Estee Lauder ratings downgraded by Moody’s due to recovery delays

Investing.com -- Moody’s Ratings has downgraded the issuer and senior unsecured note ratings of The Estee Lauder Companies Inc (NYSE:EL). (Estee Lauder) from A2 to A3. The senior unsecured shelf rating has been changed to (P)A3 from (P)A2, and the commercial paper rating is now P-2, down from P-1. Moody’s has also given Estee Lauder a negative outlook.

The downgrade is a result of a slower-than-expected recovery for Estee Lauder’s current weakened credit metrics. This is due to the soft Asia travel retail market, an expanded Profit Recovery and Growth Program (PRGP), and uncertainties related to tariffs and global economic challenges. These factors will postpone the recovery of credit metrics compared to Moody’s expectations during the last downgrade in November 2024. The downgrade also reflects the concentration of profits in the skin care market.

The negative outlook is due to the lack of clarity regarding the timing of profit improvements. This is caused by uncertain macro and trade conditions, and the risk associated with the execution of growth and margin turnaround initiatives.

As of March 2025, Estee Lauder’s gross debt-to-EBITDA leverage was high for the rating at 4.4x. Moody’s expects this leverage to decrease as savings from the PRGP are realized. However, with significant restructuring actions continuing into fiscal 2026, a significant profit and leverage recovery is only expected in fiscal 2027. The company’s net leverage is more moderate at 3.23x, considering the company’s cash balances.

The A3/P-2 ratings reflect Estee Lauder’s strong global market positions in prestige beauty, supported by a portfolio of well-recognized brands. Moody’s believes that Estee Lauder’s strong brands, revamped approach to channels and marketing, cost savings and growth initiatives, and continued investment in product development will position it for revenue, profit, cash flow, and leverage improvement over time. Margins are expected to begin to increase in fiscal 2026 as cost savings from the company’s PRGP are realized.

Estee Lauder is aiming to reduce its total employees by 5,800 to 7,000, with about a third of this reduction expected to be achieved by the end of fiscal 2025. This indicates that significant restructuring initiatives will extend into 2026. The execution of these initiatives carries some risk and will take time, while leverage will remain high for the current rating until improvements can be realized.

The company maintains excellent liquidity with $2.6 billion of cash on the balance sheet as of March 31, 2025, an undrawn $2.5 billion revolver, and an undrawn $1 billion 364-day facility with a term out option. The company has halted share repurchases and lowered its dividend to align the payout with current lower earnings. Moody’s expects the company to generate roughly $250 million to $350 million of free cash flow over the next 12-18 months.

Estee Lauder’s credit impact score is CIS-2, indicating that ESG considerations are not material to the rating. The main environmental risks for Estee Lauder stem from sourcing inputs and managing waste and pollution from the manufacturing process and packaging. Social risks come from the need to continually adapt to ongoing and potential future changes in end-consumer preferences and manage a broad and complex global supply chain.

Estee Lauder’s ratings could be upgraded if the company maintains its strong global franchise of beauty brands, sustains strong profitability and free cash flows, and successfully executes growth and margin enhancement plans. A better balance of profits by geography and category to reduce the concentrations that have contributed to operating volatility would also be necessary for an upgrade. The company would also need to demonstrate a sustainable improved EBITA margin, debt-to-EBITDA sustained below 3.0x, and a commitment to conservative financial policies to be upgraded.

The ratings could be downgraded if the company does not stabilize and improve operating profits and free cash flow due to factors such as competitive pressures that weaken market shares, shifting consumer behavior, price erosion, cost increases or failure to see benefits from its PRGP plan. Estee Lauder’s ratings could also be downgraded if it does not demonstrate progress toward achieving debt-to-EBITDA of 3.5x or below or the company adopts a more aggressive financial policy such as through significant share repurchases or large debt funded acquisitions.

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