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Estée Lauder Falls Most on Record After Pulling Its Guidance

Clinique products are displayed for sale at an Ulta Beauty Inc. store in New York, U.S., on Thursday, May 31, 2018. Photographer: Gabby Jones/Bloomberg (Gabby Jones/Bloomberg)

(Bloomberg) -- Estée Lauder Cos. pulled its guidance for the year, citing uncertainty over a new chief executive and weak demand in China. The shares plunged in New York trading.   

The New York-based company also cut its dividend “to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team to reaccelerate our profitable growth trajectory,” it said in a statement Thursday. 

The surprise moves sent shares down by as much as 27% on Thursday — the biggest decline on record. The stock had already fallen 40% this year through Wednesday, compared to a 22% increase in the S&P 500.

Sales dropped by 4% in the quarter ended Sept. 30, as consumer sentiment worsened in China and a pullback in Asia hit the company’s duty-free stores. The cosmetics company also reported a net loss of $156 million, primarily due to charges associated with talc litigation.

Stéphane de La Faverie, who takes over as CEO in January, will have to either tackle the sales slump and show investors that the turnaround plan he inherits from his predecessor is working — or come up with a new strategy. 

Estée Lauder said its sales in China fell by a double-digit percentage in the most recent quarter, dragged down in part by weak demand for its La Mer and namesake brands. The results underscore market concerns that Estée Lauder relies too much on the country, despite repeatedly telling Wall Street on earnings calls that it has “multiple engines of growth.” 

Rival L’Oreal SA also posted disappointing results for the most recent quarter because of weakness in China and like-for-sales in the region that include the country fell 6.5%. But the French conglomerate relies less heavily on China, so overall sales rose. 

At Estée Lauder, “there are no ‘multiple engines of growth,’ at least not profitable ones,” Evercore analysts led by Robert Ottenstein wrote in a research note. The bleak outlook isn’t just because of China, though. “Estée’s makeup business, with lesser Asian exposure, is losing money despite one billion dollars in sales,” they added. 

‘Move Us Forward’

The company has been contending with declining US market share and sluggish sales in China, particularly in duty-free shops, known as the travel retail business. 

But the decision to pull guidance altogether and cut the company’s dividend suggests the financial picture is worse than expected, since the owner of brands including La Mer, Clinique, the Ordinary and Le Labo had already significantly lowered its annual outlook in August.

“While we believe the new economic stimulus measures in China present medium- to long-term potential for stabilization and ultimately growth in prestige beauty, we anticipate still-strong declines near-term for the industry in China and Asia travel retail,” outgoing Chief Executive Officer Fabrizio Freda said. 

The cosmetics company is forecasting sales in the current quarter to fall as much as 8% versus a year ago and said China stimulus won’t help performance in the three-month period. 

That second-quarter guidance, which Raymond James analyst Olivia Tong called “frightful,” is dramatically below the flat revenue growth that Wall Street had been expecting. “Visibility will remain low near term and investors will continue to question the pace of earnings recovery,” Tong wrote.

During the past two years, Freda has repeatedly cut guidance, giving Wall Street the impression that executives don’t have a grasp on what’s going on and dampening expectations of a long-promised recovery.

“The biggest debate around Estée Lauder is whether the current issues in China (~20% of total sales) and TR (travel retail, ~20% of total sales; down from 28% at peak) are structural or transitory,” Jefferies analysts Ashley Helgans wrote.

This week, the company said De La Faverie, 50, will succeed Freda, who has been CEO since 2009. It also said two Lauder family members would step down from their posts, marking the first time since the company was founded more than 75 years ago that a member of the Lauder family hasn’t been involved in the day-to-day management of the business. 

On Thursday, Freda said he was hopeful that his successor will help “move us forward with speed and agility.”

(Updates shares and adds details, analysts comments in sixth through ninth paragraphs and 14th.)

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