Beauty may be only skin deep, as the murdered British poet Sir Thomas Overbury wrote in the early 1600s, but the desire for it is far more pervasive.
That, combined with the relative affordability of luxury cosmetics, should insulate Estee Lauder from economic challenges like those faced by consumers in China, a significant source of the New York-based company's growth, Chief Executive Officer Fabrizio Freda told investors Wednesday.
Estee Lauder's sales in the world's second-largest economy accelerated during the three months through September, despite the country's slowing growth and tariffs imposed on American products in retaliation for President Trump's duties on Chinese goods. The company's total sales climbed 8 percent to $3.52 billion, exceeding its revenue targets.
While executives are wary of the potential dampening effect of the trade dispute on its China sales, "we have not seen any slowdown" yet, Freda noted.
The "amazing interest for luxury beauty" among China's expanding middle class is unlikely to disappear, he added. "It may be variable or volatile because of economic trends in the short term or because of tariff implications or any other aspect, but it will not change, in our opinion, for the long term."
The White House has imposed duties on $250 billion of Chinese imports so far in an effort to force Beijing to negotiate more favorable trade terms with Trump. The 10 percent levies on $200 billion of those goods, which began in late September, are set to more than double to 25 percent in January, and Trump has threatened levies on another $267 billion in products.
Chinese President Xi Jinping's government responded to many of the initial U.S. tariffs with retaliatory duties, including on U.S. agriculture and beauty products, but that won't be possible with all of them, given the substantial trade imbalance between the two nations.
Once Beijing has exhausted potential levies on U.S. imports, however, it has promised punitive non-trade measures that Chris Krueger of Cowen Washington Research Group says might include government-encouraged boycotts of American products, increased customs enforcement, and aggressive factory inspections.
While Trump's tariffs, and the concern among lawmakers and economists about their impact, have become an issue in next week's congressional elections, the president is likely to blame any Republican losses not on his policies but on opposition to them, Krueger predicted.
If Republicans maintain their congressional majorities, on the other hand, he'll be free to pursue more protectionist measures largely unimpeded.
Makeup powders and preparations are among the $200 billion in additional Chinese products on which the White House has already imposed a 10 percent duty, and Estee Lauder priced the effects of the duties and Beijing's retaliation into its profit target for fiscal 2019, which continues through Sept. 30.
When the company raised that target 2 percent to as much as $4.82 a share on Wednesday, it accounted for the possibility that U.S. trade policy will grow even more aggressive.
"We believe that we may experience higher tariffs in January," Freda said, so "embedded in the guidance in the second half from an earnings-per-share standpoint is the inclusion of that increase in tariffs."
Only about a third of Estee Lauder products sold in China come from the U.S., he noted. The remainder are produced in Europe and Canada, Chief Financial Officer Tracey Travis told analysts earlier this year.
The company, whose brands include Clinique, M.A.C. and La Mer, had hoped to avoid tariffs because, as Freda said in August, "beauty is not a category of tension and represents a benefit for all countries."
Billions of dollars are, and will be, coming into United States coffers because of Tariffs. Great also for negotiations - if a country won’t give us a fair Trade Deal, we will institute Tariffs on them. Used or not, jobs and businesses will be created. U.S. respected again!— Donald J. Trump (@realDonaldTrump) October 23, 2018
Trump concedes that tariffs, on the other hand, are a cause of tension, but argues that they will ultimately pay off.
"China has banned imports of U.S. agricultural products, such as poultry, cutting our farmers and ranchers off from their market, but we’ll get it opened up again," he said at a midterm campaign rally in Indianapolis on Saturday. "After decades of economic abuse, we are finally fighting back as a country."