The Estée Lauder Companies is a global leader in the prestige beauty industry, offering a diverse portfolio of iconic brands across skincare, makeup, fragrance, and hair care. With a strong heritage, a commitment to innovation, and a strategic focus on high-growth categories, the company has built an enduring presence in luxury beauty. Despite facing near-term challenges, The Estée Lauder Companies remains a dominant force with a long-term vision for expansion and profitability. The question remains: Does this beauty powerhouse deserve a spot in your portfolio?
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The Business
Estée Lauder Companies, an American multinational beauty powerhouse, specializes in skincare (51% of net sales in fiscal 2024), makeup (28%), fragrance (16%), and hair care (4%) products. Founded in New York in 1946 by Estée and Joseph Lauder, the company boasts an impressive portfolio of 27 globally recognized brands, including Estée Lauder, Origins, Jo Malone London, Clinique, and Bobbi Brown. Other well-known brands, such as TOM FORD, Too Faced, Dr.Jart+, and The Ordinary, further enhance Estée Lauder’s status as a leader in luxury and prestige beauty products. Additionally, the company licenses brands like AERIN, BALMAIN, and Dr. Andrew Weil for fragrances and cosmetics, broadening its brand moat. Estée Lauder’s products are available in approximately 150 countries through various channels, including its own website, 1.600 freestanding stores, and third-party retailers. The company’s omnichannel approach includes authorized websites, third-party online marketplaces, department stores, duty-free locations, and specialty retailers. In fiscal year 2024, the Americas contributed 29% of net sales, Asia/Pacific 32%, and Europe, the Middle East, and Africa (EMEA) 39%. To cater to a wide range of consumer preferences, Estée Lauder emphasizes distinct brand positioning. The company classifies its brands by price point and lifestyle into four categories: "Luxury Brands" such as La Mer, Jo Malone London, and TOM FORD; "Large Brands" like Estée Lauder and Clinique; "Scaling Brands" like Aveda and The Ordinary; and "Developing Brands," which include Le Labo and Dr.Jart+. This segmented approach, combined with a robust product portfolio, strengthens Estée Lauder’s appeal across global markets and diverse consumer demographics.
Management
Stéphane de La Faverie is the CEO of The Estée Lauder Companies, a role he assumed on January 1, 2025. With over 25 years of experience in the prestige beauty industry, he has a distinguished track record of building and leading global brands. Since joining The Estée Lauder Companies in 2011, Stéphane de La Faverie has held several key leadership positions. Most recently, he served as Executive Group President, overseeing a diverse portfolio that included Estée Lauder, Jo Malone London, Le Labo, and The Ordinary. His tenure as Global Brand President of Estée Lauder from 2016 to 2022 was marked by significant growth, particularly in engaging a diverse consumer base and expanding the brand’s presence in China. Before joining The Estée Lauder Companies, Stéphane de La Faverie was the General Manager of Giorgio Armani Beauty USA, a division of L’Oréal Paris. He began his career with the Lancôme Global brand in Paris and later took on roles that deepened his expertise in luxury beauty management. He holds a degree from ESC Bordeaux Business School. Under Stéphane de La Faverie’s leadership, The Estée Lauder Companies aims to build upon its storied legacy while continuing to define its position as a global leader in prestige beauty. He is recognized for his inclusive and empathetic leadership style, balancing emotional inspiration, authenticity, and strategic insights to drive long-term, sustainable growth. His approach emphasizes brand excellence and innovation across categories, geographies, and channels, fostering a culture where top talent is attracted, challenged, and empowered to innovate. Colleagues and industry peers describe Stéphane de La Faverie as a dynamic leader who combines strategic vision with operational excellence. His tenure at The Estée Lauder Companies has been marked by significant milestones, including the enhancement of the company’s fragrance portfolio and the integration and expansion of industry disruptors like The Ordinary. His strategic foresight and commitment to excellence continue to position The Estée Lauder Companies for sustained growth in the global beauty industry. While still early in his tenure as CEO, Stéphane de La Faverie’s extensive industry experience and proven leadership make him well-equipped to lead The Estée Lauder Companies into its next chapter.
The Numbers
The first metric we’ll review is the return on invested capital (ROIC), where our goal is a consistent 10-year history with annual ROIC above 10%. Estée Lauder Companies has generally maintained strong ROIC figures over the last decade, except for 2020, when the global pandemic severely impacted operations. 2023 and 2024 have also been notably challenging years, with 2024 seeing the lowest ROIC in the past decade. Several factors contributed to this decline, including macroeconomic pressures and a $471 million impairment charge related to Dr.Jart+, following lower-than-expected growth and profitability for the brand. While three of the past five years have seen a lower-than-ideal ROIC, Estée Lauder’s historical performance suggests it is fundamentally a high-quality company currently navigating some difficulties. Based on these insights, I believe Estée Lauder is likely to see ROIC improvements in the coming years.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Though there have been occasional years with decreases in equity, the overall performance remains strong. It's also reassuring to see that, despite recent challenges, Estée Lauder Companies has maintained an equity level that is still higher than its pre-pandemic standing. This resilience indicates a solid foundation even amidst a challenging environment.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share.It’s no surprise that Estée Lauder Companies has maintained positive free cash flow every year over the past decade. The company recorded its lowest free cash flow in fiscal 2023, and while fiscal 2024’s free cash flow was the lowest since 2017 (excluding 2023), it's promising to see year-over-year growth. Management’s guidance for increased free cash flow in fiscal 2025 is also encouraging. The levered free cash flow margin has been under pressure over the past two years, marking its lowest levels in the last decade. However, the increase in this margin during fiscal 2024 is a positive sign. Additionally, with the free cash flow yield at its highest point in the past decade, shares appear to be trading at a more attractive valuation than usual, though we will explore this further later in the analysis.
Debt
Another important factor to consider is the level of debt, specifically whether it is manageable enough to be repaid within a period of three years, calculated by dividing total long-term debt by current earnings. For Estée Lauder Companies, this calculation indicates a debt repayment period of 18,63 years—significantly higher than the preferred threshold. However, there are a few reasons behind this elevated figure. First, the company delivered lower earnings in fiscal year 2024. Additionally, recent acquisitions, such as Tom Ford in fiscal year 2023 and DECIEM in fiscal year 2024, have contributed to the higher debt load. Management has clearly prioritized debt repayment, evidenced by the temporary halt of its share buyback program. Therefore, while the debt level is higher than ideal, it does not necessarily dissuade me from considering an investment in Estée Lauder Companies.
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Risks
Based on my findings so far, I believe that Estée Lauder Companies is a quality business. However, no investment comes without risk, and Estée Lauder also faces significant challenges. One major risk is competition. The beauty industry is highly saturated, with consumers having a vast array of choices influenced by brand reputation, product quality, accessibility, and price. Estée Lauder faces intense competition from large players like L’Oréal, Unilever, Procter & Gamble, and LVMH, each offering multiple brands within the same categories. Additionally, the growing demand for sustainable products increases competitive pressure. While Estée Lauder has made strides in sustainability, other companies are advancing eco-friendly initiatives that may especially appeal to younger, environmentally conscious consumers. In a sector where innovation is key, Estée Lauder faces the challenge of keeping up with technological advancements. Competitors increasingly use digital tools, such as AI and data analytics, to enhance personalized marketing and customer experiences, which strengthens their relevance and helps capture market share. If Estée Lauder cannot match the speed and sophistication of these advancements, it risks losing consumer interest and its competitive edge. Adding to the challenge, some of Estée Lauder’s competitors own or have partnerships with its retail partners, which can limit its control over shelf space and promotional visibility, potentially putting the company at a disadvantage in certain retail environments.
Macroeconomic factors present significant risks for Estée Lauder Companies, as the business is sensitive to changes in consumer spending and overall economic conditions. During economic downturns, consumers often cut back on discretionary purchases, like beauty and skincare products, in favor of essentials when disposable income declines. Rising inflation, interest rates, and energy costs can further affect consumer confidence and spending power, directly impacting Estée Lauder's sales. Additionally, foreign currency fluctuations pose a risk to the company’s pricing strategy and profitability in international markets, particularly for duty-free purchases—a significant revenue source tied to global travel. A challenging economic environment could dampen sales and profitability, potentially affecting the goodwill and valuation of its brands, as seen with Dr.Jart+, which faced slower-than-expected growth due to economic pressures in key regions.
The “China risk” presents a multifaceted challenge for Estée Lauder Companies, stemming from declining consumer confidence, regulatory changes, and evolving shopping habits in what has historically been a crucial growth market. Recently, China’s prestige beauty industry has experienced significant weakening, with mainland China and Asia travel retail sales softening further each quarter. Consumer confidence continues to erode, leading to a mid-single-digit decline in the third quarter of fiscal year 2024 and a low double-digit drop by the fourth quarter. This subdued consumer sentiment impacts Estée Lauder’s earnings significantly, as China and Asia travel retail—especially high-margin areas like Hainan—are major revenue contributors for its premium skincare segment. In Hainan, a critical travel retail hub, beauty market sales fell by over 40%, reflecting both reduced foot traffic and a lower rate of purchases. Although travel has resumed, spending has not returned to pre-pandemic levels, with consumers increasingly favoring experiences over high-ticket beauty items. As basket sizes decrease, pressure on sales rises. Compounding these challenges, China’s regulatory crackdown on “Daigou” purchasing has removed a once-substantial sales channel. Previously, Daigou shoppers would buy Estée Lauder products in duty-free zones like Hainan for resale at lower prices in mainland China, driving significant demand. The recent clampdown has largely shut down this channel, adding another obstacle to growth in the region.
Reasons to invest
There are also numerous reasons to consider investing in Estée Lauder Companies, as the business has substantial growth potential. One key factor is the expected growth in the beauty industry itself. Industry forecasts indicate the global skincare market will grow by 5.52% annually until 2028, with the global makeup and fragrance markets each projected to grow by around 5% per year and hair care by 6%. These growth rates suggest steady consumer demand for beauty products, positioning Estée Lauder favorably within a resilient industry. Since 2015, Estée Lauder has consistently gained market share, demonstrating the strength of its brand portfolio and effective market strategies. This advantage, especially within the prestige beauty segment that generally grows in the mid-single-digit range, suggests a promising growth trajectory as the luxury beauty market recovers and stabilizes. The beauty industry has also shown historical resilience, often rebounding strongly after economic downturns, as seen following the 2008-2009 recession. Estée Lauder's management anticipates that the company will outpace industry growth by at least one percentage point over the long term. Moreover, the “dopamine effect” of beauty—where consumers find affordable pleasures in beauty products during challenging times—helps support steady demand. This effect, combined with strong interest in skincare and makeup among younger generations, underscores a promising long-term outlook for the beauty market and Estée Lauder’s role within it.
The Profit Recovery and Growth Plan (PRGP) is designed to bolster Estée Lauder's long-term growth, profitability, and efficiency, positioning the company to better respond to market demands. The PRGP focuses on three main areas: accelerating margin expansion, making strategic investments, and streamlining operations for greater agility. By targeting margin expansion through gross margin recovery and efficient expense management, the plan aims to increase cash flow, which will support reinvestment in consumer-focused areas like advertising, brand development, and store activation. This strategy particularly supports high-potential categories such as luxury fragrance, active skincare, and distribution in fast-growing channels. Additionally, the PRGP simplifies decision-making processes and strengthens go-to-market capabilities, enhancing Estée Lauder's ability to respond more rapidly in the competitive global beauty market. As these initiatives advance, cost savings and margin improvements are expected to increase throughout fiscal year 2025, with stronger impacts on profitability as net sales recover. Should the prestige beauty market gain momentum by fiscal 2026, Estée Lauder anticipates increased sales and profitability driven by enhanced margins and focused reinvestments.
Estée Lauder’s focus on fast-growing channels reflects a strategic pivot to engage consumers where beauty shopping trends are increasingly shifting, both online and in select physical spaces. By expanding on platforms like Amazon’s Premium Beauty store and incorporating tools such as Clinique’s skin analysis feature and Bumble and bumble’s expert-led hair tutorials, Estée Lauder is aligning with spaces where consumers are more active. Early performance from brands like Clinique and Too Faced on Amazon has shown encouraging results, with high engagement, repeat purchases, and subscription models that help foster long-term customer relationships. These initiatives, particularly resonant with male consumers, are aiding Estée Lauder in building brand loyalty and reaching new demographics. On a global scale, Estée Lauder is capitalizing on social commerce to drive growth, using live-streaming, short-form videos, and direct purchasing features on social media platforms. In markets like China, Japan, and Korea, Estée Lauder has established a presence on platforms such as LINE, Rakuten, and Kakao, leveraging social commerce and gifting strategies. These channels are especially effective for engaging younger, digital-native consumers, enabling efficient product introductions, enhanced brand visibility, and customer acquisition in markets with high online beauty shopping activity. This shift to fast-growing channels not only drives consumer engagement but is also anticipated to be margin accretive for the company.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,85 which is the target set by management for fiscal year 2025. They expect the EPS to fall within the range of 2,75 to 2,95. I have selected a projected future EPS growth rate of 11% (management expects to grow between 7% and 15% per year). Additionally, I have chosen a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on the fact that Estee Lauder Companies has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $44,01. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Estee Lauder Companies at a price of $22,01 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.360, and capital expenditures were 919. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 643 in our calculations. The tax provision was 363. We have 358,689 outstanding shares. Hence, the calculation will be as follows: (2.360– 643 + 363) / 358,689 x 10 = $57,99 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Estee Lauder Companies' Free Cash Flow Per Share at $4,02 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $52,92.
Conclusion
I believe Estée Lauder Companies is a solid investment with a strong brand moat. Although there are some uncertainties with management as the current CEO plans to retire, this doesn’t deter me from considering the company's long-term potential. Recent challenges have impacted ROIC and free cash flow, but both are expected to improve moving forward. Competition is a risk, as the beauty industry is crowded with strong players like L'Oréal and Unilever, who drive consumer engagement through eco-friendly initiatives and advanced digital marketing. If Estée Lauder cannot keep up with innovation and maintain visibility in key retail channels, it risks losing market share and consumer interest. Macroeconomic factors, including economic downturns, inflation, and currency fluctuations, also pose risks by impacting consumer spending on discretionary items, especially in key travel retail markets. The ‘China risk’ is a significant concern, as declining consumer confidence, regulatory changes like the Daigou crackdown, and a shift in spending toward experiences have all weakened sales in this high-margin market. However, with the beauty industry projected to grow around 5% annually, Estée Lauder’s strong market share and focus on the resilient prestige segment position it well to benefit from rising demand, particularly among younger consumers. The Profit Recovery and Growth Plan strengthens Estée Lauder’s growth and efficiency by focusing on margin expansion, streamlined operations, and targeted reinvestments in high-potential areas like luxury fragrance. This strategy should enhance profitability and adaptability, with expected gains as the prestige beauty market recovers. Estée Lauder’s focus on fast-growing channels, like Amazon’s Premium Beauty store and social commerce platforms, allows it to capture new demographics, boost consumer engagement, and drive growth with higher margins. While some uncertainties remain, I believe buying shares below the Ten Cap price of $58 could be a good long-term investment.
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