Estee Lauder (EL) reported a better-than-expected fiscal first quarter, but a downbeat forecast for the rest of its fiscal year sent shares lower Wednesday. However, if not for our Club trading restrictions , we would have been buyers on the weakness. First, the headline numbers: Quarterly revenue declined 11% year over year to $3.93 billion, which was in line with the consensus estimate, according to Refinitiv. Organic net sales fell 5%, and that’s a little better than management’s guidance of an 8% to 10% decline, as pressure related to Covid restrictions in China weighed on the results. Asia travel retail was limited in the quarter, especially at the popular Chinese vacation spot Hainan, leading to strict inventory management by certain retailers in travel retail. Adjusted earnings-per-share declined 28% to $1.37, beating management’s guidance of $1.22 to $1.32 and the consensus estimate of $1.31, according to Refinitiv. Bottom Line We kept a position small in Estee Lauder ahead of last month’s National Congress of the Chinese Communist Party on the belief that leaders in China might soften their stance on zero-Covid. As we now know, the annual meeting there did not turn out as we had hoped. Despite continued uncertainty in China, we think it would be foolish to sell the stock after its de-rating back to pre-Covid times and one quarter away from when revenue growth and earnings are expected to accelerate. While dropping 9% to a session low of $187.85, a level not seen since January 2020, the stock did pare about a third of those declines. If there’s any break in policy or if the Chinese government provides any sign that it’s ready to move on from rolling Covid lockdowns and travel restrictions, then we fully expect Estee Lauder to be one of the largest gainers in the S & P 500 that day. The prestige beauty company is one of the best ways to play the return of travel and store traffic in Asia. It will see a surge in its business the first day those restrictions are gone. If you own Estee Lauder, you must understand that its long-term growth outlook relies on China travel. Uncertainty around its recovery makes visibility in the near-term rather low, but we believe it’s better to be opportunistic about a great company before a transitory event passes us by, and not after. Management did an excellent job navigating the initial challenges of the Covid pandemic, pivoting towards direct-to-consumer channels, picking up share, and raising its operating margin structure. We expect this hiccup in China will be no different. If the U.S. dollar is peaking here and starts to pullback, Estee Lauder will also see a huge pressure point on its business gradually ease. Reflecting the near-term earnings pressure, we’re cutting our price target to $260 per share from $275. However, for the reasons we just discussed, we would be small buyers of Estee Lauder Wednesday, if we were not restricted, and we would have gone bigger if the price returned to its…
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