Estee Lauder ratings downgraded by S&P Global due to prolonged business recovery

Investing.com -- S&P Global Ratings has downgraded the ratings of Estee Lauder (NYSE:EL) Cos. Inc., citing a prolonged business recovery, primarily in Asia. The ratings agency has revised its forecast downward, expecting the company’s turnaround to take longer than previously anticipated.

Estee Lauder’s credit metrics remain higher than historical levels, and the inclusion of an additional $700 million-$900 million in restructuring charges is expected to increase leverage to about 3.5x by the end of fiscal 2025. Consequently, all ratings, including the long-term issuer credit rating and unsecured issue-level ratings, have been lowered to ’A-’ from ’A’. These ratings have been removed from CreditWatch, where they were placed with negative implications on October 31, 2024.

The downgrade reflects S&P Global Ratings’ expectation for leverage to remain above 2x in fiscal 2026, after peaking in the mid-3x area in fiscal 2025 due to ongoing sales and profitability declines. The ratings agency’s adjusted leverage, excluding the restructuring charges, is estimated to peak near 2.5x. This forecast represents a deviation from prior projections, which had anticipated credit metric improvements in fiscal 2025 after the company’s highly profitable travel retail business in China began to decline rapidly in fiscal 2023.

Estee Lauder reported a 6% decrease in reported net sales in the second quarter of 2025, which ended on December 31, 2024. The decline was primarily driven by a 12% decrease in skincare, 8% decrease in hair care, and a 1% decrease in makeup. These declines were not offset by a 1% growth in fragrance. The company also took a substantial impairment charge of $170 million on Tom Ford (NYSE:F) makeup and $549 million on Tom Ford Fragrance, which were previously expected to grow under Estee Lauder’s ownership.

In response to these challenges, Estee Lauder announced a cut to its dividend by approximately 47% in the second quarter of 2025 to preserve cash flow and reduce its net leverage ratio. Capital expenditures, which have been high over the past two years to fund growth projects in Asia, are expected to be cut from the original guidance of $800 million for fiscal 2025 to $630 million. As a result, free operating cash flow is forecasted to improve from $700 million in 2025 to $1 billion in 2026.

Estee Lauder’s operating results continue to be negatively affected by weakness in its travel retail channel, primarily in the Hainan province and Korea. The highly profitable travel retail business, which accounted for about 30% of the company’s total sales at its peak, has come down significantly to below 20%. S&P Global Ratings expects Estee Lauder’s performance in this segment to continue to decline through fiscal year 2025.

The company is also dealing with changes in its management team, which includes two internal hires to replace its former long-time CEO and chief financial officer (CFO). The new management team has cut the dividend, removed full-year financial guidance, and announced an expansion of its restructuring program, which includes the removal of 5,800 to 7,000 positions.

Estee Lauder’s outlook remains negative, reflecting the possibility of further ratings downgrades within the next 12-18 months if operating performance and credit metrics do not improve.

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