Welcome to Rebound Capital. Here we conduct deep research into beaten-down stocks and study companies that made a successful comeback. Subscribe for free and join 4,800 other investors to make sure you don’t miss our next briefing:
A quick update before we jump in — Our drawdown watchlist continues to perform strongly (+7.5% vs. 4.1% S&P 500). On average, our buy recommendations have now 3.6x the return of the S&P 500. The GLP portfolio experienced a significant swing yesterday, losing 12% after the Novo Nordisk earnings call (which we will cover soon).
As always, here is our complete tracker in one place.
Starting Saturday, Rebound Capital will transform into a complete investment platform. In case you missed it, please read the below report before August 2nd.
Actionable insights
If you are in a rush, here’s what you should know about Estée Lauder Companies:
What they do: Estée Lauder is a leading brand in cosmetics, skincare, and fragrances with sales across the world.
Why it crashed: Extreme reliance on the Chinese markets, incompetent management, and competition from new brands.
Possible catalysts: New CEO with a turnaround plan, internal restructuring, and renewed marketing campaigns.
Estée Lauder is a leading prestige beauty conglomerate with brands spanning cosmetics, skincare, and fragrances. The company was founded in 1946 and now sells its products in ~150 countries under brands such as Estée Lauder, Clinique, M·A·C, Bobbi Brown, La Mer, Aveda, Jo Malone London, TOM FORD, etc.
Skincare accounts for the majority of the company’s revenue (51%), followed by makeup (28%) and fragrances (16%).
An interesting aspect is that the company has grown predominantly through the acquisition of emerging brands. They are exceptionally good at acquiring a small brand and then scaling it globally. Another fun fact is that despite the name, it’s an American company.
What went wrong:
The company has been in a structural drawdown, having dropped close to 80% from its all-time highs in early 2022. But to understand what went wrong, we first have to understand what went right (at least for a short while).
Estée Lauder made substantial investments in the Asia market starting in 2010. They established a $1 billion manufacturing facility in Japan, an innovation center in China, and a distribution facility in Switzerland — all aimed at capitalizing on the strong growth in China’s premium beauty market.
This approach proved exceptionally effective, enabling the company to capture a substantial market share in China, with the stock increasing by over 400% in just seven years. But then, during the pandemic, Chinese tourism and travel retail came to a halt. More damagingly, even after COVID restrictions lifted, Chinese consumer spending did not rebound as expected. By some estimates, a staggering 93% of Estée Lauder’s recent sales decline is traceable to Chinese consumers.
Critically, Estée Lauder relied on the “daigou” grey-market channel – i.e., Chinese travelers buying duty-free cosmetics in places like Hainan (China) and South Korea to resell back home. This had been an enormous unofficial sales channel (worth an estimated $81 billion globally) that boosted EL’s revenue and margins prior to COVID.
When COVID hit, travel stopped, and this business collapsed. And just as travel was resuming, China’s government cracked down on daigou reselling, cutting off one of EL’s most important sales levers.
The final nail in the coffin was that Estée Lauder’s management was not fully transparent about their true exposure to China until their earnings report was released.
For example, as late as fall 2022, CEO Fabrizio Freda was still forecasting a solid rebound, which didn’t materialize, forcing an abrupt U-turn in guidance in spring 2023.
In early 2024, a judge ruled that EL must face a shareholder lawsuit alleging it defrauded investors by “massively understating its exposure to the Chinese grey market”.
Rebound Catalysts
As we discussed in our last report, the company has some catalysts and is showing signs of a revival. The company is up 82% from its April’25 lows.
The new CEO of the company, Stéphane de La Faverie, unveiled a plan called Beauty Reimagined to restore sustainable sales growth.
The company has also started an internal restructuring with a 5,000 to 7,000 job cuts to save costs.
Even though the sales are declining, the restructuring seems to be working, with the company beating analyst expectations for its latest quarter.
Rebound Potential
While strong catalysts are a good sign, here’s how Estée Lauder (EL) fares on our quality rubric:
1. Are the fundamental issues with the company cyclical or secular?
While there is always debate on this, our take is that the issues are more structural than cyclical. Using Covid as a cover for its sales drop does not hold up to scrutiny.
Daigou channel crackdown: One is EL’s strategic overexposure to the daigou channel and travel retail – a structural choice that boosted past growth but has permanently changed post-crackdown. The daigou model may not return to its former glory, meaning EL must adapt its distribution in China (shifting more toward direct local sales, which could be less profitable than selling via duty-free)
Changing consumer preferences: EL’s brands are storied, but some have struggled to resonate with younger consumers lately. Indie brands and influencer-led products like Rare Beauty, Makeup by Mario are capturing the zeitgeist and growing rapidly.
Declining sales: According to the latest earnings report, the company was not even able to grow one of its product categories, and the overall revenue was down 10% and operating income down 27% YoY.
2. Is the unit economics profitable?
Estée Lauder’s unit economics have historically been very strong, though recent missteps dented profitability. Prestige cosmetics enjoy high margins: EL’s gross margins were around 76–78% at peak, reflecting the hefty markups on beauty products.
However, the demand shortfall in Asia resulted in EL having excess inventory in the channel. Products piled up in warehouses when Chinese travel customers vanished, and these cosmetics risked going unsold or becoming obsolete. Estée Lauder had to heavily discount its inventory, especially in prestige skincare, where brand exclusivity and pricing power are crucial.
The result was significantly weaker margins. In fiscal 2024, adjusted earnings per share were only $2.59, down 64% from $7.24 in 2022.
3. How significant is the capital investment risk?
Capital investment risk for Estée Lauder comes less from physical capital expenditures and more from strategic investments (acquisitions, brand development, inventory, etc.). While the business in itself isn’t very capital-intensive, the way the company has allocated capital in recent years is concerning.
Recent brand acquisitions have faltered: EL paid $1.45 billion for Too Faced in 2016 and $1.1 billion for Dr. Jart+ (K-beauty brand) in 2019. Too Faced’s initial momentum stalled, and Dr. Jart+ faced such struggles that EL wrote off approximately $800 million in impairments. In 2022, EL made its largest purchase to date: the Tom Ford brand for roughly $2.8 billion. The company overpaid for the brand and later recorded $773M of Tom Ford intangible impairments.
Share buybacks in 2021: While you can argue that this is hindsight bias, given that the company already knew how much they were dependent on the Chinese market, I would argue that they shouldn’t have allocated so much to buy back the stock near its all-time high.
4. How strong are the company’s financials?
While the overall financial health is sound, there is an increasing amount of stress on the company's financials. Estée Lauder’s long-term debt more than quadrupled in the last decade as it bought Too Faced, Dr. Jart+, Deciem, and Tom Ford.
While the company has traditionally succeeded by acquiring and scaling brands, it has struggled to do so in recent years. The rising debt, combined with decreasing revenue, means that the company's options will become limited going forward unless it makes a rapid turnaround.
5. Is the management clear about the challenges?
The management's transparency record is mixed.
For example, as late as fall 2022, CEO Fabrizio Freda was still forecasting a solid rebound, which didn’t materialize, forcing an abrupt U-turn in guidance in spring 2023.
The company is now facing a U.S. shareholder lawsuit alleging it misled investors about the severity of the daigou crackdown’s impact. The suit claims ELC “concealed its overdependence” on gray-market sales and failed to timely reveal why its Asia revenues were truly faltering. Internal reports indicate ELC even had a dedicated team analyzing daigou sales, underscoring how central this channel was to its business.
Adding to this, there was brewing family drama last year (since 85% of the voting rights still belong to the family), where Jane Lauder called for her cousin’s Ouster at Estée Lauder.
The only silver lining is that the new management has been more candid about the challenges and is focused on fixing them. They brought in a new CEO, Stéphane de La Faverie, effective January 2025, to lead the turnaround. The incoming CEO and remaining leadership have laid out a clear turnaround plan: they’re accelerating innovation (more product launches to reignite consumer interest), introducing new luxury-tier offerings, and implementing a comprehensive restructuring dubbed “Beauty Reimagined” to streamline operations and cut costs.
6. Is the current valuation attractive?
After an ~80% stock price collapse, Estée Lauder’s valuation has dramatically compressed from its previous premium levels. While you can experiment with the DCF metrics here, assuming mid-single-digit revenue growth from FY2026 and margin recovery to the mid-teens, along with capex at around 5% of sales, will yield a DCF valuation of roughly $75–90 per share, which is in line with the stock's current trading price.
Even the bull case, which assumes a stronger China recovery plus efficiency gains, puts the stock at $120 per share (30% upside).
So, where does that leave us?
While the brand is strong and has a new CEO with a turnaround plan, for us, the risks outweigh the upside. Competition from new brands, a clampdown on the daigou grey-market channel, and a high debt load mean that there is no easy way out for the company. It will take at least one to two years for us to judge if the turnaround plan is working and whether they can attract a younger crowd.
At the time of writing, Estée Lauder is worth $33 billion. For a company worth $133 billion at its peak, we still have a long way to go for them to reclaim their former glory.
While there is some decent momentum for the company, there is no reason to jump in right now, as we will have a lot more opportunities to get in once we have stronger signals of a rebound.
If you found this interesting, please share this report with a friend.
Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research