Estee Lauder cuts promotions as luxury fragrances help lift outlook

By Arriana McLymore and Anuja Bharat Mistry

Nov 2 (Reuters) - Estee Lauder is cutting promotions and ramping up brand investment as its turnaround gathers pace, CEO Stephane de La Faverie said on Monday after the cosmetics maker raised annual forecasts.

A willingness among affluent consumers and younger shoppers to spend on prestige beauty products has boosted demand for luxury fragrance brands such as Le Labo, Tom Ford and Jo Malone London, as well as skincare products, despite broader economic uncertainty.

Mainland China is a bright spot in Estee Lauder's turnaround efforts. The company expects strong organic sales growth from new and existing products following increased consumer-facing investment.

"We are accelerating our top of the funnel investment to build the desirability, build the awareness of our brand," de La Faverie told a media call, adding to previous plans to reduce discounts and promotions in China.

"While there continue to be offers that we are giving to the consumer, we are really focusing on creating desirability ... and to be less reliant on promotion overall everywhere around the world," he added.

Estee Lauder hopes its cosmetics category will return to growth next quarter as brands including MAC and Tom Ford makeup gain market share in mainland China, after gains for fragrance and hair care.

"We are turning the volume into value share," de La Faverie said. "When it comes to makeup and skincare, we have more work to do."

Analysts say Chinese consumers are becoming more selective in their luxury spending and increasingly favor brands that build local relevance.

Luxury groups including Gucci owner Kering, LVMH and Hermes are facing challenges from the expanding conflict in the Middle East and China's tax crackdown on wealthy shoppers, adding to pressure from weak demand in key markets including China and the US.

Prestige beauty products have proved more resilient. New York-based Estee Lauder said it would be more aggressive in gaining prestige fragrance market share in the coming year. Prestige products are priced significantly above ‌mass-market cosmetics.

"Strong organic sales growth in China shows pockets of opportunity exist amid the broader luxury slowdown and aspirational demand is shifting from expensive goods to entry-level categories such as beauty," said Sky Canaves, an analyst at eMarketer.

In the Americas, Estee Lauder's organic sales were up 4% compared with a 2% decline a year ago. Organic sales in China increased 9%, matching the growth rate recorded a year earlier.

Analysts expect Estee Lauder, which has said acquisitions are a way to reshape its portfolio across geographies, categories and price points, to focus on smaller niche deals after ending talks to buy Spanish fashion and beauty group Puig.

The company expanded distribution through Amazon's US Premium Beauty store and platforms such as Shopee and TikTok Shop, Tmall and Douyin, helping drive online organic sales.

Online channels are a way to retain customers, while brick-and-mortar stores provide experiences that will lure customers to core and innovative products, de La Faverie said during a call with analysts. Travel retail sales are "stabilizing to a slight positive" globally, he said.

Increased net sales from Beijing and Shanghai airports, and online travel retail sales in Hainan helped boost growth in Estee Lauder's Asia/Pacific region.

"Geopolitical tensions add uncertainty to the general consumer spending outlook, somewhat clouding overall visibility, in our view," Telsey Advisory Group analyst Dana Telsey said in a note.

Under the "Beauty Reimagined" turnaround strategy, Estee Lauder has focused on accelerating innovation, expanding into new channels and markets, using AI to improve consumer insights and marketing, increasing consumer-facing investment, streamlining operations and cutting costs.

The company expects fiscal 2027 organic sales growth of 4% to 5.5%, compared with its previous forecast of 3% to 5%.

It forecast annual adjusted profit of $3.20 to $3.45 per share, up from a prior range of $3.10 to $3.35.

The company's shares, up nearly 4% this year, dipped about 1% in morning trading.

First-quarter sales rose 7% to $3.72 billion, topping analysts' expectations for a 5% increase to $3.65 billion, according to LSEG data.

Adjusted profit of 72 cents per share beat estimates of 51 cents.

(Reporting by Arriana McLymore in New York City and Anuja Bharat Mistry in Bengaluru; Editing by Louise Heavens, Mark Potter, Rod Nickel)