabrizio Freda said in the statement that the company is “confident that our business in China will rebound when Covid abates.”

Executives told analysts on a conference call that they expect the Shanghai closures will lead to a “meaningful decline” in sales for China in the current quarter. Pandemic restrictions have made it hard to fulfill what the company says is still strong consumer demand. Estee Lauder expects a reopening of the Chinese economy around mid-May, based on the trajectory of Covid-19 infections, and foresees a stimulus boost from the Chinese government within the next 12 to 18 months to counter the impact of the current lockdowns.

If the restrictions are in place for longer than expected, Chief Financial Officer Tracey Travis said Estee Lauder could open a temporary distribution center in China.

The implied outlook for the current quarter looks “catastrophic,” according to Bernstein Autonomous analyst Callum Elliott. By his estimates, the company is suggesting organic sales will fall 10% to 18% this quarter. He said it's possible that “management is just being incredibly conservative.”

Barclays analyst Lauren Lieberman said the severity of the forecast cuts was “deeply” surprising.

“To be sure, with a major distribution center in Shanghai, we probably should have been braced for more short-term pressure on the business,” she wrote. “While others may well have been better prepared for today's release, we don't expect anyone will have expected a shock to EPS of this degree.”

Shares of the New York-based company slid as much as 13%, their biggest drop since March 2020, before paring that decline to about 5% as of 11:16 a.m. The stock had already fallen 30% so far this year through Monday's close.

Luxury peers also traded lower. Beauty-products maker L'Oreal SA slid 2.6% in Paris, leading declines on France's benchmark CAC 40 Index.

While China is “less material” for L'Oreal than for Estee Lauder, there's still “meaningful” downside risk for the French company's second-quarter organic sales growth average analyst estimate, Jefferies analyst Molly Wylenzek wrote in a note.

The German owner of La Prairie, Beiersdorf AG, declined about 1% in Frankfurt.

Worries about China's Covid-19 restrictions and the impact of the Ukraine war on consumer confidence also dragged down luxury and apparel stocks more widely in Europe. Adidas AG, Moncler SpA and Hermes International were among decliners in European afternoon trading. The giant conglomerate LVMH SE, which also owns beauty brands like Guerlain and Fenty Beauty by Rihanna, fell 1.6%

Estee Lauder said higher transportation and logistics costs are expected to be somewhat offset through price increases and cost savings. Longer term, the company still expects to return to 6% to 8% sales growth, 0.5% operating margin expansion, and double-digit growth in adjusted earnings per share excluding currency fluctuations.