Estee Lauder Companies Inc (NYSE:EL) (EL) would be wise to move quickly to geographically realign operations and revenues, investing in technology and supply chain to support future growth, Barclays Capital analysts wrote in a note published on Wednesday.
They lowered their target price on EL shares to $210 from $230, while maintaining an ‘Outperform’ rating on the stock, saying the provider of prestige beauty products should “seize the moment”.
“If we had to summarize how Estee Lauder ended up in the situation it is in, we believe the two biggest issues are poor demand forecasting and a lengthy legacy supply chain,” the analysts said.
“The way we see it, these are specifically operational challenges to work through and not related to EL’s brand equities, which we believe remain strong.”
The analysts at Barclays believe Estee Lauder’s longer-term structural growth drivers and algorithm are still intact, but assert that more needs to be done, and quicker.
First, they suggest scaling its Japan operations faster or add another manufacturing site in Asia.
Sakura is expected to be Estee Lauder’s largest manufacturing facility worldwide, the analysts wrote, and will likely span multi-categories, with Asia Pacific expected to be about 32% of total company sales in fiscal 2023, and Asia Travel Retail another 16% of total company sales.
As well, they believe improving EL’s IT capabilities can carry the company through the next decade, which would boost its forecast accuracy and demand planning capabilities and overall enable Estee Lauder to operate in an increasingly complex business environment in terms of stock keeping units (SKUs) and channels of distribution.
Finally, Barclays Capital analysts wonder if Estee Lauder needs to make changes to its organizational structure to improve communication and accountability, as part of the challenges over the past year could have been related to some sort of break down in communications between the Travel Retail affiliate, Supply Chain functions and Corporate such that orders were allowed to continue to be placed despite a slowdown in demand.
Contact Sean at sean@proactiveinvestors.com