‘Makeup renaissance’ drives Estée Lauder Companies growth despite China lockdowns

Despite challenges from China’s Covid-19 lockdown measures, makeup’s comeback in other global regions helped to drive a net sales increase of 10% for Estée Lauder Companies in the company’s fiscal third quarter.

On the company’s earnings call for the third quarter ending March 31, executives stated a “makeup renaissance” led to continued double-digit global growth in makeup sales, especially from MAC Cosmetics, Estée Lauder and Clinique. With renewed Covid-19 restrictions in Shanghai and other cities in China, overall global sales growth was slightly lower than last quarter. As a result of the China slowdown as well as the invasion of Ukraine, the company slashed its final-year net sales growth outlook from between 13-16% to 7-9%. Share prices hit a 52-week low following the announcement. 

“The entire [makeup] category is flourishing again,” said Fabrizio Freda, CEO and president of ELC, on the May 3 conference call, describing the makeup “renaissance” after a pandemic-driven slump. This is due to the fact that “usage occasions of makeup are coming back: back to office, back to restaurants, back to parties, back to vacations,” said Freda. 

Makeup’s overall net sales growth for the quarter was 9% globally, with skin care seeing a 6% growth. Fragrance sales grew by 28% and hair care by 15%.

With double-digit sales growth, MAC Cosmetics is “in a strong recovery trend,” said Freda. He cited the brand’s widened distribution channels, creative messaging and new product launches such as its MACStack mascara. The company also reported Clinique did well in the lip, concealer and eye categories, while Estée Lauder saw strength from its Double Wear product line. 

Skin-care sales are also still seeing global growth with increases in the Americas and EMEA on both the luxury and accessible ends. La Mer saw “strong, double-digit sales growth” in these regions, while newly acquired Deciem’s The Ordinary was listed as a top performer at retailers. 

The Americas and EMEA were the main regions of growth with 15% and 17% sales increases for the quarter, respectively. China’s Covid-19 business closures and stay-at-home orders that began in mid-March, meanwhile, caused Asia-Pacific region sales to decline by 4% during the time period. This has hit both makeup and skin care. Estée Lauder’s skin-care net sales declined as a result of the Greater China pressure, while Dr.Jart+ was also affected. 

China also affected the company’s supply chain, with reduced capacity at distribution facilities in Shanghai. In the second half of March, the company could not ship existing orders in China. “It’s not about consumer demand; it’s about access to consumers,” said Freda.

“The restriction sharply curtailed productivity of these facilities, affecting our ability to both receive product being shipped into the country and to fulfill demand across all channels of distribution,” said Tracey Travis, evp of finance and CFO of ELC, on the call. The company is considering opening a temporary distribution center outside of Shanghai and plans to expand to more regional distribution centers in the future. 

The China decline has also affected ELC’s travel retail business in Hainan, the main source of Chinese travel retail spending since the pandemic dramatically curtailed international tourist travel from China. In the second half of March, Hainan saw an estimated 60-70% reduction in foot traffic, followed by an 80% reduction in April, according to Freda. 

According to Travis, the company remains “cautiously optimistic that we will be able to fulfill the majority of our orders in time for our planned 6/18 activities,” referring to the Alibaba-led online shopping festival that normally drives big sales on June 18. Overall, the company is still bullish on China’s growth.

“We are in China for the long term and completely dedicated to continuing to develop the market and serve our customers there,” said Freda, who noted that ELC is expanding its number of brands and distribution in China. The company is also still planning to open an R&D center in Shanghai when the Covid-19 restrictions allow it to proceed. 

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