Shawn and I probably aren’t the first people you’d turn to for beauty advice, and honestly, we wouldn’t blame you. But here we are again. After diving into Ulta Beauty a few months back, we’re now turning our attention to another giant in the space: Estée Lauder.

Interestingly, Michael Burry, who’s probably just as clueless about makeup as we are, made Estée Lauder his only U.S. stock holding. That alone made us curious.

Let’s be honest: when the guy from The Big Short goes all in on a lipstick empire, you have to wonder: is he onto something, or just trying to make a value play look pretty? Either way, we decided to put on our investor goggles and dig in.

You’ll learn what’s behind the company’s struggles, what a turnaround might look like, and whether the stock offers an attractive setup today.

Let’s see if we end up agreeing with Burry’s bet.

— Daniel

Estée Lauder: Turnaround or Fall into Oblivion?

The Making of a Beauty Giant

Like many iconic beauty brands, Estée Lauder was named after its founder, or at least, close to it. Josephine Esther Mentzer was born in Queens, New York, to Hungarian and Czech immigrant parents.

Founders often trace their passion back to a formative moment, and for Esther, nicknamed Estée, that spark came early. Her uncle was a chemist who made creams and lotions, and she was captivated by his work. She learned how to mix formulas herself, then how to package and sell them. That’s when beauty met business, and she happened to be equally gifted in both.

Marketing, as we know it today, barely existed in the 1930s and 1940s. However, Estée evolved into a marketing pioneer. She was among the first to offer free product samples, a tactic now standard in nearly every beauty retailer.

The official start of Estée Lauder, the company, came in 1946. Just two years later, it landed its first major retail contract with Saks Fifth Avenue. That’s the same Saks Fifth Avenue, by the way, that has recently partnered with Amazon to launch a luxury offering on its marketplace. From there, the business took off.

Estée Lauder went public in 1995, when Estée was already 87 years old. By then, the company had grown far beyond the original brand. It had become a global beauty empire, expanding steadily in the decades that followed.

The Beauty Business Empire

Today, Estée Lauder owns around 20 brands, which it groups internally into four categories: Luxury Brands, Large Brands, Scaling Brands, and Developing Brands. These categories aren’t mutually exclusive. Brands can fall into more than one category at the same time. Tom Ford, for instance, Estée Lauder’s most recent and largest acquisition to date at $2.8 billion, is classified as both a Luxury Brand and a Scaling Brand.

Historically, Estée Lauder has had a solid track record of acquiring and scaling brands through its global network and operational scale. Clear home runs like La Mer and M·A·C stand out, with M·A·C growing from about $140 million in sales before the deal to an estimated $3 billion today. Jo Malone London, another standout acquisition from 1999, has since become a ten-bagger and remains a market leader, especially in Asia.

But not every deal met expectations, and the misses have become more frequent over the past decade. The $1.45 billion acquisition of Too Faced initially showed promise, with strong momentum between 2016 and 2018, but growth has since slowed. It’s still a meaningful brand, but it hasn’t reached the heights of Estée’s earlier successes. Others, like GlamGlow and Becca, acquired for a combined $400 million, fell short and were eventually written off.

The most significant disappointment, though, was Dr. Jart+. Acquired for $1.1 billion, it was Estée Lauder’s first major acquisition in Asia, aiming to tap into the rising popularity of Korean beauty among younger consumers. But the bet hasn’t paid off. At least not yet. Estée Lauder has since booked impairment charges of around $800 million, making Dr. Jart+ one of the costliest missteps in the company’s M&A history. And while bad acquisitions were only one of many pieces of Estée Lauder’s downfall, this serves as a great introduction to our next chapter…

The Downfall – Macro and Micro Mistakes

Yes, some of Estée Lauder’s more recent acquisitions didn’t pan out as hoped. But is that really why the company lost 80% of its market value… more than $100 billion?

The short answer is: no. The real damage came from a combination of structural and strategic missteps as well as external shocks, most of which can be traced back to one country that has rattled the entire fashion and beauty industry in recent years: China.

Estée Lauder’s Dependency on China

For years, Estée Lauder was praised for its aggressive expansion into China. Investors loved it. The country was both a growth engine and a margin booster. On paper, that heavy reliance wasn’t even obvious. Europe appeared to be the largest and most profitable market. But that wasn’t really the case.

Morningstar estimates that up to 93% of Estée Lauder’s recent sales declines can be traced back to Chinese consumers. So why doesn’t this show up more clearly in the numbers? That’s largely because of a practice called daigou.

Daigou is a grey-market system where individuals, often Chinese travelers or overseas residents, buy luxury goods abroad and resell them back home, usually at a markup that still undercuts local retail prices. For Estée Lauder, this evolved into a massive unofficial distribution channel, especially through duty-free hubs like South Korea and Hainan.

When COVID hit, this part of the business collapsed, just like everything else. But for a company as dependent on Chinese demand, the damage was far worse. China’s recovery lagged behind the rest of the world, lockdowns dragged on for years, and there was no wave of stimulus checks like in the U.S., which caused demand to decline meaningfully. And just as international travel was picking back up, the Chinese government cracked down on the daigou system, cutting off one of Estée Lauder’s most important sales levers.

To give you a sense of just how significant the daigou channel was, before the crackdown, it was valued at a staggering $81 billion. That’s not a rounding error. And when you’re one of the biggest beneficiaries of that system, like Estée Lauder, the impact is hard to overstate.

High-end luxury brands like Louis Vuitton always had a more complicated relationship with daigous. LVMH CEO Bernard Arnault once said, “For your image, there is nothing worse. It’s dreadful.” But Estée Lauder sits in a different position. It’s a premium brand, not true luxury. That distinction is subtle, but it matters, a topic Shawn and I unpacked in more depth during our LVMH episode.

The understatement of the importance of the Chinese consumer will now come to bite Estée Lauder a second time. Earlier this year, a judge ruled that Estée Lauder must face a lawsuit alleging that it defrauded shareholders by massively understating its exposure to the Chinese grey market.

Inventories, Margins, and Debt…

The daigou collapse and China’s sluggish recovery hit Estée Lauder hard, but every global beauty and fashion retailer faced these headwinds. Yet, none of them struggled as much.

One of the key issues has been rising inventory levels. We went into detail on why this matters in our Nike episode, but in short: when products don’t move, they pile up in warehouses, risk becoming obsolete, block new launches, and often have to be sold at a discount, damaging brand equity in a prestige segment where pricing power and exclusivity are everything. On top of that, excess inventory ties up working capital, hurting cash flows because cash is spent on goods that haven’t yet been sold.

But again, Estée Lauder wasn’t the only company facing this issue. What made it worse was that, for Estée Lauder, it became a perfect storm of rising inventories, shrinking cash flows, and a ballooning debt load. The acquisitions of Too Faced, Dr. Jart+, and Tom Ford caused long-term debt to nearly quadruple since 2016. Other companies saw similar challenges, but Estée Lauder’s margins and cash flows deteriorated far more sharply.

The main driver behind this deterioration has been the sharp decline in gross and operating margins. Instead of adjusting costs in response to falling revenue, Estée Lauder allowed both COGS and SG&A expenses to keep rising. As a result, gross margins dropped by 4% between 2021 and 2024, and operating margins were nearly cut in half, falling from 20% in 2022 to just 10%.

It’s hard to look at those numbers without seeing a degree of mismanagement. And maybe that’s part of the reason why things started to feel like a real-life episode of Succession, with some internal family drama added to the mix.

The Lauder Family Drama

While Estée Lauder passed away in 2004 at the proud age of 95, the company stayed in the hands of the Lauder family. To this day, it owns 85% of the voting shares. Perhaps that’s another point we should add to the list of risks. Most of the public face of the company has been William Lauder, Estée’s grandson, who has served as Executive Chairman since 2009. The CEO, though, was Fabrizio Freda, an outsider and former Procter & Gamble executive who had been running the company since 2009.

Fabrizio Freda was widely credited with driving Estée Lauder’s global expansion, and naturally, that included the aggressive push into Asia. So when the travel retail disaster unfolded and the company’s overexposure to China was laid bare during the pandemic, his standing weakened. While parts of the family still supported him, others began calling for more control and a strategic reset. I’ll spare you the full soap opera here — you can catch the details in our podcast — but let’s just say it gave Shawn, a big Succession fan, a glimpse of how corporate drama plays out in real life.

Jane Lauder, Estée’s granddaughter and long-time Executive VP, ended up resigning after being passed over for the CEO role. Instead, that job went to someone from outside the family, though not completely new to the company. Stéphane de La Faverie had been with Estée Lauder for nine years but wasn’t a Lauder by name. Around the same time, William Lauder, Estée’s grandson and Executive Chairman, also stepped down.

And just like that, for the first time in nearly 80 years, no Lauder family member holds an operational role at the company. But maybe that’s exactly what Estée Lauder needs right now — a breath of fresh air.

The Comeback Plan

As the new CEO, Stéphane de La Faverie now has to come up with a turnaround strategy. And for better or worse, he has two: The Profit and Recovery Growth Plan (PRGP) and the broader strategic vision dubbed Beauty Reimagined. The PRGP is essentially a major cost-cutting initiative. To be fair, it was launched back in 2023 before Stéphane officially took over, but he has since expanded it significantly in 2025.

The plan includes cutting between 5,800 and 7,000 jobs, trimming overhead, and outsourcing certain functions, all in an effort to generate annual pre-tax savings of $1.1 to $1.4 billion by fiscal 2027. But the path there isn’t painless. The company expects to incur between $1.2 and $1.6 billion in restructuring charges, most of which are just beginning to show up now. So, there’s still more turbulence ahead before those savings translate into actual results.

The second leg of the plan, Beauty Reimagined, is all about reigniting top-line growth. Estée Lauder wants to double down on prestige skin care and fragrance, expand distribution in growth channels like Amazon Premium Beauty and TikTok Shop, and better tailor product innovation to evolving consumer preferences. New collections have already launched at brands like M·A·C and La Mer, and they’ve opened freestanding fragrance stores to tap into one of the few bright spots in their portfolio.

Geographically, they’re working to reduce their overreliance on China, a key vulnerability exposed in recent years. That includes a reset of the Asia travel retail business, supply chain shifts away from U.S. sourcing to buffer against tariffs and geopolitical risks, and a broader push into markets like Japan and Southeast Asia.

I don’t know about you, but to me, all of this sounds somewhat familiar. It mirrors much of Nike’s recent turnaround playbook: not overly fixated on DTC, using platforms like Amazon to meet customers where they shop, and refocusing on innovation and product drops. Estée Lauder’s version leans heavier on cost-cutting, but the end goal is the same — a leaner, more agile, and more consumer-focused organization.

Whether this can translate into long-term success is hard to say, but there are early signs of progress. In the first three quarters of fiscal 2025 (remember, EL’s financial calendar is slightly ahead), gross margins expanded by more than 300 basis points, even as sales volumes remained soft. That points to improved operational efficiency, leaner inventory levels, and less need for heavy discounting or promotions.

That said, turnarounds are tough. Nike faced, and still faces, its own set of headwinds, but it benefits from structural strengths I don’t necessarily see with Estée Lauder. Then again, I’ll be the first to admit I lack the kind of deep consumer insight that someone more embedded in the beauty world might have. And there’s only so much you can glean from reading online reviews.

I know many of you also enjoy reading Michael Mauboussin’s work. And just a couple of weeks ago, he released a new paper discussing turnaround situations. As if he had known we would discuss Estée Lauder… Jokes aside, there was a great chart in there, showing how hard it is for a turnaround to come to fruition.

In this study, he looks at more than 30 years of corporate performance and categorizes companies by return on capital quintiles, from the best-performing to the worst. The study then tracked how these companies moved across quintiles over time: who stayed strong, who declined, and, most importantly for us, who managed to climb their way back up.

The takeaway? Winners tend to keep winning. Nearly half of the top quintile companies stayed there. But for companies in the bottom quintile, only 12% managed to rise all the way to the top. For those in the second-worst group, it was just 8%.

In other words, it’s statistically rare for struggling businesses to stage a full comeback, even if they were once leaders. But that’s also where the opportunity lies. If most companies fail to execute a turnaround and the market knows that, the few that do can produce outsize returns. Betting on a comeback means betting against the base rate, but also potentially catching a major re-rating.

Keeping that in mind, let’s get to the heart of this article!

Valuation – Is Burry right to invest in Estée Lauder?

After everything we've covered — the demand issues, the collapse of the daigou channel, bloated inventories, and the company’s restructuring and innovation efforts — the natural question is: What’s Estée Lauder worth?

Before the pandemic, Estée Lauder consistently delivered a net income margin of around 10%. In my base case, the assumption is that they gradually work their way back to that level, reaching it by the end of a five-year forecast period. Top-line growth, however, is expected to remain muted. Management has already signaled that 2025 will bring no revenue growth, but starting in 2026, the company is projected to return to modest growth mode.

When you look at the model, those big growth numbers for net income and EPS might make it seem like I’m betting on Estée Lauder turning into a growth company. But that’s not the case. EPS was $6.60 back in 2022, so even though the modeled growth rates look strong, $4.33 is still just about two-thirds of what the company earned three years ago. And we’re talking about four years into the future here.

I’ve also included an adjusted earnings line that accounts for restructuring charges and lawsuits. We didn’t cover the lawsuit in detail here because it’s not a major part of the investment case, but we touched on it briefly in the podcast.

For the 2029 exit multiple, I used 22x — well below both the adjusted long-term average of 30 and the current forward P/E of 44. Discounting at 8% and applying a 10% margin of safety gets me to a fair value of just under $60.

At the time we recorded the episode, that was about 20% below the stock price. Today, it implies closer to 30% downside. In my bull case, I arrive at a fair value of $102, which assumes a 3–4% CAGR in top-line growth, with sales picking up across all segments and 200 to 300 basis points of margin expansion, especially in skincare and fragrance.

I consider this a fairly conservative bull case, which is why I weighted it more heavily in my valuation than the bear case. The bear case, frankly, earns its name. It assumes only low single-digit growth in Fragrance and Skin Care and a meaningful decline in margins across all segments. That would imply a slow but steady erosion of the business — a scenario that becomes realistic if the brand fails to connect with younger consumers and can’t successfully reinvent itself.

Putting everything together, I land at a blended price target of $67. And with the stock still trading meaningfully above that level, Shawn and I chose not to add Estée Lauder to the Intrinsic Value Portfolio.

I have to admit, while researching the company, I was a bit surprised that Michael Burry placed such a big bet on Estée Lauder. I checked the timing, and the average price during his buying window was around $66. If that’s indeed when he bought, it gives me some confidence in my valuation — seems like he and I landed in the same ballpark. That said, even at that level, I wouldn’t call it a phenomenal opportunity. Sure, the stock could double (from $66) if the restructuring plays out perfectly. But there’s also a very real bear case, especially when you consider the weak financials, and in particular, the balance sheet.

In any case, I wish Burry the best of luck with his investment. Then again, maybe he’s already out. He’s not exactly known for sticking around.

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Weekly Update: The Intrinsic Value Portfolio

Notes

• A little Uber Fun Fact: I just came across an article by our Portfolio holding, Uber, about launching new transportation options in Italy, introducing Uber Boat in Capri and Uber Copter in Rome. Uber Boat offers on-demand water transfers and private tours around the island, while Uber Copter provides helicopter rides between Rome and coastal hotspots like the Amalfi Coast. The services are part of Uber’s broader push into premium and leisure travel across Europe. Riders can book both options directly via the Uber app, expanding the company’s presence beyond cars. These offerings are aimed at affluent tourists seeking faster and more scenic alternatives to traditional travel.
  

• Figma, the Adobe rival, is expected to IPO this summer. In 2022, Adobe was interested in acquiring the company for a price tag of $20 billion, but regulators halted the deal. Since then, the valuation has come down a bit. A tender offer in 2024 valued the company at 12.5 billion. However, after 46% year-over-year revenue growth in Q1, there’s a good chance the IPO buzz could help Figma reclaim some of that premium.

Quote of the Day

"When competing one-on-one, follow two simple rules: If you are the favorite, simplify the game. If you are the underdog, make it more complicated.”

— Michael J. Mauboussin

What Else We’re Into

📺 WATCH: Google I/O Key Note 2025

🎧 LISTEN: Stig Brodersen and Guy Spier discussing Living by an Inner Scorecard

📖 READ: Michael Mauboussin – Drawdowns and Recoveries

You can also read our archive of past Intrinsic Value breakdowns, in case you’ve missed any, here — we’ve covered companies ranging from Alphabet to Airbnb, AutoZone, Nintendo, John Deere, Coupang, and more!

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