Estée Lauder: Navigating Towards Technical Support Despite Financial Headwinds

The Estée Lauder Companies Inc. (NYSE:EL) experienced a notable decline in its financial performance for fiscal 2023. The company's reported net sales decreased compared to the previous year, mainly due to challenges in the Asia travel retail sector, particularly in Hainan and Korea. Despite these setbacks, there was noticeable growth in many markets across Asia/Pacific and Europe, the Middle East & Africa, with the Fragrance segment being a standout in organic net sales growth. This article presents the financial performance of 2023 and delves into a technical examination of the stock's price to determine its potential trajectory and identify investment prospects. Current observations indicate that the stock maintains a pronounced bearish momentum but is nearing crucial support areas.

Financial Performance

Estée Lauder witnessed a decline in its financial performance for the June 30, 2023 fiscal year. The company reported a net sales figure of $15.91 billion, reflecting a 10% decrease from the $17.74 billion in the previous year. This decline was mainly influenced by a 6% drop in organic net sales, attributed chiefly to the challenges in Asia travel retail, particularly in Hainan and Korea. However, this setback was partially counterbalanced by growth in almost all markets in Asia/Pacific and Europe, the Middle East & Africa. The company's emerging markets and the Fragrance segment notably experienced a double-digit increase in organic net sales.

Regarding profitability, Estée Lauder's net earnings stood at $1.01 billion, marking a significant decline from the prior year's $2.39 billion. Consequently, diluted net earnings per share dwindled to $2.79 from the previous year's $6.55. When considering the adjusted diluted net earnings per share (excluding certain charges and adjustments), the figure came to $3.46, indicating a 49% decline in constant currency. Unfavorable foreign currency transactions adversely affected the reported and adjusted figures, primarily in key international travel retail locations.

Moreover, the President and Chief Executive Officer, Fabrizio Freda, commented on the company's resilience by returning to organic sales growth in the fourth quarter, highlighting momentum in the Middle East & Africa, and Latin American markets, as well as a substantial surge in Asia/Pacific, particularly mainland China and Hong Kong SAR. Despite challenges faced in Asia's travel retail segment and North America's softness, the company observed significant growth in Fragrance across all regions. Additionally, Makeup saw an upward trend in the fourth quarter.

Additionally, Q4 2023 2023 saw a 1% increase in net sales, with Makeup, Fragrance, and Hair Care contributing significantly to this growth. Skin Care's challenges persisted due to hurdles in Asia's travel retail. The ongoing COVID-19 pandemic continued to disrupt operations throughout the year. Asia's travel retail recovery pace was slower than anticipated, with factors like prolonged store closures in Hainan, slow transition to post-COVID regulations in Korea, and delays in international flights and visas hampering growth. The mainland China market also experienced challenges, predominantly COVID-related disruptions in H1 of fiscal 2023.

Estée Lauder projects a promising fiscal 2024 based on their sales and earnings outlook. Reported net sales are anticipated to rise by 5% to 7% in 2024 compared to 2023, even after considering a 1% headwind from foreign currency translation. An increase of 6% to 8% is expected in terms of organic net sales. On the earnings front, the forecast for reported diluted net earnings per common share stands between $3.43 and $3.70. This range slightly shifts to between $3.50 and $3.75, excluding restructuring and other associated charges. Furthermore, on a constant currency basis, adjusted diluted net earnings per share are projected to grow by 4% to 12%. However, the ever-volatile nature of currency exchange rates, spot rates, will result in an estimated $.11 dilution to the net earnings per share for fiscal 2024.

A Deep Dive into Estée Lauder's Technical Perspective

The monthly chart below indicates that Estée Lauder's technical perspective suggests a pronounced bearish trend. The price consistently gravitates towards long-term support under significant bearish momentum. Yet, it's worth noting that the company experienced a sharp price surge after the Great Recession. A variety of factors contributed to this impressive rally without a significant dip:

• Estée Lauder's aggressive global expansion propelled its revenue, especially in emerging and Asia-Pacific markets.
• Growing middle-class demographics in these regions spurred a demand for high-end beauty products.
• The company maintained a competitive edge with regular product innovations, a solid launch lineup, and well-thought-out acquisitions.
• The company's pivot towards digital avenues, e-commerce, and potent marketing initiatives boosted brand visibility and outreach.

This solid run reached its high in January 2022 with an all-time high of $366.73, after which the price began its descent toward long-term support. The Fibonacci retracement analysis, from the low of approximately $8.43 during the Great Recession to the all-time high, shows a crucial pivot at $145.29-representing 61.8% of the rally. Although the price is slipping past this mark, a definitive monthly close is essential to confirm a breach. Notably, there's robust support at the intersection of $116, delineated by the red and blue trend lines.

The weekly chart elucidates further with primary support levels represented by red lines at $132.77 and $116.41. For investors, these levels are potential entry points for Estée Lauder stocks. The RSI also underscores a highly oversold condition, suggesting a possible upward rebound from these technical support levels. For potential investors, it's advisable to watch for confirmation or specific signals at these support thresholds before initiating long positions. If the price doesn't show noteworthy activity at these points and breaches these supports, a continued decline could be on the horizon.

Market Risk

Estée Lauder experienced a notable drop in net sales and earnings for the fiscal year ending June 30, 2023. This downturn may foster negative market perceptions, heralding more challenges in the upcoming year. The company's performance in the U.S. market is particularly worrisome due to the slow retail recovery and tight inventory management, compounded by fears of a recession driven by inflation.

From a technical perspective, Estée Lauder's stock exhibits a solid bearish trend. The critical threshold lies at a monthly close below $145.29; if the stock slips beneath this mark without finding support, it could signal a prolonged downward trajectory for the company's shares. On the other hand, a monthly above $229.85 might confirm that the bottom is formed and price hikes are on the horizon.

Bottom Line

Estée Lauder faced a challenging fiscal year 2023, marked by a net sales and earnings decline. This downturn is primarily attributed to disruptions in the Asia travel retail sector, specifically in Hainan and Korea. On the positive side, the company saw substantial growth in regions like Asia/Pacific, Middle East & Africa, and Latin America. Moreover, while sectors like Makeup, Fragrance, and Hair Care witnessed positive trajectories, Skin Care encountered hurdles, primarily due to Asia's travel retail challenges. Pandemic disruptions, notably in Asia and the U.S., further exacerbated the company's challenges. Despite these setbacks, the firm remains hopeful, anticipating organic sales growth in the coming fiscal year and laying plans to capitalize on its substantial brand equity and robust innovation pipeline.

On the other hand, the technical analyses suggest a bearish trend in the short term for Estée Lauder, with a pivotal point at $145.29. If prices close the month below this level, the price might decline. Nonetheless, the robust critical support stands at $116.41 and $132.77. Investors might consider waiting for the market to stabilize within these price brackets before purchasing, with an eye toward potentially higher prices.