Estée Lauder is facing difficulties in the wake of the reopening of China's luxury retail market, as supply chain problems continue to plague the company. While many businesses have moved beyond logistical issues, Estée Lauder is still struggling due to its longer supply chains in Asia compared to its competitors. Most of the products sold by the company in Asia are imported from outside the region, leading to duty-free shops in China having to order merchandise at least six months in advance.
However, the sudden lifting of restrictions by the Chinese government at the end of last year led to a spike in infections and sales volatility, resulting in duty-free shops having too much inventory. This has contributed to the company slashing its annual forecast for the third time in six months, with a significant drop in sales at duty-free shops in China and South Korea. As a result, shares plummeted by 18% by the end of the week, and S&P Global Ratings revised its credit outlook on Estée Lauder to negative from stable on Friday.
This is in contrast to rival L’Oréal SA, which reported "flattish" travel retail sales in Asia during a similar timeframe and is beginning to see a pickup in sales in China. Other high-end beauty firms, such as LVMH, Kering SA, Coty Inc., and La Prairie owner Beiersdorf AG, have also experienced growth in China's luxury retail market.
Estée Lauder's repeated forecast cuts have raised concerns about the company's sales visibility, according to Morningstar analyst David Swartz. The company's longer supply chains have made it difficult to navigate the market's sudden changes, with duty-free shops in China and South Korea cutting back on orders due to an excess of inventory. Estée Lauder expects total sales to fall 10% to 12% for the fiscal year ending in June.
Estée Lauder recently opened a manufacturing facility in Japan and is opening distribution centers in mainland China and Hainan in an effort to ship its products to Asia more quickly. However, some analysts argue that these investments came too late to meet the needs of its growing travel retail business, which represents an estimated 27% of total sales in the most recent fiscal year.
While most analysts who cover the company believe that the setbacks are temporary and demand for Estée Lauder's products remains healthy, there are signs that the company's bounceback could be choppy. China's duty-free stores are working through backlogs while also facing sluggish demand for Estée Lauder's products, likely due to the faster rebound of consumer traffic compared to consumer spending. This raises questions about whether Chinese shoppers are less interested in Estée Lauder's brands compared to its rivals.