China lockdowns hit top names in the beauty business

Strong fragrance and make-up sales helped Estée Lauder report better than expected revenue in its fourth quarter, although the cosmetics group was still hobbled by Covid-19 disruptions in Asia.

Sales growth was particularly strong in the Americas during the quarter, where the continued relaxation of Covid-19 restrictions has resulted in consumers returning to going out and shopping in brick-and-mortar retail stores. However, this was more than offset by the negative impact on travel and retail traffic stemming from Covid-19 restrictions in China. Estée Lauder typically generates around one-third of its revenue in the country.

Estée Lauder reported net sales of $3.56 billion (€3.51bn) for the quarter ending June 30th, a 10 per cent decrease from the same period last year, but above expectations of $3.4 billion, according to analysts polled by Refinitiv.

Organic net sales, which exclude recent acquisitions, divestitures and currency fluctuations decreased 8 per cent during the fourth quarter.

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For the full year Estée Lauder reported organic net sales increased 8 per cent. Fragrance net sales grew across every region, while make-up sales increased in most of its brands, reflecting “recovery in western markets, increased usage occasions”.

The New York-based company reported net earnings of $52 million for the quarter, below analyst expectations of almost $110.4 million. Adjusting for one-time costs, Estée Lauder reported adjusted earnings per share of 42 US cent, above the 33 cent expected by analysts.

Estée Lauder cut its full-year sales and profit forecasts earlier this year, citing Covid-19 lockdowns in China as a major factor in disrupting supply chains. The company said its distribution facilities in Shanghai returned to normal capacity in early June. However, the company said recent lockdowns in the island province of Hainan are a “strong headwind”.

The company said its fiscal first-quarter results will also be hurt by the end of licence agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines.

“We are very confident in the strength of our company and in the vibrant long-term growth opportunity of prestige beauty, but recognise the environment remains complex and uncertain at this point in time,” said chief executive Fabrizio Freda in a statement.

As consumers return to going out, Estée Lauder forecast full fiscal year 2023 net sales to increase between 3 and 5 per cent from $17.74 billion in 2022. That would fall short of the increase implied by analysts’ forecasts for $19 billion.

Fellow high-end retailer Tapestry also cautioned about weakness in China in its earnings results on Thursday. The parent company of the Coach and Kate Spade brands said revenue in China fell more than 30 per cent in the three-month period to July 2nd due to Covid-related disruptions.

Tapestry executives said they expect revenue in China to decline 15 per cent in the current quarter and bounce back to growth in the company’s fiscal third quarter. – Copyright The Financial Times Limited 2022/Bloomberg