Estee Lauder doing less, The Real Real can’t do anything and everyone is sad about Chinese not spending.
The Critique: by Cherise Lloyd
The newsletter focused on consumer brand business, from finance to supply chain, and the market's economic trends.
THIS WEEK’S STORIES
Earnings Call-Out:
Estee Lauder
It's not uncommon for companies to create buzz around new projects aimed at sparking a turnaround or strategy shift. While many companies opt for names inspired by space or war, Estée Lauder took a different route with their "Profit Recovery and Growth Plan" (PRGP). This initiative is all about boosting profit margins and driving up sales.
So, what exactly is the PRGP? Glad you asked! It’s about "moving faster in leveraging winning channels, launching accretive innovation inclusive of new big opportunities, and enhancing our precision marketing capabilities for increased effectiveness and efficiency of our consumer-facing investments." Clearer now, right?! Essentially, they’re focused on doing more with less—less inventory, less marketing, less shipping, fewer people. You get the idea. And this leaner approach is expected to cost between $500-$700 million.
A few things stand out: Estée Lauder is struggling in Asia's travel retail market, mirroring a broader trend of reduced spending by Chinese consumers. While their gross margin has improved, operating expenses have gone up as a percentage of revenue—fewer lipsticks sold means higher costs per unit.
Then there’s the Dr. Jart+ investment. This South Korean skincare brand took a goodwill impairment hit of $471 million, about 42% of its 2019 purchase price. And here’s the kicker: these acquisitions were financed with debt. Estée Lauder’s debt sits at $7.74 billion, which is 59% of their total capitalization or 145.6% of equity. While they can cover these payments with operating cash flow, it’s still a hefty load. Not Revlon's levels of trouble, but it does limit their financial flexibility. Yet, you've got to admire their commitment to keeping those dividends flowing!
EL’s Earning Call Bingo: Green Shoots 1, PRGP 23, Travel Retail 35
The Real Real
The best you can say here is they lost less, but since they were never profitable, everyone seemed cool about that.
From the 10-K for Q2 2024: “Since inception, we have generated negative cash flows from operations and have primarily financed our operations through equity and convertible debt financing.” The debt level at quarter end was $442.7 million, and equity deficient was $335 million
Something may have changed changed. In February, the company entered into agreements with certain holders of its 2025 and 2028 Notes to exchange $145.8 million of the 2025 Notes and $6.5 million of the 2028 Notes for $135.0 million of the company’s 4.25%/8.75% PIK/Cash Senior Secured Notes due 2029 (the "2029 Notes"). The 2029 Notes carry an interest rate of 13% per year, with 8.75% paid in cash semi-annually and 4.25% as payment-in-kind (PIK) interest, also paid semi-annually.
This debt comes with significant strings for a company that needs debt to live. The company is restricted from creating liens or incurring additional debt, engaging in affiliate transactions, selling assets, making certain payments or investments, paying dividends, and merging with or into other entities. The notes are secured by a first-priority lien on most of the company's and guarantors' assets and are guaranteed by any future wholly-owned domestic subsidiaries.
Additionally, under the 2029 Notes Indenture, the company must maintain liquidity above $25 million on the last day of any month. This liquidity is calculated as the sum of unused borrowing capacity under any revolving credit facility or similar financial arrangements (considering any borrowing limits) plus the total unrestricted cash and cash equivalents held by the company and its subsidiaries. There are additional mentions of clauses to consider the company in default and make the debt immediately collectible.
Since the business model doesn’t seem to make money, maybe someone will buy them for the operations. Hello, anyone listening? It only takes several million dollars.
News and Crazy Things
Retail Pessimism
Speaking of Chinese Consumers, Hong Kong retail property owners are pessimistic about the return of luxury brands paying high rents.
Temu’s parent company, PDD Holdings, is sitting on cash and not sharing. With only the warning that record profits can’t continue, investors are getting suspicious.
Conferences and Networking
ICSC: Orlando
It was my first visit. I'm sorry if I missed you. Still getting my networking chops and my timing.
GlobeSt. Women of Influence:
Tahoe, investors, brokers, and great panels.