Estée Lauder: cosmetic company faces more bad news

Estée Lauder has done well to penetrate the Chinese market, perhaps too well. The country had emerged as a bright spot for the cosmetic group after it became the first major economy to recover from the Covid-19 pandemic.

But a fresh wave of lockdowns in Shanghai and a new outbreak in Beijing has brought the US-based group problems. Estée Lauder generated over a third of its revenue and operating profit from China last year.

On Tuesday the company behind brands MAC and La Mer took the axe to its full-year outlook. Net sales for the year should now expand between 7 and 9 per cent, well down from its previous range of 13 to 16 per cent. Forecast for earnings per share fell to a range of $6.54 to $6.70 down roughly a tenth.

Chinese consumers’ insatiable demand for pricey toners, face masks and skin creams mean very little if they cannot venture out of their homes. The lockdown in Shanghai has also severely limited Estée Lauder’s ability to ship orders from its distribution facilities.

Estée Lauder is not the only multinational wrongfooted by China’s lockdowns. Apple, Coca-Cola and General Electric are among those that have warned that current quarter results would suffer lost sales, partly due to supply chain shortages and factory shutdowns there. Analysts expect more US companies to issue cautions.

Estée Lauder chief executive Fabrizio Freda trumpeted his confidence that business China would rebound when Covid abated. A 5 per cent drop in the company’s share price on Tuesday suggests investors believe otherwise.

Scepticism is deserved. While the stock has shed a third of its value since the start of the year, it still trades on a punchy 32 times forward earnings. Shanghai’s current lockdown will eventually end. But as long as Beijing insists on its zero-Covid policy, which involves curfews and mass quarantines even if patients are asymptomatic, retail sales cannot grow there. That suggests Estée Lauder, and others, may face more earnings warnings in the coming months.

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