TIVP028: Estée Lauder (EL): Michael Burry’s Big Bet w/ Daniel Mahncke & Shawn O’Malley

27:18So that's not a unique selling point for any premium brand anymore. In fact, when you look at Estee Lauder's R &D spend and you compare it to their marketing spend, you will realize that R &D is only a small portion of it. Most money goes into marketing. That spend is actually 10 times higher than R &D. I guess there's only so much you can do on the quality side and all the big brands have the capacity to spend money on that. And there's another trend that hurts the company, the upcoming of social media, of course, but also personal brands. You mentioned that in your Ulta beauty pitch as well, right?

27:51Yeah, I did. I compared Ulta's following to Sephora since I kind of saw them as the main competitor. And for these brands, social media has become incredibly important, of course. If there's a trend on social media, especially TikTok, that can really quickly turn into a multi-million dollar opportunity for Ulta, Sephora, or Estee Lauder. But premium brands like Sephora or Estee Lauder have a harder time being part of these trends where people go around and show off their fashion hauls, for example. That mostly happens with cheaper brands or where you can get special offers. Ulta offers a lot of these through its loyalty program.

28:32And Sephora just doesn't offer those kind of discounts. And I don't really think Estee Lauder does either. So that makes it a lot harder to go, oh, look how much stuff I got for$100. It doesn't really translate at a more premium retailer. It's more difficult. And usually Estee Lauder doesn't do that. But there have been exceptions in the Chinese market. But we'll get to that at a later point. Let's quickly talk about personalized brands and how they changed the industry. Back in the day, celebrities modeled or advertised for brands like Estee Lauder. And of course, they still do that. But you will see a lot more individual brands.

29:09And those have become real competitors. They're just huge companies. To just list a few, you have Fanny Beauty by Rihanna, Kylie Jenner Cosmetics, Rare Beauty by Selena Gomez. And Harley Bieber has her own line as well. And I could go on for a while here. These are really big companies. Fanny Beauty is valued at$2.8 billion, which is more than Estee Lauder's most expensive acquisition ever, and that was Tom Ford, for which they paid$2.3 billion. Kylie Cosmetics is valued at$1.2 billion, and Harley Bieber's company was just recently sold to Elf Beauty for$1 billion. So it's not just value on paper, those companies actually sell at those valuations.

29:49For a company like Estee Lauder, this is both competition and opportunity. It's still an acquirer, although Tom Ford was its last deal in a while. And currently, I would be more than surprised if we see any new deal announced anytime soon. And even when the company would be doing much better than it is today, the dramatically lower barriers to entry are not helping Estee Lauder and any incumbent for that matter. You just teased that Estee Lauder is handling discounts in China a bit differently. So let me take the opportunity to ask you about their strategy more generally in China and Asia. Estee Lauder is the beauty company that probably bet heaviest on the Chinese market, is my understanding.

30:34And honestly, before 2022, the stock market and really the entire industry applauded Estee for that foresight. Every brand wanted to be in China, and Estee Lauder was really leading the way over there, I would say. and the stock price skyrocketed to$370, resulting in that market capitalization of around$130 billion that make it a close second competitor to L 'Oreal, or at least a lot closer than today, where L 'Oreal is worth something like eight times as much as Estee Lauder. The Chinese economy recovered much slower than anticipated during and after the pandemic. And then they had that subsequent real estate crisis.

31:14And you add to that the Daigou breakdown and the Asia strategy, which the market loved in 2021. Now it was seen as this risk and the company was overly concentrated on betting on that part of the world. But beyond the macro headwinds, how does it look over there for Estee Lauder now? Is it a similar dynamic compared to the Western cosmetics market? China definitely faced some severe headwinds in recent years, but it looks like the economy is heading into the right direction now. And the same applies to the Chinese beauty market as well. And in China, there's still this trend to go for more premium brands, and you consume more of those than we do in the Western world.

31:58The middle class is still growing, and people who enter it want to display that they've made it. And even when that's easier to do with luxury fashion than cosmetics, it still feels good to know that you're wearing expensive makeup. But that doesn't mean it's an easy market for Estee Lauder. The days when a European or an American brand had some form of a special appeal to Chinese consumers is largely over. I've seen that shift when I researched for my Mercedes episode and in cosmetics there's actually a name for that shift and it's called Sea Beauty. Sea Beauty is about homegrown Chinese beauty brands that focus on Chinese heritage and designs.

32:36And those brands have become extremely popular over the last five to 10 years, especially among younger consumers. These companies have leveraged digital marketing, competitive pricing, and even a form of patriotic appeal to capture market share within those customer segments. It makes sense that in cosmetics rather than fashion, for example, local brands should probably have a bigger appeal than foreign ones. While style also varies, skin tone, climate, and just other cultural ideas of beauty can play a significantly larger role in cosmetics than in fashion, I think. So it's only natural that local brands can sometimes serve those markets better.

33:22A Chinese brand, for example, might formulate products specifically for humid subtropical climates or for common skin concerns in those areas. And they also tend to be faster at picking up on local trends, such as the current wave of traditional Chinese medicine inspired skincare or the packaging aesthetics that resonate more with younger Gen Z buyers in China. Western legacy brands, on the other hand, often roll out these global campaigns with slower product cycles, which don't always match the speed or nuance of local consumer behavior. So do you know how Estee Lauder has approached that challenge?

34:03Do they own local brands in their portfolio or do they just create local campaigns within their existing brands? Estee Lauder does own Asian brands. It bought a soul-based company, Dr. Judd Plus, which I already mentioned, which was a major move at the time, not just because it gave them a foothold in Korea, but because it was the first time that Estee Lauder fully acquired a company headquartered in Asia. And Dr. Jot Plus was not just any niche label. It was one of the most successful examples of derm science skincare. So that means minimalist design, clinical positioning, very popular among younger consumers who care less about those luxury logos and more about the ingredients in the product and also about results.

34:48And that's an audience that Estee Lauder needs to target a lot more. And by the way, when I did my research, I stumbled up on Reddit again. Oh, you did? Okay. So one of those rare occasions at Daniel's on Reddit. Well, as I said, when I need an insight into how people perceive a product that I personally don't use, it's a great place to start. And there were quite a lot of people who liked the product a lot. The Dr. Judd Plus deal was meant to do two things. Tap into fast-growing regional trends and also diversify the company's innovation pipeline. Korean beauty, and especially the kind driven by dermatologists and science-backed formulas, has become very popular in recent years.

35:30And not only in China, but also in the US and Europe. And that's what I listened to and heard on Reddit, for example. But the brand performed poorly since Estee Lauder's acquisition. And they actually had to book impairment charges of around$800 million. So it's hard to say whether that's mostly because of the macro headwinds, or because they just failed to deliver new head products. Many competitors bought Korean brands at the same time and they faced similar issues. Beyond Dr. Jout Plus and some smaller investments, the vast majority of Estee Lauder brands are still American. So the main idea remains to sell products of those brands in China.

36:10To increase the local fit, they've built a big R &D center in Shanghai though. The goal is to develop products specifically tailored to Asian skin types, climates, and just their consumer preferences. They also test reactions to pollution and humidity, problems which are pretty common in big Chinese cities. And Estolota has also made minority investments in Forest Essentials, which is an Indian premium skincare brand that combines local skincare knowledge and tradition with luxury positioning. It's a relatively small investment, and I just mention it because it shows they've been scouting. They've scouted different regions for emerging consumer movements, and they really plan on expanding into more emerging and fast-growing markets, which is a focus now.

36:58They want to prioritize that, and those could be markets like India, Brazil, the Philippines, and also Mexico, which I think is where Ulta Beauty is now going into. And all of those countries are labeled priority emerging markets, In many of those markets, only half of Estee Lauder's brand portfolio is available yet, and they want to bring it to more countries and just expand it. So they've gone way beyond just trying to establish European or American brands in Asia. Did they also change the shopping experience? I think in Asia, selling over social media, especially in live streams, is a much bigger thing than in the Western world, right?

37:39and in cosmetics, probably even more so than with other products. I know that in some parts of Asia, e-commerce adoption is actually ahead of the US, like in South Korea, for example, which is something that really surprised me when I dug into Coupang for an episode a few months ago. Yes, and the size of these sales channels is just mind-blowing. I actually couldn't believe it when I first heard it. China's live streaming e-commerce market, for example, is projected to reach over 8 trillion yuan by 2026. That is over$1 trillion US dollars. And that's about the size of the entire US e-commerce market.

38:15Of course, Estee Lauder cannot miss such an opportunity and is also integrated into these and also other sales channels. It basically operates so-called flagship stores on platforms such as Tmall, which is on Balibaba, and Douyin, which is what TikTok is called in China. and they've built this full digital commerce ecosystem with influencer live streaming, real-time social selling and all of that tailored to the Chinese market. And the majority of the ad spend in China now goes into digital and influencer channels and not anymore to let's say actors or TV advertisement. But competition is really tough.

38:55You probably know the Singles Day which is a huge mid-year sale in China and it's kind of like the Black Friday here in the US. And those days have become a major driver of beauty sales, with brands offering steep discounts and also special sets. Estee Lauder also aggressively participated in these events to drive volume. But as listeners of our show, of course, know, premium brands like Estee Lauder lose their appeal when they engage in these discounting games. And in the short term, it might boost profits, but in the long run, it just kills the brand. So to summarize the Asia strategy in business, Estee Lauder seemed to think that China is the place to be, doubled down on that market, and kind of neglected diversifying into other markets, and then paid the price for that when Chinese man weakened due to the pandemic, the slower than expected economic recovery, and then the crackdown on Daigou resellers.

39:52Inventory piled up, margins collapsed, and what was seen once as this brilliant Asia strategy now turned into this huge problem for the company and its stock. So do I understand that correctly? And if so, is a bet on Estee Lauder really essentially a bet on the recovery of the Chinese consumer then? That's definitely a big part of it. And the Chinese economy will rebound and I think we're getting closer to that point. The main question though is whether Estee Lauder can benefit from that as much as some investors think. And that question extends beyond just China gaining traction again. So a stronger Chinese consumer will certainly help, but it will not immediately result in a thriving company.

40:37The main reason for the terrible performance has been the negative operating leverage in recent years. And that's why Estée Lauder has been punished so much more by the market than its peers like L 'Oreal or LVMH, at least to some extent. Revenues declined by more than 15 % since the 2022 highs. And in the same period, net income just went from almost $3 billion to negative$870 million. The reason for that is that costs just continue to grow, revenues declined. The company should have brought fixed costs and marketing expenses down. But instead of doing that, they just kept going. And this was made worse by asset write-downs of about a billion dollars, largely due to Dr.

41:21Jirt Plus, which I discussed earlier, as well as Tom Ford and Too Faced, which is a brand Estee Lauder acquired in 2016. On top of that, Estee Lauder also incurred costs of nearly half a billion dollars for restructuring and$160 million due to a settled lawsuit. What was that lawsuit about? Apparently some talc-based products contained asbestos which caused diseases for some customers. Estee Lauder of course responded that they only used tested talc but the court denied the motion to dismiss so the party settled and Estee Lauder had to pay. That's not the only lawsuit Estee Lauder had to deal with because just two months ago, a judge actually decided that it must also face a lawsuit because of defrauding shareholders just by massively understating the overexposure to China and especially the gray markets, aka daggers.

42:17Well, there's certainly a lot going on at Estee Lauder. You might also remember how we talked about Bernard Arnault's family in our LVMH episode last week. We compared it to the show Succession, which is one of my favorites on HBO. But from what I've heard, that comparison might actually be even more appropriate in this case with the Estee Lauder family. Yeah, there was quite a lot going on. So if that's your favorite show, you might as well want to read more about the Estee Lauder family. And it's actually not just interesting gossip. It's also important for the company since the fight for power within the company has led to multiple management changes and also a new CEO.

42:57So what's important to understand is that while Estee Lauder passed away in 2004 at the proud age of 95, the company stayed in the hands of the Lauder family. It's still only about 85 % of the voting shares, so you might add that to the list of risks if you do not trust them. And over the last years, the unity between the family members has significantly suffered. Most of the public face of the family has been William Lauder, who is Estes' grandson, and he's served as executive chairman since 2009. The CEO, though, was Fabrizio Freda, who is an outsider and a former Procter & Gamble executive, who had been running the company since 2009 and was rightly credited with professionalizing operations and driving global expansion, including the push into China.

43:48But over time, it seemed the trust between the family and the executive team began to crack, especially after the disaster with the travel retail, which exposed the overexposure to China generally and caused just a series of financial problems that followed. So it was the family pushing back against the current CEO from the inside. Yes and no. Parts of the family pushed back, but some others stood behind him. So there was just growing internal tension with some lot of family members pushing for more control and a strategic shift. And the real turning point, though, came in April 2024, when it was announced that Jane Hertz McHugh is a longtime executive who had been with the company since 1987 and was considered a potential future CEO, would be leaving.

44:38And that caught a lot of insiders and family members off guard. And shortly after that, the company announced that Fabizio Fredo would step down as CEO. He remains as a strategic advisor, but it was pretty obvious that the internal fight for power had been decided and it was time for a new management team. Stéphane Delafavrier came in as the new CEO. He's a French executive with long experience at Estee Lauder, including leading the Estee Lauder brand itself. He's not a family member, but he was seen as someone who understands both the culture and the business aspects. The problem was that Jane Lauder, the granddaughter of Estee and executive VP at the company, didn't like that at all.

45:21She thought she should have gotten the CEO role instead. She was so mad for being overlooked that she actually wrote a letter to the board demanding that her cousin, William Lauder, the executive chairman, should be removed from that role. And the feud then escalated when Jane resigned later that year and the board confirmed Stéphane de Laferriere would become CEO in January 2025 and William would also step aside as executive chair. This marked the first time in almost 80 years that no Lauda family member held any operational title at the company. So it really is historical and obviously all of that drama added a lot of pressure to the stock.

46:04It feels like Estee Lauder, the company, not the person, went through everything that Bernard Arnault will be trying to prevent from happening at LVMH when his succession inevitably comes to fruition. But after all this drama with the new CEO, what is the strategic shift that you've alluded to? There are two programs in place that are supposed to put Estee Lauder back on track. One is called the Profit Recovery and Growth Plan, and the other is their new Beauty Reimagined Strategy, which started in early 2025. And the former was launched in late 2023 and was supposed to be only a two-year initiative aimed at improving operational efficiency, cutting costs, and ultimately restoring operational leverage.

46:51The company expected some modest savings to help margins get back on track. But as revenue continued to decline, they expanded the plan significantly. And now the restructuring charges are projected to land between$1.2 and$1.6 billion, with up to 7 ,000 jobs eliminated globally. According to Estee Lauder, this will result in annual gross savings of between$1.1 billion and$1.4 billion. When I look at the financials, I can only see a real spike in restructuring charges in the last year. And as you said before, that's about half a billion. So we can expect another 600 to 900 million dollars in these restructuring costs in the next couple quarters.

47:35Is that right? In the next quarters and years, right. The new plan is to complete the restructuring up until 2027. So it's not only about waiting for the cost savings to show up in the financials. That's why they have this Beauty Reimagined initiative, which is also supposed to initiate growth in the meantime. The first pillar is consumer coverage. They want to meet the customer wherever they are. And that means expanding into faster growing channels like TikTok shop or launching premium brands directly on Amazon in the US at least. And they're also rolling out freestanding stores for luxury fragrances in key markets, which is a smart move because fragrance has been one of the few bright spots for them in the last years.

48:21That slogan and the idea to sell on Amazon now seems a little too familiar to me. Yes, it's the same playbook Nike uses after its strategy shift away from DTC. That's not the only parallel. Just like Nike, Estee Lauder wants to get back to its innovative different nature and that's less about coming up with a new lipstick and more about speeding up development cycles and tailoring products for regional needs. We have solid and iconic brand in the portfolio of the Estee Lauder company. You've mentioned some of them from La Mer to Estee Lauder to Tom Ford, Jo Malone London here like you know in the UK and we are very convinced that our brands are really meeting the consumer demand around the world.

49:04We just need to be more agile. We need to be faster, you know, reacting like, you know, to the trend of like, you know, the consumers. And one of the things that I've committed is to make sure that we follow the consumers where they are going. We need to be more reactive to where the consumer goes. And we need to simply just make sure that we give them the innovation that they are looking for in the time that they want it. And it also had a huge inventory problem, just like Nike, which caused the same problems with working capital and the need for discounting products. So the plan is to restructure and then reinvest and reposition the product portfolio.

49:43Yeah, that's a pretty good way to frame it. But there are two other important levers, and that's geographic diversification and supply chain resilience. They've realized that the over-dependency on China has to be addressed. So they are pushing harder into Southeast Asia, India and Latin America. On the operational side, they're trying to cut China's reliance on US sourcing from 25 % to 10 % mid-year using facilities in Europe and across Asia to buffer against tariffs and geopolitical risk. Yes, unfortunately, all of that is still a topic after a couple of months. We are already discussing it.

50:23And then late last year, they also decided to cut the dividend after consistent dividend growth since the IPO in 1995, except for 2020 and the COVID pandemic. That's never a popular move. And we have discussed how the same thing could also happen at Nike down the road. And if that should happen, that's probably a bad thing. But in Estee Lauder's case, I see it as the right decision because it makes no sense to pay a dividend when your business is clearly struggling with profitability. And I would rather just see a plan laid out for a recovery, which they have done, than investing money there. And that's what they're doing right now.

51:03So I think that's the right approach. Have investors seen any improvements yet? There have been first signs of improvement and it's obviously not yet the turnaround the company needs, but it looks like it could get there. In fiscal 2025, the company achieved over 300 basis points of cross margin expansion during the first three quarters, despite lower sales volume. This expansion has largely been due to improved operational efficiency, leaner inventories which they have finally brought down, and a reduction in discounts and promotions as a result of that. That's essentially what we both are hoping that Nike will report soon as well.

51:42On the growth side, Estrellauder is seeing traction across several fronts as well. Its digital transformation efforts have definitely paid off with digital channels now accounting for about 28 % of total sales. And that's up from just 13 % in 2018. So the company has also made some investments into AI. And while I'm not yet sure whether that will actually move the needle and be a significant cost saver or was just mentioned in the reports to be able to put AI in there, We should be happy about it because the partnership is with our portfolio company, Adobe. And the idea is to integrate Generative AI into its marketing campaigns, also saving a couple dollars.

52:24I saw a really great chart from Michael Mobison the other day, basically showing how hard it is for turnaround stores to actually come to fruition. and basically what they did is they broke out companies returns on capital over 30 years comparing the results from the beginning and then the end of the period and they categorize the companies into these performance quintiles so the highest returning companies in one quintile and the lowest returning companies in the bottom quintile and they mapped out what percentage of companies would stay in their quintile over the time period, what percentage moved up and became more profitable relative to the rest of the group, and then what percentage became less profitable and moved into the lower quintile or just stayed flat.

53:12And to kind of make a long story short, the idea was that literally it's far more often that high returning companies just continue earning excess high returns than it is that lower quintile companies move up in relative profitabilities. so the winners keep winning most of the time and it's less likely that a loser becomes a winner even if they were a winner in the not so distant past and so for example from 1990 to 2022 48 % of the companies that ranked in the top quintile of returns stayed in the top quintile and then another 19 % only fell a little bit to the second best quintile yet only 12 % of companies in the lowest quintile at the beginning ended in the top quintile.

54:00And then just 8 % of companies went from the second worst quintile and moved up to the top group. And that'll all make a little more sense. If you're watching this on Spotify or YouTube, you can see the chart that we're referencing, but a really high level. The point is statistically speaking, the odds are stacked against us here with SA louder, where you have a company trying to go from now being in a lower quintile and moving back up as part of a turnaround story. But at the same time, that is how big payoffs can be earned. If most companies fail to turn around their businesses and the market knows that, and yet you can identify one of the few companies that will actually do so, well, the payoff would be substantial.

54:42And so with that backdrop, how about we go to the part that people are really interested in, and that is your valuation. What exactly needs to happen so that you would be interested in S.A. Louder? And at what point, if ever, should we buy the turnaround story? Knowing that, again, the odds of S.A. Louder returning to a top quintile of profitability are not necessarily in our favor. What's interesting about this paper has been that it showed statistically you are definitely taking a risk with every turnaround that you take. And at the same time, the payout really can be big. if you hit the returning point.

55:21And that basically means you pay a low price. So when I valued Estee Lauder, I first wanted to figure out what it would mean for the stock if and when management achieves the restructuring that it is currently in the process of. And then we cover margins to approximately a 10 % net income margin. That's what Estee Lauder earned for years prior to the pandemic era. So my base case is a more or less successful turnaround. And I say more or less because it would take Estee Lauder three more years to return to 2024 sales. But due to the restructuring, profits should recover much faster than that. Well, you know that Estee Lauder won't return to growth this year.

56:03But next year, we should see sales growth again, even if it's just 1 % or 2%. For the PE, I assumed a 2029 exit multiple of 22. That's far below the long-term average of 29 and even further below the average of the last five years, which has been above 30. But honestly, when I look at this company, I really don't find much that would still justify a premium multiple. We talk about the term quality and you mentioned it earlier in this episode. And Estee Lauder is portrayed as this high-quality company, currently under pressure and possibly trading at a discount. and its market share and pricing power do make it a better than average company.

56:46But if the last years have shown us one thing, then it's that this company is not bulletproof and it's definitely not the last man standing in a bad macro environment. And for me, that's what I require from a high quality company that would deserve a premium multiple. It would take too long to go through the growth and profit assumptions for each segment, but essentially I assume a return to the lower end of growth and profitability prior to the downturn. Looking at your model, this gives you what looks like a relatively slow revenue growth estimate, but earnings would still compound at over 30 % during that modeling period as they trim costs and begin to benefit from some of the operating leverage available to them as growth resumes.

57:35And of course, we have to keep in mind that this is going off a very low base. So 30 % sounds huge, but really isn't that much compared to what Estee Lauder had earned in 2022, which was a particularly good year. And if I see that correctly in your model, you also have an adjusted earnings line in which you account for these impairments and restructuring charges. And when you do that, the EPS growth immediately gets cut in half. All right. So this is definitely not a growth company, even though 30 % might sound like it. Some of the growth numbers just look high because they were close to nothing at the start of the period.

58:12The next step is applying a discount rate. I use 8%. There's a lot of uncertainty involved in Estee Lauder's situation, but when we look at the market share data and the overall quality of earnings, I think the conservatism should be in growth and margin assumptions and not embedded in a higher discount rate. Long story short, I get a fair value of about$64 then. And this time I apply a 10 % margin of safety as well, which is something that I'm usually not a huge fan of doing, but we could buy into a falling knife here. And when that's the case, we have to be extra careful about the price we pay.

58:46So this then leaves us with about$57. That's far below the current price of$75. And to be honest, I'm a bit surprised by that after seeing Barry go all in, at least in his US portfolio and seeing the stock chart, a lot of people talking about it, I would have thought it was cheaper than that. I agree. But as always, it highly depends on your inputs, right? So did you do a bull and bear scenario as well? Because I could imagine with a turnaround story like this, there is a pretty wide spread between the possible and plausible outcomes for a company like this. I did and you're completely right. The difference is huge.

59:28In my bull case, I achieve a net income margin of approximately 11.5 % and revenue growth of still just 3.5%. With a bit of a macro tailwind, this is definitely probable and not even that bullish. And if you combine that with an exit multiple of 27, which is also in line with historical averages, you get to a fair value of almost$110, so significantly more. In the bear case, I assume the turnaround won't happen and Estee Lauder will kind of stagnate, not necessarily shrinking, but not growing either. And unsurprisingly, the stock has a long way of losses ahead of it then. Its fair value would be something close to$30.

1:00:08The hard thing about investing is that I can imagine really why each of those scenarios could unfold. And while it's a good exercise to do some modeling and think through these possibilities, ultimately, it always comes back to your conviction in the brand. Do you feel good about the culture, the management team, their incentives, the durability of the products, the resilience of their supply chain, like those kind of things? And unless you have a lot of conviction in the value of their products or the management team being able to lead a turnaround like with Nike, when you have this great CEO coming back to kind of helm the ship, it's just really hard to say, OK, I think the bull outcome is specifically more likely to occur than the bear outcome or vice versa.

1:00:52it because otherwise if you're just equally awaiting the bull and bear outcome you might as well just look at the base case because they're probably going to average each other out and and like i said the nike situation has been similar and i think what mattered to you and me and what ultimately tipped the scales for us is that we are or in my case were customers and understand the product much more intuitively and then additionally there are these kind of more tangible advantages that nike has over its competitors so i don't know i just have a better feel for what Nike could do to reinvigorate its business.

1:01:25And that is really what investment decisions can come down to, kind of a gut feeling. You can crunch the numbers all you want, but to some extent, there's a degree of pattern recognition that drives your confidence in making a final decision. Otherwise, if you just can't get there, it just goes on the too hard pile. And I don't really see the same advantages in S.C. Lauder's case relative to Nike. And my impression is that you don't see those either, right? For better or worse, and due to your own personal biases and experiences, we just have more confidence in Nike's ability to beat the odds and successfully do a turnaround.

1:02:06And I keep bringing up Nike because that is really the only company in our portfolio that's a true turnaround. To a lesser extent, you could say the same about Ulta. But it was the same with LVMH last week as with Estee Lauder. I couldn't get myself to buy the stock just because the PE ratio looked historically low. Because if their sales seem very fickle and vulnerable to me, that low PE ratio is going to be illusory in the long run. There's not much that I can add to that. And by the way, the PE is not even that low. As you said, it's similar to the Nike situation where the forward P is still quite high because people do believe in a turnaround.

1:02:47And if other people believe in it and they're already paying the price for it, that's probably not the situation you want to be in. And despite reading as many reviews as I could, it's just harder to understand the market and its trends if you lack a personal connection to the product. And as you said, I don't see many equivalents for Nike's strength when I look at Estee Lauder. And that might be because I don't understand the company as well, but I just don't see it. And having said that, numbers don't lie and the market share data still looks favorable for Estee Lauder. Their pricing power is also evident in their margins and especially in the past, but we're already seeing that kind of gaining traction again.

1:03:24At least under normal circumstances, this is a good company. And I can also imagine that the turnaround strategies will be successful. They seem very logical and the first signs of success are already showing. So for me, it's about the price I have to pay. And there's a great quote that fits here pretty well I think. The definition of a stock that's down 90 % is a stock that fell by 80 % and then halved. I like to keep that in mind with turnaround plays. The chart looks very intriguing but just because the stock has already fallen by a lot doesn't mean it can't keep falling further and my base case might be a bit too conservative in the event of a turnaround but I still assume a successful turnaround and that's not even a given.

1:04:07And if even under these assumptions of a turnaround. The really attractive price is only in the 50s and perhaps the low 60s that I wouldn't feel too good betting my money on it when the stock trades in the mid 70s. And as you know best, there's a reason why we even have Nike as just a 2 % position in our portfolio. It is a turnaround play that takes time and it might get even uglier on the way. And by the way, when you guys hear this, Nike has just reported earnings. So you're much smarter than Sean and I because we don't know those numbers yet. And I think this quarter could very well be a tough one again.

1:04:43And for Estee Lauder, the same is true. Yeah, and to anyone who's listening to this and thinking, okay, how can you have conviction in Ulta but not LVMH or Estee Lauder? Well, the differences are subtle, but for one, Ulta is a diversified retailer. They sell prestige products like Estee Lauder and they also sell mass market products like Elf And then they sell private label stuff, too, that we talked about earlier. And they sell hundreds of brands. And really, they are more representative of beauty spending generally than they are tied to the performance of any specific brand. It's a much more resilient business model.

1:05:23And it's also domestically focused for the most part, which just makes the story a lot simpler for better or worse. And their business has not fallen off by nearly as much. I mean, it's really just stagnated as opposed to really getting a beating like Estee Lauder has. It's been pressured, but Ulta's ability to endure the obstacles thrown at it, I think, is a testament to their more diversified business model. And there is a great deal of functional utility to Ulta's products that are offered at fair prices compared to LVMH. And so I know that Ulta will likely continue to be the go-to retailer for a wide range of products, regardless of which brands are doing well or not, because they pretty much sell all of them.

1:06:08And Estee Lauder and to a lesser extent LVMH are bets not only on specific brands working, but also on the persistence of their premium pricing, which I just have much less confidence in. And in other words, I know a range of customers will continue to visit Ulta stores for their beauty needs because it has the best assortment of products and a really great loyalty programs. But I have much less conviction in specifically whether Estee Lauder's brand will do well. and that to me is the difference in a nutshell which is to say if you recommend it Daniel I'm more than happy to pass on this company for now while maybe keeping an eye out for if the stock does get cut in half again and the bulls who are kind of still optimistically betting on the turnaround store here finally lose their patience assuming nothing has gone catastrophically wrong then I could see the stock being really really interesting I totally agree and to be honest, I still think that probability-wise a turnaround is more likely than not, but we've just seen the statistical facts and how unlikely it is in most cases.

1:07:17I'm just not willing to bet on it at this point. It's also been the entire research process. It's been surprising to me how few people I could find that actually like Estee Lauder's products and would say they would never buy something else. I've seen that more often with Ulta, which is supposed to be a lower quality brand or retailer, but I don't really see feedback backing up those market share numbers. And that's a little odd to me. So I'm just not confident and I'm not feeling good about adding Estee Lauder at these prices. So I think it's safe to say we don't follow Michael Bowie into this investment.

1:07:51And honestly, who knows whether he is even still invested at this point. I mean, he's not really known for holding his positions for a long time. So he might even have sold out a long time ago. All right. And with that, how about you give us your hints for the next episode? You know, the train keeps moving. Keeps moving. Yeah. So next week will be a fun one. We're digging into a very unloved name. I'll try to give out some hints that don't totally spoil things, but that is easier said than done. This is a company that was one of the biggest COVID era beneficiaries that the market has since fallen out of love with, yet they dominate their market share in what is, I think, objectively a very promising and fast-growing area.

1:08:36And as a third hint, and I'm maybe giving away too much here, but if you don't know it after the other two hints, I'll say that if you live in North America, at least, there is a very good chance you have one of these products physically in your home, or at least have had one at some point in your home. One extra hint from me. If you are living in Germany, you definitely never had one of those products in your home. Right. Today, I will leave you with a quote from Peter Lynch, a short one for that matter. It goes, quote, turnarounds seldom turn. And I think that's pretty fitting for today's episode.

1:09:12And I won't go as far as saying SLR won't turn. I'm just not yet ready to bet my money on it, perhaps at some later point. And with that, have a great day and see you next Sunday.

1:09:28Thank you.