The second biggest beauty queen: Estée LauderIntro
Estée Lauder, the second-largest global cosmetics company, has experienced over 80% drop in share price from its peak, an unexpected downturn for a traditionally resilient stock in the beauty sector. Additionally, I will examine two major competitors, Coty and L'Oréal, to better understand Estée Lauder’s current position within the industry. While Estée Lauder remains a strong brand with a high market profile, its valuation challenges, dependence on recovering markets, and competitive threats may make Coty and L'Oréal viable alternatives for investors looking for stability or better value propositions.
Company Overview
History and Market Position:
Founded in 1946, Estée Lauder has built a robust, globally recognized portfolio including Estée Lauder, Clinique, Tom Ford, Jo Malone, La Mer, and other high-end brands. The company offers a range of beauty products, including skincare, makeup, fragrance, and haircare. Estée Lauder operates through various sales channels worldwide, including department stores, specialty shops, beauty salons, spas, and authorized e-commerce platforms. Notably, the company generates approximately 30% of its sales online, reflecting a successful adaptation to digital retail trends for a nearly century-old brand.
Geographical Reach:
Estée Lauder’s primary markets are Europe (Europe, Middle East and Africa: 39%), Asia (Asia/Pacific: 33%), and the U.S (The Americas: 28%), with Europe being the most important, closely followed by Asia. Skincare products, in particular, serve as a key revenue driver, demonstrating the brand’s strength in high-value beauty categories.
Family-Run Philosophy and Performance:
As a family-run corporation, Estée Lauder emphasizes long-term and sustainable growth. Family-owned businesses have outperformed employee-led firms over the past two decades, an encouraging trend for investors who prioritize stability. Even though Estée Lauder has had a poor performance over last months, Family owned businesses perform better than non-family owned (Credit Suisse Research).
Market Challenges and Recent Decline
Share Price Decline:
Estée Lauder’s share price decline has been significant, with over 80% drop from its peak. This surprising performance is primarily attributed to economic difficulties in China, a key market for Estée Lauder. The company is heavily affected by reduced travel activity and weak domestic demand in China, especially following Covid-19, as its high-end products often see strong sales in airport and travel retail environments. There was also a big uprise of the stock price due to the recovering phase of Covid-19. People were able to get out and enjoy recreational activities again.
Competitive Pressures:
The beauty market has seen heightened competition and lower barriers to entry. Even in the prestige sector, Estée Lauder faces challenges from new entrants, particularly influencer-backed brands that resonate with younger consumers. Social media influencers, such as Kylie Jenner, have successfully built high-profile brands that leverage direct community engagement, which has diverted consumer attention from traditional brands. In 2019, Jenner sold a 51% stake in Kylie Cosmetics to Coty, underscoring the appeal of influencer-driven brands in today’s market. Not to mention its biggest competitor L’Oréal. The brand insulation that Estée Lauder once enjoyed, is making it harder for the company to defend its market share as effectively as it did in previous decades.
Financial Overview and Valuation
Current Valuation Metrics:
• Share Price: Trading around $64
• Fair Value Estimate: ~$187 (reflecting significant potential upside)
Estée Lauder’s P/E ratio (Current 112x) is very high but its still a strong brand. The current valuation levels mirror those of the 2008–2009 financial crisis, signaling possible downside risk.
Growth and Margin Targets:
• Revenue growth target: 6–8%, which exceeds inflation and provides a stable growth outlook.
• Profit growth target: Double-digit profit growth, with a focus on luxury products.
• Operating margin target: Annual increase of 50 basis points.
Estée Lauder’s long-term strategy aims to exceed market growth by 1% annually in prestige beauty. Although attractive, the current valuation combined with low revenue growth and modest profit projections, may pose risks, particularly with 5% risk-free rates available in the market.
Competitor Analysis
1. Coty
• Valuation: P/E of 14x, significantly below Estée Lauder.
• Product Portfolio: Coty’s brand portfolio includes Burberry, Calvin Klein, Chloé, Gucci, and Tiffany, among others. Coty is less reliant on the Asia-Pacific market (only 11% of revenue), reducing its exposure to economic fluctuations in the region.
• Financial Health: Coty’s recent focus on reducing debt has brought leverage from 6.8x in 2021 to 3.3x in 2024. Additionally, Coty has struggled with high debt due to an acquisition-heavy strategy. Recently, Coty hired a new CEO from L’Oréal, potentially signaling a turnaround.
• Market Position: Despite its lower quality compared to Estée Lauder, Coty’s valuation and reduced exposure to China make it an interesting, though riskier, alternative.
2. L’Oréal
• Valuation: Trading at 30x earnings, in line with Estée Lauder’s.
• Margins: Excellent financials, with a 75% gross margin, 20% operating margin, and 15% net margin.
• Growth Stability: L’Oréal has grown its market share over the years, maintaining a stable valuation. With a fair value projection of around 27x earnings, L’Oréal appears fairly valued in the current market environment.
Conclusion and Outlook
Estée Lauder, though a premier player in the luxury beauty industry, faces valuation challenges given its high premium relative to current and projected growth. High valuation levels at a time when risk-free rates are 5% create added pressure for the company to achieve strong returns, a challenging feat amid economic headwinds in core markets.
While Coty’s lower valuation makes it an appealing choice for value-focused investors, its past management missteps and reliance on debt-financed growth carry risk. Nevertheless, Coty’s reduced China exposure and recent restructuring make it worth watching for those seeking a higher-risk, higher-reward alternative. L’Oréal, meanwhile, offers a more balanced approach with strong margins and stable growth potential, supported by fair valuation metrics.
