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 in airports, cruises, and hotels across the globe.
As the largest luxury market in the world, China quickly became a hub for luxury beauty brands. Names like Estee Lauder (NYSE:EL), The Beauty Health Company (SKIN), and Korea’s Amorepacific capitalized on Chinese consumers’ insatiable appetite for indulgence. As a result, these companies were vulnerable when Chinese consumers cut back on high-priced luxury items as travel restrictions during COVID 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 is showing faint signs of life.
“Looking ahead, management teams indicate (the first half of 2024) will continue to be a bit challenging but gradually improve through (the second half of 2024) as we lap easier comps, better inventory levels, and hopeful recovery in consumer demand,” Canaccord said in their report.
For Estee Lauder (EL) the recovery could take a bit longer given not only its significant exposure to the Chinese luxury market but high inventory levels that could take several quarters to clear out.
Estee Lauder’s (EL) inventory swelled by more than 26% between 2019 and 2023 at the same time sales were dropping (according to Canaccord Genuity’s data, Estee Lauder’s inventory/sales ratio widened to a 31 basis point spread, almost double that of L’Oreal). But analysts at Canaccord expect the company will take more aggressive measures to clear inventory with promotions, increased ad spending, and even employ “inventory obsolescence charges.”
“It appears (Estee Lauder) is in a better position now than a year ago as we start to see easier compares and 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 clearing, we remain on the sidelines until there is a clear trend of improved growth.”
There are still significant headwinds in the travel retail business to think that nascent signs of life will bring demand back to pre-COVID levels. While Canaccord sees “light at the end of the tunnel,” the firm also asks, “how long is the tunnel?”
The most significant hurdle for travel retail is the continued restrictions on flights between the U.S. and China, exacerbated by flight restrictions over Russia. The worsening macroeconomic environment in China is also problematic, as well as the government’s crackdown on daigou resellers (businesses that buy foreign luxury goods and sell them domestically at a markup).
But when the situation improves, Canaccord points to Estee Lauder (EL) as the most likely to benefit as it has suffered the most pain.
