Estee Lauder cuts forecasts on China curbs, tightening inventories

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FILE PHOTO: An Estee Lauder cosmetics counter is seen in Los Angeles

By Ananya Mariam Rajesh

(Reuters) -Estee Lauder Cos Inc cut its full-year forecasts on Wednesday ahead of the most important holiday season, blaming lockdowns in China and American retailers cutting stocks of its cosmetics and fragrances on worries of a slowdown in demand.

The company’s shares were down about 9% in premarket trade after it also forecast second-quarter sales and profit below market expectations.

Renewed lockdowns under China’s zero-COVID policy are weighing heavily on the country’s business activity and consumer confidence, and hampering sales growth of many U.S. companies such as Estee.

Many companies in China are stuck with piles of unsold stock as cautious consumers stay away from crowded shopping districts and travel destinations like Hainan.

Estee also said U.S. retailers were tightening inventories of its products, a sign that the benefits of the “lipstick effect”, where consumers buy more beauty products instead of big-ticket items during an economic downturn, were beginning to fade ahead of the holiday season.

“With rising interest rates and high inflation, the demand for luxury cosmetics might be reducing, and Estee’s lowered full-year expectations might be an indicator of that,” Kunal Sawhney, the CEO of equity research firm Kalkine Group, said.

Estee has flagged global currency headwinds will also impact its full-year forecast as a strengthening dollar eats into profits of companies operating internationally.

China lockdowns also caused a 6% fall in Estee’s makeup segment that had seen a brief recovery from a pandemic-induced slump as people slowly return to work and attend social events.

Estee now expects 2023 net sales to decrease between 6% and 8%, compared with the prior forecast of a 3% to 5% growth.

The MAC brand owner expects full-year 2023 adjusted profit per share to decrease between 19% and 21%, compared with the previous forecast of a 5% to 7% growth.

(Reporting by Ananya Mariam Rajesh in Bengaluru; editing by Milla Nissi)

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