While beauty may be in the eye of the beholder, the business of beauty can get ugly, especially within the travel retail business, those ubiquitous duty-free shops at airports, cruise ships, and hotels around the world.
As the largest luxury market Globally, China has quickly become a hub for luxury beauty brands. Names like Estee Lauder (NYSE:EL), The Health and Beauty Company (FUR), and Korean company Amorepacific took advantage of Chinese consumers' insatiable appetite for indulgence. As a result, these companies were left vulnerable as Chinese consumers reduced their purchases of high-priced luxury goods as COVID travel restrictions left the travel retail business gasping for air.
According to a research report from Canaccord Genuity, which takes a closer look at the travel retail industry, the Year of the Dragon could be a turning point for the sector, as early data on shopping during the Lunar New Year holiday shows that consumer spending on luxury goods is showing weak signs of life.
“Looking ahead, management teams indicate that (the first half of 2024) will continue to be a bit challenging, but will gradually improve (the second half of 2024) as we get easier comparisons, better inventory levels and a recovery hopeful about consumer demand. Canaccord said in his report.
For Estee Lauder (EL), the recovery could take a little longer, given not only its significant exposure to the Chinese luxury market, but also high inventory levels that could take several quarters to clear.
Estee Lauder (EL) inventory increased more than 26% between 2019 and 2023 at the same time as sales fell (according to Canaccord Genuity data, Estee Lauder's inventory-to-sales ratio widened to a margin of 31 basis points, almost double that of L'Óreal). But Canaccord analysts expect the company to take more aggressive steps to clear inventory with promotions, increased advertising spending and even employing “inventory obsolescence charges.”
“It looks like (Estee Lauder) is in a better position now than it was a year ago, as we're starting to see easier comparisons and we could see the company benefit from Chinese consumers moving away from Japanese beauty brands,” Canaccord said. , although the firm remains cautious. “While we are encouraged by sales trends during the Lunar New Year and inventory clearance, we remain on the sidelines until there is a clear improving growth trend.”
There are still significant headwinds in the travel retail business that suggest emerging signs of life will see demand return to pre-COVID levels. While Canaccord sees “light at the end of the tunnel,” the company also asks: “How long is the tunnel?”
The biggest hurdle for travel retail is the continued restrictions on flights between the United States and China, exacerbated by flight restrictions over Russia. The worsening macroeconomic environment in China is also problematic, as is the government crackdown on daigou resellers (companies that buy foreign luxury goods and sell them domestically at a profit).
But when the situation improves, Canaccord points to Estee Lauder (EL) as the most likely to benefit, as it has suffered the most pain.
