On Wednesday, DA Davidson maintained its Buy rating on Estee Lauder shares (NYSE: NYSE:EL), holding steady with a $130.00 price target. The firm's stance comes despite Estee Lauder's sales challenges in Mainland China and China-related travel retail, which represent about 30% of the company's sales. Estee Lauder's financial performance faced headwinds in the first half of fiscal year 2024 due to excess inventory in the Asia travel retail channel, notably in the Hainan vacation region.
Re-stocking in the travel retail channel took place in the second half of fiscal year 2024. However, Estee Lauder is anticipated to see a year-over-year decline in organic sales for the first quarter of fiscal year 2025. This projection follows a weakening in point-of-sale (POS) activity in Asia travel retail during the fourth quarter of fiscal year 2024.
The downturn in travel retail sales is reflected in data from a Chinese government website, which indicated a significant 70% drop in Hainan travel retail sales on a two-year stack basis in July 2024. This decrease marked the third consecutive month of deceleration, following a five-month period of improvement that lasted until April 2024.
DA Davidson's price target of $130 for Estee Lauder is based on a multiple of 40 times the calendar year 2025 estimated earnings per share (EPS) of $3.25. This valuation reflects the firm's analysis and expectations for the company's financial prospects in the coming year.
In other recent news, Estee Lauder's Profit Recovery and Growth Plan (PRGP) is on track, aiming to deliver between $1.1 and $1.4 billion in net profit over fiscal year 2024 levels. However, Estee Lauder's first quarter fiscal year 2025 forecast fell short of analyst expectations, leading DA Davidson to revise its earnings per share (EPS) estimate for the company, reducing it by $1.28, or 30%, to $2.95.
On the analyst front, Piper Sandler upgraded Estee Lauder's stock from Neutral to Overweight, setting a price target of $114. However, TD Cowen, Morgan Stanley (NYSE:MS), Deutsche Bank (ETR:DBKGn), and Evercore ISI all adjusted their price targets for Estee Lauder, reflecting a cautious outlook due to management transitions and challenging market conditions.
CEO Fabrizio Freda has announced his retirement, initiating a search for a successor. As part of its future plans, Estee Lauder intends to launch the Balmain Beauty brand, expand its luxury portfolio, and build a distribution center in Hainan to improve stock normalization in travel retail.
These are recent developments in the company's strategic direction and growth plan.
InvestingPro Insights
As Estee Lauder navigates its sales challenges in Mainland China and related travel retail markets, insights from InvestingPro provide a deeper understanding of the company's financial health. Estee Lauder's current market capitalization stands at approximately $33.31 billion, and despite the recent downturn, the company has maintained its dividend payments for 29 consecutive years, showcasing a commitment to shareholder returns. The company's gross profit margin remains impressive at 71.66% over the last twelve months as of Q1 2024, indicating strong profitability in its operations.
However, the stock has experienced a significant price drop over the last six months, with a total return of -36.64%, reflecting investor concerns and market conditions. Analysts have revised their earnings expectations downwards for the upcoming period, which may impact future valuations. With a high Price/Earnings (P/E) ratio of 86.76, Estee Lauder is trading at a premium compared to industry peers, which could suggest caution for potential investors looking for value opportunities. For those interested in a more detailed analysis, there are 20 additional InvestingPro Tips available on the Estee Lauder InvestingPro page.
DA Davidson's price target of $130.00 reflects optimism about Estee Lauder's ability to weather current challenges and anticipates a return to growth. As Estee Lauder approaches its next earnings date on October 31, 2024, investors will be closely watching for signs of recovery and strategic initiatives to address the dynamic conditions in the Asia travel retail market.
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