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Profit Recovery Aids Estee Lauder (EL), Soft Asia Region Ails

The Estee Lauder Companies Inc. EL is benefiting from the implementation of the Profit Recovery Plan and its strong presence in emerging markets where demand is growing. EL continues to operate in a challenging macroeconomic environment and geopolitical tensions across certain parts of the world.

Let’s delve deeper.

Factors Working in Estee Lauder’s Favor

The Zacks Rank #3 (Hold) company commenced the implementation of its Profit Recovery Plan for the fiscal 2025 and 2026 (announced in November 2023) aimed at fortifying profitability, fostering accelerated sales growth and enhancing operational agility. This plan is tailored to enhance gross margins, streamline costs and diminish overhead expenses while amplifying investments in pivotal consumer-facing endeavors.

The company is optimistic about the long-term potential within the global prestige beauty sector. Additionally, management is confident in its ability to strategically position itself to achieve more diversified growth across its portfolio. The company streamlined its innovation pipeline for the fiscal 2025 and 2026, prioritizing trend-setting products.

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Estee Lauder has a strong presence in emerging markets, where demand appears to be growing. It generates significant revenues from emerging markets like Thailand, India, Russia and Brazil, which encourages it to make distributional, digital and marketing investments in these countries.

The company has also been building out infrastructure across emerging regions that help in generating continued growth. As a result, the company is well insulated from macroeconomic headwinds in developed nations. In its last earnings call, management highlighted that strong double-digit growth in Mexico, Brazil and India during third-quarter fiscal 2024 boosted performance in emerging markets year to date.

Weakness in Asia Region

Estee Lauder is battling softness in the mainland China region for the past few quarters.  In third-quarter fiscal 2024, the company experienced lower-than-expected net sales in mainland China, reflecting the impact of ongoing softness in overall prestige beauty stemming from subdued consumer confidence and softness during holidays and key shopping moments. In the Asia-Pacific region, quarterly sales inched down 1% to $1,176 million.

Road Ahead Looks Tough

Estee Lauder continues to operate in a challenging macroeconomic environment and geopolitical tensions across certain parts of the world. In addition, the company remains exposed to the dangers of unfavorable currency headwinds. Considering macroeconomic challenges — including softness in overall prestige beauty in mainland China and geopolitical volatility in certain regions — management offered a drab view for the fiscal 2024.

For the fiscal 2024, management projects a net sales decline of 2-3%. Organic net sales are anticipated to decline 1-2% in fiscal 2024. The annual operating margin is likely to range between 9% and 9.5%, suggesting a contraction from the previous year's margin of 11.4%. Adjusted earnings per share (EPS) are expected in the band of $2.14-$2.24, suggesting a decline from $3.46 reported in the fiscal 2023.

In the past three months, the company’s shares have lost 21.4% compared with the industry’s decline of 17.4%.

Solid Food Bets

Vital Farms Inc. VITL offers a range of produced pasture-raised foods. It currently sports a Zacks Rank #1 (Strong Buy). VITL has a trailing four-quarter average earnings surprise of 102.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings indicates growth of 22.5% and 59.3%, respectively, from year-ago reported numbers.

Utz Brands Inc. UTZ, which manufactures a diverse range of salty snacks, currently carries a Zacks Rank #2 (Buy). UTZ has a trailing four-quarter earnings surprise of 2%, on average.

The consensus estimate for Utz Brands’ current financial-year earnings indicates growth of 26.3% from year-ago reported numbers.

Lamb Weston Holdings, Inc. LW is a leading global manufacturer, marketer and distributor of value-added frozen potato products. It currently has a Zacks Rank #2. LW has a trailing four-quarter earnings surprise of 13.8% on average.

The Zacks Consensus Estimate for Lamb Weston’s current fiscal-year sales and earnings suggests growth of 22.7% and 18.4%, respectively, from fiscal 2023 reported figures.

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The Estee Lauder Companies Inc. (EL) : Free Stock Analysis Report

Lamb Weston (LW) : Free Stock Analysis Report

Vital Farms, Inc. (VITL) : Free Stock Analysis Report

Utz Brands, Inc. (UTZ) : Free Stock Analysis Report

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