The Estée Lauder Companies Inc. (NYSE: EL)

The Estée Lauder Companies faced significant headwinds in fiscal 2025, with net sales declining 8% to $14.3 billion. The decline was primarily driven by challenges in the travel retail business, particularly in Asia, and ongoing subdued consumer sentiment in key markets. Despite the revenue pressure, the company demonstrated operational excellence through its PRGP initiatives.

A major bright spot was the 230 basis point expansion in gross margin to 74.0%, achieved despite significant sales volume declines. This improvement was driven by operational efficiencies, strategic pricing actions, and reduced excess inventory through the company’s PRGP initiatives. The expansion reflects over 300 basis points of improvement in each of the first three quarters, with relatively flat performance in Q4 despite the largest sales volume decline of the year.

Operating performance was severely impacted by $1.3 billion in goodwill and intangible asset impairment charges and $481 million in restructuring charges, resulting in an operating loss of $785 million. On an adjusted basis, operating income decreased 28% to $1.15 billion, with operating margin contracting 220 basis points to 8.0%. This reflects increased consumer-facing investments and sales volume deleverage, partially offset by PRGP benefits.

Adjusted diluted EPS declined 42% to $1.51, impacted by lower operating income and a higher effective tax rate of 38.8% compared to 31.0% in the prior year. The company established a $172 million valuation allowance against U.S. tax credit carryforwards, reflecting uncertainty about realization given reduced U.S. taxable income.

Cash flow from operations decreased to $1.27 billion from $2.36 billion in the prior year, primarily reflecting lower earnings and unfavorable working capital changes. The company reduced capital expenditures to $602 million from $919 million, optimizing spending to improve free cash flow generation.

Skin Care, the company’s largest category at $6.96 billion, declined 12% organically. The decline was primarily driven by challenges from Estée Lauder and La Mer brands in the Asia travel retail business, reflecting ongoing subdued sentiment from Chinese consumers and retailer shifts toward more profitable duty-free models. However, The Ordinary showed mid-single-digit growth, benefiting from expanded distribution including Amazon’s U.S. Premium Beauty store.

Makeup sales decreased 5% organically to $4.21 billion, primarily due to declines from M·A·C and Estée Lauder brands. M·A·C faced retail softness leading to elevated inventory levels and retailer destocking, while Estée Lauder was impacted by Asia travel retail challenges. Clinique provided a bright spot with growth across all geographic regions, benefiting from Amazon distribution and successful innovations.

Fragrance demonstrated relative resilience with flat organic performance at $2.49 billion. The category was supported by strong double-digit growth from the company’s luxury brands, particularly Le Labo and KILIAN PARIS. Le Labo’s performance was driven by its Classic Collection and City Exclusives, benefiting from innovation and expanded consumer reach. This growth offset declines from traditional fragrance franchises.

Hair Care declined 10% organically to $565 million, primarily due to continued softness in Aveda’s brick-and-mortar channels and freestanding store closures. However, the category showed improved operating results through disciplined expense management despite the sales pressure.

Operating income results were significantly impacted by impairment charges across categories, totaling $1.3 billion. These included charges related to TOM FORD ($549M), Dr.Jart+ ($375M), and Too Faced ($50M), reflecting lower-than-expected performance in key markets and strategic shifts in brand positioning.

The Americas declined 3% organically to $4.41 billion, reflecting ongoing retail softness and pressures from subdued consumer confidence. The region faced elevated inventory levels and destocking at certain retailers, along with timing differences in shipments. However, the company benefited from expanding to eleven brands in Amazon’s U.S. Premium Beauty store and launching three brands in Amazon Canada.

Europe, Middle East & Africa experienced the most significant decline at 13% organic decline to $5.38 billion. The region was heavily impacted by the strong double-digit decline in global travel retail business, which is included in EMEA reporting. Retail markets also declined mid-single digits, with particular weakness in the UK market.

Asia/Pacific declined 7% organically to $4.54 billion, with mixed performance across markets. The region saw double-digit declines in Hong Kong and Korea, offset by mid-single-digit growth in mainland China. Despite the decline, the company achieved prestige beauty share gains in mainland China during the fiscal year, driven by innovation and targeted consumer reach strategies.

The geographic performance highlighted the significant impact of travel retail challenges, particularly in Asia, and the importance of the company’s strategic initiatives to diversify distribution channels and strengthen positions in domestic retail markets.

The Estée Lauder Companies continued executing its “Beauty Reimagined” strategic vision while implementing the comprehensive Profit Recovery and Growth Plan (PRGP) to drive operational transformation:

Beauty Reimagined Strategic Progress

• Innovation Excellence: Launched breakthrough innovations including M·A·C Nudes Collection, La Mer Night Recovery Concentrate, Estée Lauder Double Wear Concealer, and Clinique Almost Lipstick in Nude Honey
• Digital Expansion: Launched eight brands in Amazon’s U.S. Premium Beauty store and three brands in Amazon Canada, expanded distribution in Southeast Asia with 14 additional Shopee stores and four TikTok Shop locations
• Luxury Growth: Opened approximately 40 net new fragrance freestanding stores globally, led by Jo Malone London and Le Labo, including flagship stores in Beijing and Seoul
• AI Integration: Featured on Microsoft’s AI @ Work list and announced strategic partnership with Adobe for generative AI integration across Creative Cloud workflows

Profit Recovery and Growth Plan (PRGP)

The expanded PRGP restructuring program represents a fundamental transformation of the company’s operating model:

• Total expected charges of $1.2-1.6 billion to achieve $0.8-1.0 billion in annual gross benefits
• Net reduction of 5,800-7,000 positions, with over 3,200 positions already approved as of August 2025
• Focus areas include organizational rightsizing, process simplification, outsourcing of select services, and evolution of go-to-market models
• Cumulative charges of $610 million recognized through fiscal 2025, with $747 million in initiatives approved through August 2025

Consumer-Facing Investment Strategy

The company strategically increased consumer-facing investments by approximately 400 basis points as a percentage of sales in fiscal 2025, funded by PRGP cost savings. These investments supported:

• Market share gains in strategic markets including mainland China, Japan, and the U.S.
• Brand expansion with The Ordinary scaling to new platforms and geographic markets
• Enhanced marketing campaigns and promotional activities to drive customer acquisition
• Innovation launches across all product categories to maintain competitive positioning

Management provided optimistic guidance for fiscal 2026, expecting to restore positive sales growth after three years of declines:

Financial Guidance

• Net sales growth of 2-5% on a reported basis, 0-3% organically
• Adjusted operating margin of 9.4% to 9.9%, with greater expansion expected in the second half
• Adjusted diluted EPS of $1.90-$2.10, representing 26-39% growth
• Adjusted effective tax rate of approximately 36%
• Operating cash flow of $1.0-1.1 billion, capital expenditures of ~4% of sales

Key Assumptions

The outlook incorporates several strategic and market assumptions:

• Travel Retail Recovery: Modest growth expected at mid-point of range, with improvement in shipments particularly in first half of fiscal 2026
• Mainland China Stabilization: Mid-single-digit return to growth reflecting early signs of market stabilization
• Inventory Management: Tighter monitoring and significant reduction in discounts to better align retail and net sales growth
• Tariff Impact: Approximately $100 million unfavorable impact from currently enacted incremental tariffs, net of mitigation strategies

Regional Structure Reorganization

Beginning with fiscal 2026, the company will report under a new four-region structure:

• The Americas (including North America and Latin America)
• EUKEM (Europe, UK & Ireland, and Emerging Markets including Southeast Asia)
• Asia/Pacific (including global travel retail business)
• Mainland China (reported as separate region)