Analyst Note
| Rebecca Scheuneman, CFA |Estee Lauder shares are down 5% as the firm reduced fourth-quarter guidance in conjunction with its March-ended fiscal third-quarter results. China imposed lockdowns in some of its largest cities in mid-March to curb the spread of COVID-19, which is inhibiting demand for beauty products in brick-and-mortar and travel channels, although online demand remains strong. Estee’s distribution facilities are in Shanghai, where restrictions are severe, limiting its ability to fill orders. Thus, we plan to lower our fourth-quarter Asia-Pacific sales estimate to a 28% decline from 11% growth previously, taking consolidated fourth-quarter organic sales to a 4% drop from 14% growth. But we think China will ease restrictions in coming weeks, as COVID cases have been declining, and Estee’s sales should recover briskly, as the weakness seems be driven more by supply constraints than weak demand. Therefore, we do not plan to revise our $280 fair value estimate materially. We think the stock weakness provides a rare opportunity for investors to buy this high-quality, wide-moat name.