Estee Lauder (EL) reported mixed fiscal 2023 third-quarter results before the opening bell Wednesday. However, what’s really pressuring shares and troubling the Club as shareholders was a very weak outlook for Q4. Shares of prestige beauty giant plunged more than 20% at their worst levels of the session. Revenue fell about 12% year-over-year to $3.76 billion, beating analysts’ expectations for $3.71 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) sank more than 75% to 47 cents, missing analyst forecasts of 51 cents. However, EPS did match the upper end of management’s prior guidance. The results included a 3% drag due to foreign currency dynamics in key international travel retail locations. Bottom line This was not a good release and we are deeply disappointed. The magnitude of the management’s guidance revision is about as bad as we have ever seen, especially with only one quarter left in the company’s fiscal year. You have to wonder why the team decided not to preannounce this update. Contributing to the terrible guidance, Estee Lauder said the post-Covid recovery for its Asia travel retail business is proving “far more volatile” and “more gradual” than management had previously expected, given the quicker recoveries previously seen in other regions of the world after the lifted their pandemic restrictions. The team believes this trend in Asia will only be temporary, but that’s of little comfort Wednesday, as the stock plunged. While management only spoke to the remainder of its fiscal year 2023, it’s quite clear that fiscal year 2024 estimates are going to need to come down materially. The momentum seen elsewhere, in both developed and emerging markets, is encouraging and may indeed support management’s view that the recovery in its Asia travel retail business is a question of when not if. However, we must recognize that the company did not have the visibility it thought it had, and that any forward commentary on the timing of a recovery in Asia must be taken with a grain of salt. While displeased with Estee Lauder’s fiscal Q4 guide, we think the magnitude of the selloff represents something of a rush to the exits, no matter the price. To us, that’s an emotional knee-jerk reaction and at these levels, we think selling would be unwarranted. Instead, we are currently working to determine if shares are a buy — as they were the last time we saw them under or around $200 — or if the uncertainty relating to the Asia travel retail recovery timing means more patience is warranted. With fiscal 2024 estimates set to be revised lower, it’s likely there’s little urgency to step in right here and now and allocate additional capital to our EL position until investors have some time to absorb the reset and shares consolidate. Our price target and rating are currently under review as we debate this internally, and we’ll have more to say on the quarter later Wednesday on the Homestretch, which will be up on…
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