The Estée Series: 2-Who will take on the company?
Complacency, poor performance and a series of profit warnings have made the Estée Lauder Companies lose two thirds of its value in two years. America’s biggest beauty group is perceived as a sitting duck waiting to be taken on, stock market investors say. The Estée Lauder Companies is the ideal target for a group such as LVMH or for an activist fund to come in, build up a stake and push for change to drive up the value of the shares, industry sources and investors say.
There is no evidence so far that one or more activist funds are building up a holding in the U.S. beauty giant, but many investors are betting on it happening. “At this depressed level, the stock could attract an activist investor or a potential buyer,” the manager of a major Canadian investment fund told Miss Tweed this week. “That’s why we’ve recently bought the stock.” The most obvious buyer is LVMH but a deal is not on the cards, sources close to the French luxury group said. At least not yet.
The world’s biggest luxury goods group is still digesting its purchase of Tiffany & Co. for which it paid $15.8 billion. Estée is worth $43 billion, three times the size of America’s best-known jeweler. LVMH has been admitting to investors that the integration of the U.S. jeweler had not been as smooth as hoped, investment firms say.
After LVMH completed the acquisition of the American jeweler in early 2021, within a month more than 200 senior managers left the New York-based company with golden parachutes, the equivalent of two years’ salary, several sources close to the group said.
“Some departures were quite expensive,” one told Miss Tweed this week. “This has put a lot of pressure on our management resources. LVMH’s talent pool is not endless. The group does not have the talent now to run Estée Lauder if it bought the company. Plus, some of its beauty brands are not worth that much anymore and some, like Clinique, work well mainly in the U.S.”
CULTURAL DIFFERENCES
Buying Tiffany has inoculated LVMH against big U.S. acquisitions for the foreseeable future, several people close to LVMH say. “Also, there are pretty important cultural differences between the American way and the French way and these have made integration all the more difficult,” one person close to the group said. LVMH’s investments in Donna Karan and Marc Jacobs have not been success stories. The group sold Donna Karan and DKNY, its more accessible line, in 2016 and has had to work hard to restructure Marc Jacobs, which lost money for years.
In recent days, LVMH has been telling fund managers that the integration of Tiffany & Co. was not as smooth as had been hoped, and the company’s performance was disappointing, analysts and investment firms say. The current downturn in luxury spending has also taken its toll, the reason that the company’s sales were under pressure, LVMH has told investors.
The French group did a great job in creating hard-hitting advertising campaigns with pop stars Beyoncé and Jay-Z to enhance the brand’s profile and desirability. It dominated headlines with the re-opening of its glitzy New York flagship store in June. The group has ditched the brand’s low-priced products and successfully promoted its new high jewelry collections. Now the hard work begins and that involves having to refit and relocate dozens of boutiques in the United States and elsewhere. Overall, it is proving to be a tough test for the Tiffany team, including CEO Anthony Ledru, and Alexandre Arnault, the 31-year-old son of the LVMH chairman and controlling shareholder, Bernard Arnault, who is executive vice-president of product and communications.
“LVMH did the easy fix first,” one luxury goods analyst told Miss Tweed on condition of anonymity. “Now comes the difficult part. It’s about working on collections and on the concept, the layout and location of boutiques.” Hence, LVMH is unlikely to come forward to buy Estée Lauder. Nor should investors bet on Kering or Richemont making a bid either. Neither of the luxury groups would have the money or the managers to run the company. A group of private equity firms could make a bid for the U.S. company, but that would be risky. They would face the same human resource problem.
In the absence of an obvious buyer, it is likely that one or more activist investors will build up, or are already building up, a stake in order to demand change. The slight rise in the company’s share price in recent days reflects that expectation, investors say. However, one wonders what pressure an investor will be able to put on the Lauder family since they own 35 percent of the company and 84 percent of voting rights. The activist funds Third Point and Bluebell Capital have made good profits trying to force Cartier owner Richemont to change its governance and strategy, as Miss Tweed reported last year. The reality is they did not get far. They faced resistance from the Richemont chairman Johann Rupert, who controls the Swiss group with 51 percent of voting rights.
On Friday, William Lauder, Leonard’s son and executive chairman of the company, restated his confidence in the current management and in the chief executive officer, Fabrizio Freda, who has been running the company for nearly 15 years and has pocketed hundreds of millions of dollars in the process.
“We are confident that the board, Fabrizio, and our company’s leadership, are taking the necessary measures to address near-term performance,” William Lauder said at the company’s annual shareholders’ meeting. “On behalf of the Lauder family, I want to reiterate to the board, our stockholders and our employees that we remain steadfast in our commitment to the long-term continuity of The Estée Lauder Companies as a family-controlled enterprise, because we see the enormous and exciting potential of this business.” However, company insiders say that behind the scenes there are disagreements between members of the Lauder family about keeping Freda on and about the company’s strategy. Leonard Lauder, 90, who officially retired from the board on Friday, leads the opposition and is in favor of hiring a new CEO, several internal sources said. His son William wants to keep Freda for now. At the AGM, Gary Lauder, 61, Leonard’s youngest son, a venture capitalist who was never involved much with the company, joined the board.
NEW CEO NEEDED
The Lauder family may not be willing to sell, but the minute they are LVMH might actually make a move, some analysts believe. However, one thing is certain: the company needs a new CEO and senior management team. Freda, who is 66, has become too focused on profitability and has not spent enough time and money on building the image and storytelling of the company’s brands, investors say. He has also let a grey market for the company’s products grow out of control in China. His priority is boosting sales, not building brand equity. “There’s been a progressive and steady pauperization of Estée Lauder’s brands,” said one senior manager who recently left the company. “But you cannot complain about it openly given the current corporate culture.” The strongest brands at Estée Lauder now are La Mer, Jo Malone London and Tom Ford. Most others have lost market share in recent years.
At Estée, everything is decided by three people, insiders say: Freda and executive group presidents Jane Hertzmark Hudis and Stephane de la Faverie, Freda’s right-hand man. Faverie is the manager who has received the most promotions in the past two years, they say. The affable 49-year-old French executive oversees many brands, including Jo Malone London and Aramis, on top of the Estée Lauder brand and niche perfume labels Editions de Parfums Frédéric Malle and By Kilian. Several internal sources at the company say Faverie has been groomed to replace Freda. That scenario appears less likely since Freda’s vision and credibility are being strongly questioned by the market.
Hertzmark Hudis, 63, is powerful in the company. Former staffers say she was the babysitter of Aerin and Jane Lauder, daughters of Ronald Lauder and granddaughters of founder Estée Lauder. A spokeswoman for the company denied this was the case. However, staffers say this is why she is so close to the family as she met them at a very young age. A protégée of Ronald’s brother Leonard Lauder, who ran the company for many years, she rose up the ranks and is now in charge of La Mer, Bobbi Brown Cosmetics, Tom Ford, Balmain Beauty, M.A.C., Clinique, Origins, Aveda and Bumble and bumble.
She is working on the launch of Balmain’s new line in September next year. Some industry analysts are concerned that future management upheavals could affect the much-awaited debut.
Jane Lauder, who is executive vice-president in charge of enterprise marketing and chief data officer, lost credit as a potential successor to Freda after having poorly managed Clinique. However, she is the second-biggest family shareholder of the company behind Leonard. Insiders at Estée Lauder say no-one in the Lauder family appears to have the right stuff to take over. Aerin, who launched her eponymous homeware and beauty brand in 2012, has not built a strong track record. Her Aerin brand never grew much beyond the United States and is not regarded as having a strong story behind it beyond that of its founder, a Lauder heiress and socialite. If the whole family finally comes to an agreement that Freda needs to go, it is likely that it will hire someone from outside the firm, industry analysts say.
PRESTIGE FRAGRANCES
An area in which the Estée company needs to boost its presence is fragrance. None of its brands are in the global top five, dominated by Chanel, L’Oréal’s Lancôme and LVMH’s Dior. In September, the company announced it would open a fragrance unit in Paris called the Atelier by the end of 2024. “The Atelier will further accelerate ELC’s strategic ambitions in luxury and prestige fragrances, supporting the Company’s existing enterprise-wide fragrance capabilities to help drive breakthrough innovation, speed-to-market, and artisanal quality at scale, leveraging synergies across the brand portfolio,” it said in a statement. Meanwhile, Coty has also been increasing its presence in Paris, moving the center of gravity from New York to the French capital. In September, the New York-listed company obtained a dual listing in Paris.
Over the years, the Estée company has closed or sold several poorly performing businesses. At the end of June this year, it did not renew its license with the brands Tommy Hilfiger, Donna Karan, DKNY, Michael Kors and Ermenegildo Zegna. In 2021, it closed the Australian cosmetics brand Becca and the Rodin olio lusso skincare line. In 2020, it discontinued the North America-focused cosmetics line Prescriptives. In 2019, it ended its license with Tory Burch and in 2016 with Italian fashion brand Marni, and in 2015 with Coach. You wonder how Estée Lauder is planning to regain lost territory in fragrance if it has shown that it was not able to successfully build the beauty and perfume business of some of America’s most important fashion brands. Even Tom Ford, its biggest success story to date, is poorly distributed, some industry sources say. Investors will have to make sure the company continues to invest in the Tom Ford brand, which it now owns, as well as in its retail network if it is to remain one of the main engines of the company’s future growth.