What's going on?

Beauty giant Est�e Lauder gave a disappointing sales outlook for the year on Thursday.

What does this mean?

There�s a phenomenon called the �lipstick effect� that tends to emerge in times of economic hardship, where shoppers scale down their luxury purchases to something smaller � hence lipstick � rather than stop them altogether. That dynamic was in full flow last quarter: Est�e Lauder�s fragrance and make-up sales lifted its revenue in the US, Canada, and Latin America by 12% from the same time the year before.

So it was a shame about China, whose shopping districts sat empty due to ongoing Covid restrictions. That left Est�e Lauder�s brands � including Clinique and La Mer � with piles of unsold stock, which dragged down sales in the Asia-Pacific region by 23%. So even though the company managed better-than-expected overall sales of $3.6 billion last quarter, its full-year sales and profit outlook still came in well below expectations.

Why should I care?

Zooming in: Handbags and gladrags.
Est�e Lauder is also reportedly thinking about buying luxury company Tom Ford for $3 billion. But while the latter�s beauty and fragrance businesses would be a good fit, clothing and accessories would be more of a stretch. For one thing, Est�e Lauder doesn�t have the expertise required to run a fashion house, which it might need to remedy by partnering with someone who does. And for another, Tom Ford�s handbags are a small part of its product line � not ideal given that handbags are the real money-spinners in the industry.

The bigger picture: Just you watch.
There are some luxury shopping habits that the lipstick effect can�t explain, and the boom in watches is one of them: data out on Thursday showed that Swiss watch exports hit a near-record $2.3 billion in July (tweet this). Stranger still, the highest-end pieces were the biggest draw, with those worth $500 or more representing 95% of that total.