The Estée Lauder Companies Inc. (NYSE: EL)

Estée Lauder’s fiscal Q3 2025 results reflected ongoing challenges in the travel retail business, with total net sales declining 10% to $3.55 billion. Organic net sales decreased 9%, excluding foreign currency impacts. Despite the revenue decline, the company achieved its organic sales outlook and exceeded profitability expectations through effective margin management and cost control initiatives.

A significant bright spot was the 310 basis point expansion in adjusted gross margin to 75.0%. This improvement came despite significant sales volume declines and was driven by the company’s Profit Recovery and Growth Plan (PRGP), which includes operational efficiencies and strategic pricing actions. The expansion included a 240 basis point benefit from prior-year manufacturing overhead charges, partially offset by a 100 basis point impact from similar charges in fiscal 2025.

Operating income declined 42% to $306 million, reflecting increased investments in consumer-facing initiatives along with sales volume deleverage. The adjusted operating margin contracted 270 basis points to 11.4%, primarily due to higher marketing and promotional spending to drive market share gains in strategic markets.

Diluted EPS decreased to $0.44 from $0.91 in the prior year. On an adjusted basis, excluding restructuring and other charges, diluted EPS was $0.65, a 33% decline. The company’s effective tax rate increased to 34.0% from 31.1% in the prior year, while the adjusted tax rate remained stable at 30.8%.

For the nine-month period, operating cash flow decreased to $671 million from $1.47 billion in the prior year, reflecting lower pre-tax earnings and unfavorable working capital changes. Capital expenditures decreased to $395 million as the company optimized spending to improve free cash flow.

Skin Care remained the largest category with net sales of $1.81 billion, though declining 11% organically. The decline was driven by reduced Asia travel retail business, particularly impacting Estée Lauder and La Mer brands. Challenges included ongoing subdued sentiment from Chinese consumers, difficult comparisons to prior year replenishment orders, and retailer shifts toward more profitable duty-free models.

Makeup net sales decreased 7% organically to $1.04 billion, primarily due to declines from M·A·C and Estée Lauder. The decline reflected timing of shipments for new product launches and retailer destocking driven by elevated inventory levels. Operating income dropped 79% due to the sales decline and increased promotional investments.

Fragrance showed relative resilience with only a 1% organic decline. The category was supported by strong double-digit growth from Le Labo and its Classic Collection. Fragrance operating income increased, reflecting improved cost management and lower cost of sales, partially offset by increased consumer-facing investments.

Hair Care sales declined 10% organically, primarily due to continued weakness in Aveda’s salon and freestanding store channels. However, operating results improved through disciplined expense management despite the sales pressure.

Overall, all categories faced challenges related to travel retail weakness and general retail softness, but showed varying degrees of resilience based on category-specific dynamics and strategic initiatives.

The Americas segment declined 5% organically to $1.05 billion. The decline was primarily driven by North America, which faced retail softness, declining consumer confidence, and elevated inventory levels leading to retailer destocking. Operating income improved modestly due to disciplined expense management and PRGP benefits.

Europe, Middle East & Africa experienced the most significant decline at 16% organic decline, heavily impacted by the strong double-digit decline in global travel retail business. The region’s retail markets declined mid-single digits, with particular weakness in the UK market. Operating income decreased due to volume declines and increased consumer investments.

Asia/Pacific showed relative strength with only a 1% organic decline. Performance was mixed across markets, with double-digit declines in Hong Kong and Korea offset by mid-single-digit growth in mainland China. The company successfully captured market share gains in mainland China, benefiting from the timing of Lunar New Year and strong innovation performance.

The geographic results highlighted the company’s strategic progress in capturing market share in key markets despite broader industry challenges, particularly in travel retail channels.

The company continued executing on its “Beauty Reimagined” strategic vision and Profit Recovery and Growth Plan (PRGP), driving meaningful operational improvements despite revenue headwinds:

Beauty Reimagined Strategic Priorities

• Innovation Pipeline: Launched several breakthrough innovations including M·A·C Nudes Collection, La Mer Night Recovery Concentrate, and Estée Lauder Double Wear Concealer
• Digital Transformation: Achieved mid-single-digit organic net sales growth online, expanded presence on TikTok Shop and Amazon Premium Beauty
• Luxury Expansion: Opened 10 net new freestanding stores globally, led by Le Labo and KILIAN PARIS
• AI Integration: Featured on Microsoft’s AI @ Work list, partnered with Adobe for generative AI integration

Profit Recovery and Growth Plan (PRGP)

The expanded PRGP restructuring program aims to deliver between $1.2-1.6 billion in charges to achieve $0.8-1.0 billion in annual gross benefits. Key components include:

• Organizational simplification and rightsizing with expected net reduction of 5,800-7,000 positions
• Outsourcing of select services and evolution of go-to-market footprint
• Enhanced operational efficiencies and inventory optimization
• Strategic pricing actions to improve discount and promotion structure

As of March 31, 2025, the company has recognized $498 million in restructuring charges and approved initiatives totaling $623 million with a net reduction of over 2,600 positions.

The company provided the following outlook for fiscal 2025 full year:

• Net sales expected to decline 8-9% on both reported and organic basis
• Stronger double-digit decline expected in Q4 travel retail business
• High-single-digit organic decline in Asia/Pacific region
• Adjusted gross margin of approximately 73.5%
• Effective tax rate of approximately 38%
• Adjusted EPS in the range of $1.30-$1.55

The outlook assumes no further material adverse impacts from currently enacted tariffs and continued execution of strategic transformation initiatives to drive a return to growth in fiscal 2026.