Estee Lauder sinks on disappointment that CEO Fabrizio Freda didn't have better news about China

Published Thu, Mar 14 20244:01 PM EDT

Estee Lauder shares declined Thursday after CEO Fabrizio Freda offered an underwhelming outlook on China at a retail conference earlier in the day. Showing their dissatisfaction and selling down the embattled stock more than 3%, investors had expected better news from Freda — considering he called an "inflection point" in sales and profit during last month's post-earnings conference call. The stock, at the time, surged 12% on the comments. Speaking Thursday morning at the UBS Global Consumer and Retail Conference in New York City, Freda acknowledged short-term volatility in Estee Lauder's business in China. He did, however, reiterate that he believes the company's long-term prospects in the world's second-largest economy are still intact. Freda, who has been CEO for 14 years, said China remains an important growth segment for Estee Lauder, and the trend of more consumption there is not changing. Even with Thursday's decline, shares were still up about $3 each since earnings day on Feb. 5. The stock rose nearly 4% on Wednesday ahead of the event. But over the past 12 months, shares have fallen more than 35% after taking it on the chin in last year's strong market and in 2022's bloodbath. EL YTD mountain EL stock performance YTD. At the UBS conference, Freda said he sees a softening in overall China consumption but argued he does not believe it will be the status quo in the long term. Rather, he expects consumer sentiment there to come back along with the economy. China's post-Covid economy has been slow to recover, which has hurt U.S. companies doing business there. Traffic coming back in Asian travel retail is "encouraging," the CEO said, echoing what the company said last month about correcting inventory levels in Asia travel retail. Alongside fiscal 2024 second-quarter results, Estee Lauder delivered details of its recovery plan, which aims to put the company in a better position to "restore stronger and more sustainable profitability." Management expects incremental operating profit of $1.1 billion to $1.4 billion by fiscal year 2025 and 2026. While management is confident that performance will improve going forward, we still see Estee Lauder as a "show me" story. This is to say, when it delivers and hits its targets, that's when we will be less wary on the stock and have more confidence to take action. The Club has our 4 rating on shares, which means we won't be making any decisions until more information becomes available. Freda lost a lot of credibility after the company's poor performance for more than a year. But after the stock's reaction to a glimmer of hope last month, it still appears that there's still some confidence left in the CEO's leadership. In the second half of fiscal 2024, Estee Lauder said it's positioned for stronger profitability versus the first half. We believe that should help margins in the future if results were to play out that way. (Jim Cramer's Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Pedestrians walk past the American multinational skincare, and beauty products brand, Estée Lauder (Estee Lauder) logo seen in Hong Kong.

Budrul Chukrut | Lightrocket | Getty Images

Estee Lauder shares declined Thursday after CEO Fabrizio Freda offered an underwhelming outlook on China at a retail conference earlier in the day.