HSBC downgrades Estee Lauder on restructuring, beauty segment concerns

Investing.com -- HSBC on Wednesday trimmed its rating on Estee Lauder (NYSE: EL) stock to Hold from Buy and adjusted the price target to $100 from $130, citing concerns about the company’s ability to meet its guidance amid the current market conditions in China.

“More importantly, being in denial on daigou means that brand equity might end up being more compromised than what we initially thought across a number of brands, weighing on future growth for the group,” HSBC analysts said in a note.

Estee Lauder shares fell 1.5% in premarket trading Wednesday.

The downgrade comes after HSBC's observations from a trip to Hong Kong and Shanghai, where they gathered insights on the luxury market's situation.

The analysts' findings coincide with recent reports from other beauty and luxury goods companies, such as Coty (NYSE: COTY)'s announcement of slower growth in the U.S. and China, and LVMH Moet Hennessy Louis Vuitton SE (EPA: LVMH)'s beauty division missing expectations, both citing challenges in the Chinese market.

Estee Lauder's significant exposure to the daigou channels has been a concern for nearly three years, HSBC notes.

The company's reluctance to address and detach from this unstructured trade has raised questions about its strategy.

“We continue to wonder how this is possible given ELC remains a family-controlled company,” HSBC analysts said. “The ease in finding premium brands from the group at greatly discounted prices in the Mainland is troubling, in our view.”

According to HSBC, the ongoing restructuring within Estee Lauder is perceived as a double-edged sword.

While necessary, it may be causing internal strife, potentially leading to the departure of quality managers.

The analysts also speculate that the next CEO will likely be an internal appointment, as no external candidates have been announced. They mention Stéphane de la Faverie and Jane Lauder, who are currently leading the restructuring efforts, as potential leaders.

However, there are concerns that their involvement in past decisions may hinder the significant cultural shift that HSBC analysts believe is necessary for the company's future success.

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