A new Southern District of New York lawsuit alleges Estée Lauder retail sales in Asia relied on “a pervasive, prohibited gray market resale industry” and prohibited, duty-free resellers called daigou.
One stockholder has sued Estée Lauder’s board in Manhattan federal court on Tuesday over the company’s practices in this market.
The plaintiff, Portia McCollum, wants to force the directors to repay Estée Lauder for their alleged misconduct.
She’s merely seeking to recoup attorney’s fees and legal costs associated with bringing the action, not a traditional monetary judgment in her favor.
The complaint alleges the company’s Asian travel-retail sales channel, a critical growth market for the makeup and perfume house, exploited duty-free tax exemptions.
McCollum names 13 current and former directors and officers, including Chairman William P. Lauder of the eponymous family dynasty.
The action pleads seven counts, seeking an accounting of salaries, bonuses, stock awards, and sale proceeds. McCollum also demands governance reforms at the company, including stronger board oversight, disclosure controls, and requirements to solicit shareholder input.
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Estée Lauder and the secretive daigou market
Daigou — a Chinese word meaning “buying on behalf of” — are buyers of duty-free stock who flip those items for a profit in mainland China.
Typically trafficking cosmetics, liquor, and luxury items, they resell authentic merchandise above their duty-free cost basis yet below official Chinese retail prices, retaining a slight margin.
Daigou activity can be lawful or unlawful, depending on how it’s conducted.
The core claim of this week’s new lawsuit centers on sales of Estée Lauder products on the vacation island Hainan. It claims that Estée knowingly supplied daigou with products to drive sales within its Asia travel retail segment while illegally concealing the truth of its reliance on daigou.
After Hainan trade lockdowns amid COVID restricted Estée Lauder’s sales in early 2022, revenues stagnated and inventory piled up.
On a May 3, 2022 earnings call, then-CEO Fabrizio Freda, immediately focused on restoring that sales channel, declaring “confidence in Hainan’s future.”
Board members would allegedly proceed to conceal and obscure the truth of its daigou operations for months, according to McCollum.
At a Bernstein investment conference, Freda touted “incredible results in travel retail.” However, according to the complaint, secretive daigou resale, not travelers, was the true source of that recovery.
The company has already settled another daigou lawsuit
The cosmetics giant has faced complaints about its daigou practices in the past, previously agreeing to pay $210 million to settle a securities class action while denying any wrongdoing.
Insurance paid for part of that settlement, Reuters reported.
However, McCollum isn’t satisfied with the settlement’s force to ensure that the company’s board will not repeat similar misbehavior in the future. She has therefore sued board members personally.
McCollum wants the board to repay the company. Her suit further alleges the company spent roughly $880 million repurchasing 3.5 million shares at inflated prices, overpaying by about $515.5 million.
Another stockholder, Michael Muskopf, filed a similar derivative complaint against the same 13 defendants on August 14, 39 days earlier. McCollum has asked that her case be treated as related to his.
The company’s newsroom shows no statement on the suit.
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