While beauty may be in the eye of the beholder, the beauty business can get ugly, especially in travel retail, those ubiquitous duty-free shops in airports, cruises and hotels around the world.
As the largest luxury market Around the world, China has quickly become a hub for luxury beauty brands. Names like Estee Lauder (NYSE:EL), The Beauty Health Company (SKIN), while Korea’s Amorepacific has capitalized on Chinese consumers’ insatiable appetite for indulgence. As a result, these companies have been vulnerable as Chinese consumers cut back on high-priced luxury items as COVID travel restrictions have left the travel retail sector reeling.
According to a research report from Canaccord Genuity, which takes a closer look at the travel retail sector, the Year of the Dragon could be a turning point for the industry as early data on purchases during the Lunar New Year holiday shows that spending of consumers for luxury shows weak signs of life.
“Looking to the future, indicate the management teams [the first half of 2024] it will continue to be a little challenging but will gradually improve [the second half of 2024] as we turn in easier tenders, improved inventory levels and a promising recovery in consumer demand,” Canaccord said in their report.
For Estee Lauder (EL), recovery may take longer, given not only its significant exposure to the Chinese luxury market, but also high inventory levels that may take several quarters to clear.
Estee Lauder (EL) stock increased more than 26% between 2019 and 2023, while sales were declining (according to data from Canaccord Genuity, Estee Lauder’s stock-to-sales ratio widened to a spread of 31 basis points, almost double that of L’Oreale). But Canaccord analysts expect the company will take more aggressive measures to clear inventory with promotions, increase ad spending and even employ “inventory obsolescence charges.”
“It seems [Estee Lauder] is in a better position now than a year ago as we start to see easier comparisons and may see the company benefit from Chinese consumers moving away from Japanese beauty brands,” Canaccord said, although the company remains cautious. “While we are encouraged by the sales performance during the Lunar New Year and inventory clearance, we remain on the sidelines until a clear trend of improving growth is observed.”
There are still significant hurdles in the travel retail sector to think that the first signs of life will bring demand back to pre-COVID levels. While Canaccord sees “the light at the end of the tunnel,” the company also wonders “how long is the tunnel?”
The most significant obstacle for travel retail is the ongoing flight restrictions 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’s crackdown on daigou retailers (companies that buy foreign luxury goods and resell them domestically at a markup).
But as the situation improves, Canaccord points to Estee Lauder (EL) as most likely to benefit because it has suffered the most pain.