Estée Lauder (EL.US), one of the world's largest skincare, cosmetics, and fragrance companies, experienced declining performance in fiscal 2025, with full-year net sales falling approximately 8% year-over-year. Q4 sales reached about $3.41 billion, down 12% compared to the prior year, though still better than market expectations. However, the beauty and skincare giant's fiscal 2026 profit guidance fell far short of expectations, and the company also projected that rising U.S. tariff rates would reduce its earnings by approximately $100 million. Following the release of weak performance data and guidance, Wall Street financial giant Morgan Stanley issued a research report reaffirming its cautious bearish "Neutral" rating on Estée Lauder stock, predicting continued share price decline with a target price of just $66, suggesting potential downside of over 20% in the next 12 months in Morgan Stanley's view.

Regarding detailed financial results and guidance, Estée Lauder saw significant declines across nearly all major product categories, with regional performance particularly dragged down by weak Asian travel retail business. Due to these impacts, the company's quarterly sales remained weak, failing to deliver the additional upside that markets had hoped for from a strong recovery in China and other Asian markets. Despite sales pressure, Estée Lauder's Q4 profitability performed better than expected: gross margin remained flat with slight improvement year-over-year (adjusted gross margin of 71.9%, up 10 basis points), mainly due to price increases, product mix optimization, and cost savings offsetting the adverse impact of volume declines. Selling and administrative expenses were slightly higher than expected (rising about 0.6 percentage points as a share of net sales year-over-year), but due to better-than-expected gross margins, the company achieved operating profit of $137 million, above market consensus of $116 million. The company's adjusted earnings per share was $0.09, slightly exceeding analyst expectations (approximately $0.07-$0.08). However, this earnings level declined significantly from the prior year period (previous year's EPS was $0.64 per share).

Morgan Stanley's analyst team noted in their earnings commentary that weak net sales meant the slight EPS beat was more driven by cost and gross margin improvements, but growth quality was relatively insufficient. Since the market had expectations for earnings guidance based on significant improvement signals from Asian business, the lack of any surprises in sales and earnings guidance disappointed investors. On the day of earnings release, Estée Lauder's stock price fell about 4% to reflect these factors.

Company management provided cautious outlook for fiscal 2026: expecting organic net sales year-over-year change in the range of 0 to +3%, with reported net sales growth of +2% to +5%. This growth guidance is roughly in line with market consensus expectations (approximately +2%-3%). Estée Lauder expects the global prestige beauty market to grow about 2%-3% in fiscal 2026, providing a moderate industry backdrop for the company. Under this assumption, the company's fiscal 2026 adjusted earnings per share (EPS) guidance range is only $1.90-$2.10, implying potential year-over-year growth of 26%-39%. However, this EPS guidance is below Wall Street's previous consensus expectations of approximately $2.1-$2.20 range (about +46% year-over-year).

Morgan Stanley's analyst team stated in their research report that Estée Lauder's new fiscal year performance outlook guidance is generally conservative, especially with profit guidance below expectations. Morgan Stanley indicated that the main reason EPS guidance is below market predictions lies in higher tax rate assumptions: the company expects fiscal 2026 effective tax rate of about 36%, significantly higher than the market's original prediction of about 32%, a difference that could make EPS guidance about $0.14 lower than expected values. Morgan Stanley stated that excluding tax rate impact, the company's underlying earnings guidance is closer to Wall Street expectations.

Morgan Stanley's analyst team also pointed out that the new CEO's first full-year guidance tends to be cautiously optimistic, which can partly explain guidance being slightly below expectations. Additionally, the company's outlook for fiscal 2026 Q1 performance is equally cautious: expecting Q1 organic sales to decline low single digits to flat year-over-year. This quarterly guidance essentially covers the market consensus range (-1% to 0%), indicating management's judgment on recovery pace aligns with market views.

Notably, the company expects travel retail business channels to achieve high single-digit growth pace in early fiscal 2026, with China market expected to return to steady positive growth, but anticipates declines in other regions will moderate.

Morgan Stanley maintains its "Equal-weight" rating on Estée Lauder, reflecting a neutral to cautiously bearish stance. The firm's $66 12-month target price is significantly below the current stock price. This target price is based on applying approximately 22.5x expected P/E ratio to the company's projected fiscal 2027 earnings per share (EPS) of $2.93. In comparison, Estée Lauder's average forward P/E ratio in the 10 years before the COVID pandemic was about 26x. Morgan Stanley uses lower valuation multiples mainly because the company's current earnings base and net sales remain under pressure, while uncertainty exists regarding the effectiveness and actual execution of the "Beauty Reimagined" transformation plan, combined with pressure from Trump tariffs, collectively weakening visibility of whether performance can smoothly recover. In other words, Morgan Stanley believes it's inappropriate to assign historically average high valuation multiples before the company fully emerges from its trough or shows significant recovery signals.

Morgan Stanley continues to maintain a cautious stance on Estée Lauder's performance prospects, stating that if demand for prestige beauty products in China and North America continues to weaken, or if global travel retail business recovery falls short of expectations or even deteriorates further, it will continue to drag down company sales. Meanwhile, if the company loses market share in major categories/markets or faces poor execution in advancing its "Beauty Reimagined" transformation plan, it will negatively impact profitability. Additionally, intense price competition from European and Chinese competitors may also compress profit margins. These adverse factors combined could cause company performance and stock price performance to fall even short of Morgan Stanley's current expectations.