On February 5, U.S. beauty giant Estée Lauder Companies announced key performance figures for the second quarter of fiscal year 2024 ending December 31, 2023: net sales declined 7% year-on-year to $4.28 billion (on an organic basis: -8%) due to the expected challenges in Asia’s travel-retail sector and the continued weakness of the overall high-end beauty industry in mainland China, with the global travel-retail business declined by 28% on an organic basis and operating profit increased by 3% year-on-year to US$574 million.
Profitability improved significantly compared to the previous quarter – in the first quarter of fiscal 2024, Estée Lauder’s operating profit plunged 85% year-on-year to $98 million.
“We are at an inflection point (inflection point),” CEO Fabrizio Freda emphasized several times at the following analyst meeting following the earnings release.
“It’s first of all acknowledging the need of some important changes, and Estée Lauder needs to address Pressure Points in the post-pandemic era.” Fabrizio Freda confessed that “the Chinese market and improving margins are key to this.”
Fabrizio Freda said that consumer sentiment in China has weakened recently, which has led to a decline in the growth rate of high-end beauty products. However, it remains very optimistic about the long-term opportunities in China and will continue to invest in growth.
Fabrizio Freda also disclosed more detailed information about the Chinese market at the conference:
- The Estée Lauder Group’s brands are powerful, with retail sales growing consistently faster than overall sales and double-digit growth for luxury brands such as La Mer, Tom Ford, Jo Malone, Bobbi Brown, Kilian, Frédéric Malle, Aveda, as well as continued growth for the brand’s brands such as La Mer, TOM FORD, Jo Malone, Bobbi Brown, Kilian, and Aveda. La Mer, Jo Malone, Bobbi Brown, Kilian, Frédéric Malle, Aveda, and Le Labo continued to grow rapidly.
- The Group’s market share in China declined “slightly” in the second quarter, although it continued to increase its share in some segments, including skincare, which gained 80 basis points (0.8%), and fragrances and hair care, which also improved.
- Free-standing stores achieved double-digit growth in retail sales.
- The Hong Kong market performed well and the Group gained a significant market share in this market.
Fabrizio Freda further explained his plans for future growth in China, covering sales channels, product innovation, festival marketing, supply chain, etc. He said, “We will continue to invest in China, where we have a great team, and we are determined to continue to expand our market share and win the “long term battle”.
- Channels: further building distribution channels and ramping up the online channel in an effort to see results in the short term, the Group will also continue to expand its share of physical stores in some emerging cities. “I would like to emphasize that in the second fiscal quarter, our offline physical market share in China grew significantly.”
- Marketing: The group will carry out a strong holiday program. “Sales in China are highly concentrated during various holiday periods.”
- Innovation: At the end of 2022, the Group officially inaugurated its China Innovation and Research Center in Shanghai, which will launch more localized and innovative products. “Innovation is key to winning the competition in this ever-changing and complex environment.”
- Travel Retail: The China team will have stronger ties with the global travel retail team to better strategize at the pricing, channel, and marketing levels. “The role of this will be demonstrated in the future.”
- Competition: Local brands in the Chinese market are still skewed toward the mass market, and while we recognize that these local brands will continue to grow, “the Estée Lauder Group’s innovation and differentiation in brand positioning will be key to winning this competition.”
- Supply Chain: The Group is shortening its supply chain through a plant in the Asia-Pacific region, enabling it to plan accordingly and respond more flexibly to demand. “It will increase the flexibility and agility of our China team.”
The Estée Lauder’s (for the year ending June 2023) operating profit for fiscal 2023 was $1.509 billion, less than half of its fiscal 2022 operating profit ($3.17 billion).
In order to reverse the continued decline in earnings, the Group announced a further expansion of its profit recovery plan with a restructuring plan. The restructuring program, which aims to improve gross margins, reduce the cost base and reduce overheads while increasing investment in key consumer-facing activities, will begin in the third quarter of the Company’s fiscal year 2024 and is expected to be substantially completed by the end of fiscal year 2026. Includes the following highlights:
- Reorganization and right-sizing of certain areas of the Company and process simplification and acceleration. Estée Lauder estimates that there will be a net reduction in corporate positions of approximately 3-5 percent. The company currently employs approximately 62,000 people globally, and on this basis will eliminate 2,000 to 3,000 employees.
- The restructuring plan will generate $350 million to $500 million in annual pre-tax gross proceeds, with a portion of the savings planned to be allocated to customer-oriented areas to drive sustainable and profitable expansion.
- The Restructuring Plan is expected to generate $500 million to $700 million of pre-tax restructuring and additional charges.
- The restructuring plan is expected to drive an increase in operating profit of $1.1 billion to $1.4 billion. in november 2023 the company had projected an increase in operating profit of $800 million to $1 billion from the profit restoration plan. the restructuring plan is expected to be a significant driver of operating profit. If the Profit Recovery Plan proceeds smoothly, the Group’s operating profit will reach $2.6 billion to $2.9 billion in FY2026.
At the meeting, the just-launched restructuring plan was the focus of analysts’ attention. Speaking about the reasons for the restructuring plan, Fabrizio Freda said that it is designed to support the Group’s further growth and investments in the future, on the one hand, and to improve the agility of the team, on the other.
“Agility is the ability to allocate resources more quickly and faster in a more volatile world, while strengthening the supply chain and the speed of innovation to better compete with local brands.”
Fabrizio Freda pointed out that another key point to improving margins is skincare, which the Estée Lauder Group needs to bring back to growth to address profitability, and in fact saw strong growth in the second quarter in the Americas, EMEA, and Asia Pacific (excluding China).
Fabrizio Freda said that the group is exploring new opportunities in skin care, including the Estée Lauder brand, La Mer, which is launching innovative products, Clinique, which is repositioning itself with its heritage, and The Ordinary, which is being reactivated, among others. In the long term, these could be key engines for our future growth in the skin sector.
| Image Credit: Estée Lauder Companies
丨Reporter：Wang Jiaqi
| Editor: LeZhi
