The Ratings Game: Estée Lauder has a plan to grow, but analysts are mixed about whether it will help the next few months

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Estée Lauder Cos. took an upbeat tone about a post-coronavirus recovery during its fiscal fourth-quarter earnings call, but analysts disagree about the beauty company’s turnaround prospects in the near term.

Estée Lauder EL, +2.85% reported wider-than-expected losses and a sharp sales decline that fell below Street expectations.

Looking ahead, the company expects fiscal first-quarter net sales to decrease by 12% to 13% year-over-year, earnings per share between 77 cents and 83 cents and adjusted EPS between 80 cents and 85 cents. The FactSet consensus is for sales of $3.45 billion, which suggests an 11.4% year-over-year decline, and EPS of $1.26.

Estée Lauder coupled the announcement of its financial results with the introduction of a strategy to remake the business over the coming quarters, the Post-COVID Business Acceleration Program. A key focus is a shift to online sales that will result in the closure of up to 15% of stores around the world and a headcount reduction of up to 2,000 workers.

“The Post-COVID Business Acceleration Program we announced today is designed to rapidly reallocate our resources, enabling us to invest in the greatest opportunities for long-term sustainable growth, like online, skin care, or China,” said Fabrizio Freda, chief executive of the company, on the Thursday earnings call, according to FactSet.

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Chief Financial Officer Tracey Travis addressed the near-term challenges the company, like so many others, face. Though there is optimism about the long term.

“We do expect to see progressive quarterly sales and profit improvement as retail doors reopen and traffic and travel gradually resumes, assuming no significant second wave occurs,” she said.

“While online is expected to perform strongly, the momentum for recovery in bricks-and-mortar and travel retail will not be realized until later in the second half.”

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D.A. Davidson says the company has already overcome huge hurdles in a Friday note titled, “The worst is in the rearview mirror.” Analysts upgraded Estée Lauder to buy from neutral and raised the price target to $231 from $183.

“Estée Lauder gave F1Q21 guidance, which should lower earnings disappointment risk, Linda Bolton Weiser, D.A. Davidson managing director, wrote. “China (~10% of sales) is in full recovery (+50% in F4Q20), travel retail (25% of sales) was down only 30%, and Estée Lauder saw year-over-year sales growth in July, which makes the 12%-to-13% decline guidance seem conservative.”

Estée Lauder shares jumped 4.4% in Friday trading after the upgrade.

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JPMorgan, on the other hand, is more pessimistic.

“Looking ahead, we continue to appreciate management’s actions to navigate the challenging operating environment and we believe the announcement of the Post-COVID Business Acceleration Program (in addition to the ongoing cost measures) is a reflection of management’s commitment to reposition the business to remain a long-term share gainer in the global prestige beauty market,” analysts wrote.

“That said, despite these necessary actions as well as the recent momentum in e-commerce, we expect share losses in the U.S. to continue and believe that the coming quarters will likely remain challenging given the pressures on brick and mortar distribution (mainly department stores) and the above-average margin travel retail business (down roughly -30% in FQ4) due to the pandemic.”

JPMorgan rates Estée Lauder stock underweight, but raised its price target to $180 from $156.

With visibility into the coming months cloudy, Raymond James maintained its outperform stock rating and moved its price target up $3 to $210, anticipating improved results in the second half of fiscal 2021, which will “serve as a healthy transition into a much better fiscal 2022.”

Stifel maintained both its buy rating and $235 price target.

“Overall we view Estée Lauder as well-positioned to gain share of a global prestige beauty category that should resume growth as the pandemic impact subsides,” analysts led by Mark Astrachan wrote. “Further, while near-term visibility is limited, sales trends are already improving, and changing consumer habits, including increasing e-commerce penetration, favor Estée Lauder and are profit accretive.”

Estée Lauder stock is up 3.2% for the year to date while the S&P 500 index SPX, +0.63% is up nearly 6% for the period.