With the stock price down so much, investors want to know what is driving the profitability plunge and whether Estée Lauder has what it takes to turn things around.

Not all growth is sustainable

Estée Lauder is a textbook example of the pitfalls of overexpansion. The company has a highly complex business regarding product lines and how it markets and sells those products. Methods of sale include online, direct-to-consumer, third-party online malls, authorized retailer websites, brick-and-mortar retail stores, department stores, salons, and spas. With so many moving parts, Estée Lauder faces the challenge of building those distribution and manufacturing partnerships while also trying to forecast customer demand. The pandemic threw a wrench in even the best forecasters' models. But in hindsight, Estée Lauder clearly overestimated the boom in skin care and cosmetics.

Looking at Estée Lauder's figures from the table in the prior section, you'll see that its sales aren't even down that much. Rather, it's the profitability that has fallen off a cliff. When that kind of drop-off happens, it usually means a business is betting too aggressively on a specific outcome -- in this case, strong consumer spending across multiple touchpoints and all geographies. Estée Lauder set itself up for amplified gains or losses based on demand. Unfortunately, demand worked against it, which magnified operating losses.

A comparison would be a highly leveraged oil and gas company that can make bank if oil prices are above a certain level. But if prices are below that level, the losses begin to pile up -- quickly.

A turnaround play worth considering

The cosmetic industry has been hit hard by a slowdown in consumer spending and competition. Estée Lauder's bulky marketing strategy left it particularly vulnerable to a downturn -- which is why the stock has sold off in dramatic fashion.

I think Estée Lauder has fallen far enough and stands out as arguably the single most compelling turnaround play in the entire sector, but that's only because of the confidence I have in its brands.

Management has made blunder after blunder -- giving investors every reason to sell the stock. And when a stock falls by this much in a relatively short period of time, that means many investors have already gone for the exits.

Buying Estée Lauder now is a bet that the worst is over for the company, but there is little evidence that this is true. On Oct. 30, Estée Lauder appointed a new CEO and executive chair to take the company's helm on Jan. 1, 2025. On Oct. 31, the day Estée Lauder reported its abysmal first-quarter fiscal 2025 earnings, it slashed its quarterly dividend from $0.66 per share to $0.35 per share to have more financial flexibility.

There's a great deal of uncertainty facing the company right now, but the good news is that much of the damage seems to be self-inflicted. If Estée Lauder can refine its marketing and distribution strategy, right-size its supply chain, and benefit from an uptick in consumer demand thanks to lower interest rates, it could be a catalyst for return to growth. Some investors may prefer to buy the stock now, whereas others may prefer to take a wait-and-see approach to ensure the company is on the right track before diving headfirst into a falling knife.

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Daniel Foelber has positions in Estée Lauder Companies and has the following options: long December 2024 $60 calls on Estée Lauder Companies, long January 2025 $90 calls on Estée Lauder Companies, and long March 2025 $90 calls on Estée Lauder Companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

At a 10-Year Low, Is It Finally Time to Buy This Former Blue Chip Dividend Stock? was originally published by The Motley Fool