Class Action Alleges Estée Lauder Misled Investors About Supply Chain Issues Linked to Asian Travel Retail Markets

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A proposed class action alleges Estée Lauder Companies Inc., CEO Fabrizio Freda and CFO Tracey Travis artificially inflated the cosmetics giant’s stock price by failing to disclose to investors issues plaguing its Asian travel retail business and supply chain management.

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The 28-page lawsuit says that travel retail, which includes sales made at duty-free stores in airports or on cruise ships, has for years been a critical part of Estée Lauder’s success in the Asian market. According to the case, the company’s travel retail business has largely relied on a specialized reselling industry in China and Korea, where resellers travel abroad to purchase large quantities of Estée Lauder products from duty-free shops and resell the items back home for a profit.

“Such reselling, referred to as the ‘daigou’ industry in China, has long helped Estée get its products into the hands of end consumers,” the filing says.

However, in the beginning of 2022, tighter governmental regulation of the daigou industry forced resellers to purchase fewer Estée Lauder products, the complaint shares. Per the suit, this reduction in travel retail sales caused inventory pile-ups that made Estée Lauder mark down its prices, leading to lower revenues and profit margins.

The case alleges that despite “persistent problems” in Estée Lauder’s Asia travel retail business, the defendants continuously omitted these issues, and misrepresented the company’s revenue growth, in public statements released between February 2022 and October 2023.

For example, when Estée Lauder announced its financial results for the second fiscal quarter of 2022, Freda stated on a February 2022 earnings call that the company was prospering “with Chinese consumers as well as in global travel retail” and that they were “excited about the long-term growth opportunity in the vibrant Asia/Pacific region,” the lawsuit relays.

As the case tells it, information about Estée Lauder’s true financial condition began to emerge through a series of disclosures in late 2022 and 2023, each followed by a decline in the company’s stock price.

For instance, in a press release published on February 2, 2023, the defendants stated they were lowering their outlook for the fiscal year due to inventory issues and disruptions in the company’s travel retail markets, the filing relays.

“However, [the defendants] continued to misrepresent the company’s business position,” the suit says, noting that on an earnings call that same day, Travis said inventory levels in China were “still coming down” and “almost at the level that we would expect sales to accelerate.”

The filing says the truth about Estée Lauder’s business prospects was finally revealed in full on November 1, 2023, when the company announced its financial results for the first quarter of 2024. 

“As part of these results, the company disclosed a decline in sales driven by a persistently slow recovery in its Asia travel retail businesses and overall slow recovery in its China markets, revealing to investors that promised rapid growth in those markets was still far off,” the complaint relays. “[The defendants] admitted that Estée’s high inventory levels had prevented it from effectively responding to market developments.”

Also that day, Estée Lauder revealed that it had slashed its net sales projection for fiscal year 2024 and had been forced to expedite a “profit recovery plan,” the case shares. Upon this news, the company’s stock fell 19 percent, to about $104.51 per share, the suit says.

“As a result of [the defendants’] wrongful acts and omissions, and the resulting decline in the market value of Estée’s stock, [the plaintiff] and the class suffered significant losses and damages under the federal securities laws,” the complaint summarizes.

The lawsuit looks to represent anyone who purchased or otherwise acquired Estée Lauder’s common stock between February 3, 2022 and October 31, 2023 was damaged upon the revelation of the alleged corrective disclosure.

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