Executive Summary / Key Takeaways

• Estée Lauder is undergoing a significant operational transformation, "Beauty Reimagined," and an expanded Profit Recovery and Growth Plan (PRGP) to address recent performance challenges, aiming to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years.
• Recent financial performance reflects ongoing macroeconomic headwinds, particularly subdued consumer sentiment in China and Asia travel retail, resulting in organic sales declines, though sequential improvement is noted outside of travel retail and market share gains are occurring in key regions like the U.S., China, and Japan.
• The PRGP, expanded to include significant job reductions (5,800-7,000 positions), procurement efficiencies, and outsourcing, is already contributing to gross margin expansion and is expected to yield $800-$1,000 million in annual gross benefits, providing fuel for reinvestment in consumer-facing initiatives.
• Strategic pivots focus on accelerating presence in high-growth channels (e.g., Amazon, TikTok Shop), delivering faster, on-trend innovation across price tiers, enhancing precision marketing leveraging AI, and capitalizing on momentum in key categories like luxury fragrance and active derm skincare.
• While volatility and external risks like tariffs (potential material impact on FY26 profitability if unresolved) and litigation (talcum settlement charge taken) persist, the company expresses confidence in returning to sales growth in fiscal 2026, underpinned by its strategic actions and expected market stabilization.

Reimagining a Prestige Powerhouse

The Estée Lauder Companies Inc. stands as a global leader in prestige beauty, a sector characterized by the blend of consumer goods' repeat purchase cycle with high-quality products and services. With a rich history rooted in brand building and global expansion, tracing back to founders Estée and Joseph H. Lauder and significantly shaped by the visionary leadership of Leonard A. Lauder, the company has cultivated a diversified portfolio spanning skin care, makeup, fragrance, and hair care, distributed across approximately 150 countries and territories. This heritage of cultivating iconic brands and expanding internationally forms the bedrock of its market position.

However, recent years have presented significant challenges. Subdued consumer sentiment in key markets, particularly China, coupled with increasing organizational complexity and a perceived lag in adapting to rapidly evolving consumer preferences and distribution channels, led to a period of performance pressure. Recognizing the need for fundamental change, Estée Lauder has embarked on "Beauty Reimagined," a bold strategic vision designed to transform its operating model and restore its trajectory of sustainable growth and profitability. This vision is underpinned by the expanded Profit Recovery and Growth Plan (PRGP), a comprehensive initiative targeting operational efficiencies, cost reduction, and strategic reinvestment.

A critical, though often less visible, differentiator for Estée Lauder lies in its deep investment in science and technology, from fundamental R&D to cutting-edge digital applications. The company operates research and development laboratories, including a new BioTech Hub in Belgium, and collaborates with institutions like MIT to accelerate biotechnology innovations. This focus on scientific rigor underpins the efficacy and quality of its prestige products, contributing to brand desirability and customer loyalty. Furthermore, the company is actively "hardwiring AI through the organization," leveraging it for tangible operational benefits. This includes using AI for demand forecasting and planning material and production needs, which management states has resulted in weighted average forecast accuracy reaching "new heights." This improved synchronization of demand and supply is expected to deliver significant improvements in inventory management, contributing to sustainable margin recovery. AI is also being integrated into workflows across product development, marketing, supply chain, and back-office functions to accelerate processes and improve decision-making. In marketing, a "Trend AI tool" is being developed to quickly identify market trends and translate them into product activations. The strategic intent behind these technological investments is clear: to enhance the competitive moat through superior product performance and faster, more efficient operations, ultimately contributing to higher margins and a more agile response to market dynamics. While specific quantifiable metrics on the direct financial impact of every technological initiative are not always disclosed, the stated goals point towards improved efficiency, reduced costs (e.g., lower obsolescence), and enhanced revenue generation through better-targeted innovation and marketing.

Within the competitive landscape, Estée Lauder operates alongside global giants like L'Oréal (OR), Procter & Gamble (PG), Unilever (UL), LVMH (MC), and Coty (COTY). While competitors like L'Oréal boast larger scale and potentially faster innovation cycles in certain areas, and mass-market players like PG and Unilever offer greater cost efficiency, Estée Lauder differentiates itself through its concentrated focus on the prestige and luxury segments. Its portfolio includes top-ranked brands in key categories and regions, such as Clinique and Estée Lauder in U.S. skincare and makeup, and its luxury fragrance brands like Le Labo and Jo Malone London demonstrating strong global momentum. While recent performance has lagged some peers, particularly in growth rates (EL's organic sales declined 9% in Q3 FY25 vs. peers often showing growth), the company's strategic pivot aims to leverage its brand equity and technological capabilities to regain market share and improve profitability, addressing vulnerabilities like high exposure to volatile markets and a historically higher cost structure compared to mass-market players. The company's move into high-growth channels like Amazon's U.S. Premium Beauty store and various social commerce platforms is a direct response to competitive pressures and shifting consumer behavior, aiming to recapture market share where it has lagged.

Performance Under Pressure, Green Shoots Emerge

The financial results for the three and nine months ended March 31, 2025, reflect the ongoing challenges and the initial impacts of the company's strategic response. For the third quarter of fiscal 2025, net sales were $3,550 million, a decrease of 10% compared to $3,940 million in the prior-year period. For the nine months ended March 31, 2025, net sales totaled $10,915 million, down 7% from $11,737 million in the same period last year.

This decline was primarily driven by continued weakness in Skin Care and Makeup. Skin Care net sales decreased 12% in Q3 and 10% in the nine-month period, largely due to pressures in the Asia travel retail business, reflecting subdued Chinese consumer sentiment, lower conversion rates, a difficult comparison to the prior year's replenishment orders, strategic reductions in reseller activity, and retailer shifts towards more profitable duty-free models. Makeup net sales fell 9% in Q3 and 4% in the nine-month period, impacted by retail softness and elevated inventory levels leading to retailer destocking for brands like MAC and Estée Lauder. Fragrance saw a smaller decline of 3% in Q3 and 1% in the nine-month period, with decreases from brands like Jo Malone London and TOM FORD partially offset by strong growth from Le Labo. Hair Care net sales decreased 12% in Q3 and 9% year-to-date, primarily due to softness at Aveda.

Geographically, the Americas saw a 6% net sales decrease in Q3 and a 3% decrease year-to-date, driven by ongoing retail softness and declining consumer confidence in North America, though partially offset by the impact of launches on Amazon's U.S. Premium Beauty store. EMEA experienced the steepest decline, down 18% in Q3 and 9% year-to-date, primarily due to the significant headwinds in the Asia travel retail business. Asia/Pacific net sales decreased 3% in Q3 and 8% year-to-date, impacted by declines in Korea (political/social unrest, Dr.Jart exit from travel retail), Hong Kong SAR, Singapore, Taiwan, and Australia, partially offset by growth in Mainland China (driven by timing of shopping moments, prestige stabilization, online growth, and La Mer launches) and Japan (tourism demand, growth in fragrance and skin care).

Despite the top-line pressures, gross margin showed resilience, expanding to 75.0% in Q3 FY25 from 71.9% in the prior year, and to 74.6% for the nine-month period from 71.6%. This improvement was attributed to the favorable impact of manufacturing costs and other efficiencies, as well as lower obsolescence charges resulting from reduced excess inventory. Operating expenses, however, increased as a percentage of sales, rising to 66.3% in Q3 and 78.2% year-to-date. This reflects the impact of sales deleverage, increased consumer-facing investments (advertising, merchandising, selling, store operating costs), and for the nine-month period, significant non-cash charges.

Operating income was $306 million in Q3 FY25, down from $531 million, resulting in an operating margin of 8.6%. For the nine months, operating income was $395 million, a sharp decrease from $1,203 million, leading to an operating margin of 3.6%. The nine-month operating results were significantly impacted by $861 million in impairment charges related to goodwill and other intangible assets (primarily TOM FORD and Too Faced) and a $159 million charge related to talcum litigation settlement agreements. Excluding these items and restructuring charges, adjusted operating income decreased 27% in Q3 and 19% year-to-date.

Net earnings attributable to Estée Lauder Companies Inc. were $159 million ($0.44 per diluted share) in Q3 FY25, compared to $330 million ($0.91 per diluted share) in the prior year. For the nine months, net earnings were $587 million ($1.63 per diluted share), down from $674 million ($1.87 per diluted share). The effective tax rate increased in Q3 FY25 due to geographical mix of earnings and stock-based compensation impacts, while the nine-month rate decreased primarily due to the discrete treatment of restructuring, impairment, and settlement charges.

Liquidity remains adequate, with cash and cash equivalents of $2,631 million at March 31, 2025. Net cash flows provided by operating activities for the nine months were $671 million, down from $1,471 million, primarily due to lower net earnings (excluding non-cash items) and less favorable changes in operating assets and liabilities compared to the prior year's significant inventory reduction. Capital expenditures decreased to $395 million from $702 million, largely due to lower payments related to the Japan manufacturing facility compared to the prior year. The company continues to manage its debt, with total debt as a percent of total capitalization at 63% at March 31, 2025. The quarterly dividend was reduced to $0.35 per share, reflecting a move to a more appropriate payout ratio and a desire for increased financial flexibility.

Encouragingly, the company is seeing sequential acceleration in global retail sales growth outside of travel retail and has achieved market share gains in key markets like the U.S., China, and Japan. Clinique, in particular, has demonstrated strong momentum with 11 consecutive months of share gains in the U.S. through March 2025. The strategic decision to reduce exposure to reseller activity and retailer shifts in travel retail, while impacting reported net sales, is intended to create a healthier, more sustainable business in the long term.

Strategic Transformation and Outlook

Estée Lauder's "Beauty Reimagined" strategic vision and the expanded PRGP are central to its plan to navigate the current environment and position for future success. The PRGP, initially focused on rebuilding profit margins, has been expanded to accelerate operational transformation, targeting three key areas: more competitive procurement, improving supply chain efficiencies (including a zero-waste approach), and outsourcing select services.

As part of the expanded PRGP, the company is implementing a significant restructuring program, which now estimates a net reduction of approximately 5,800 to 7,000 positions globally (9-11% of the workforce as of June 30, 2023). Total restructuring and other charges are estimated to be between $1,200 million and $1,600 million before taxes, expected to result in future cash expenditures funded from operations. Initiatives under the expanded program are expected to be substantially completed by the end of fiscal 2027. Once fully implemented, the program is expected to yield annual target gross benefits of $800 million to $1,000 million before taxes, a portion of which will be reinvested in consumer-facing activities. The net benefits of the PRGP are expected to enable a return to a double-digit operating margin over the next few years.

The strategic pivots under "Beauty Reimagined" are designed to drive growth by accelerating best-in-class consumer coverage (expanding presence in high-growth channels like Amazon, TikTok Shop, Shopee), creating transformative innovation (faster, on-trend products across price tiers, leveraging biotechnology and AI), boosting consumer-facing investments (increasing visible advertising, optimizing marketing ROI), and reimagining the way the company works (leaner, more agile organization, regional P&L ownership starting FY26). Specific innovation examples include Clinique's new serum and Estée Lauder's concealer driving U.S. makeup share, La Mer and TOM FORD innovations fueling China growth, and Le Labo's continued global strength. The strategic repositioning of MAC's Studio Fix foundation with a lower price point in certain markets exemplifies the focus on innovating across price tiers for new consumer acquisition.

Looking ahead, the company expects volatility and uncertainty to continue in the near term, particularly related to consumer sentiment in China and the U.S., political unrest in Korea, and changes in Asia travel retail dynamics. These factors are expected to impact net sales and profitability, including the effective tax rate. The headwind in the travel retail business is expected to be even greater in the fourth quarter of fiscal 2025.

For the full fiscal year 2025, the company anticipates total organic net sales to decrease in the range of 9% to 8% compared to last year. This outlook reflects the continued softness in global travel retail and ongoing pressure in Asia-Pacific. Gross margin is expected to be approximately 73.5%, and the effective tax rate is projected at 38%. Full-year EPS is expected to be between $1.30 and $1.55, including approximately $0.03 of dilution from currency translation.

A significant external risk factor is the potential impact of new and existing tariffs. While the company does not anticipate a material impact to fiscal 2025 profitability, it anticipates a material adverse effect on fiscal 2026 profitability and cash flows unless meaningful resolution of trade negotiations is achieved. The company is proactively regionalizing its supply chain and increasing production in North America and Japan to mitigate these impacts.

Despite the near-term challenges and risks, the company expresses confidence in its ability to return to sales growth in fiscal 2026. This confidence is based on the strategic reset of the travel retail business, the expected benefits from the fully implemented PRGP, and the assumption of a meaningful resolution of tariff issues.

Risks to the Thesis

While the strategic transformation and PRGP offer a path to recovery, several risks could impact the investment thesis. Continued deterioration of consumer sentiment in China and the U.S. could further pressure sales and profitability beyond current expectations. Political and social unrest in key markets like Korea could disrupt retail traffic and dampen sales. The success of the expanded PRGP, particularly the large-scale job reductions and outsourcing initiatives, depends on effective execution and could face integration challenges or impact employee morale. The anticipated benefits from procurement and supply chain efficiencies may not fully materialize as planned.

External factors like unresolved trade negotiations and the imposition of high tariffs could materially impact fiscal 2026 profitability and cash flows, potentially offsetting gains from the PRGP. The competitive landscape remains intense, with agile incumbents and new entrants vying for market share across channels and price tiers. Litigation risks, particularly related to cosmetic talcum powder matters, remain, and while settlements have been reached for a significant portion of pending and potential future claims, the range of reasonably possible losses in excess of accrued liabilities currently cannot be reasonably estimated and could be material. Declines in net sales and profitability could also lead to further impairment charges for goodwill and other intangible assets.

Conclusion

Estée Lauder is navigating a complex period marked by significant macroeconomic headwinds and internal operational transformation. The "Beauty Reimagined" strategic vision and the expanded PRGP represent a decisive effort to address these challenges head-on, aiming to restore sustainable sales growth and rebuild profitability towards a solid double-digit operating margin. While recent financial performance reflects the pressures, particularly in Asia travel retail and China, green shoots are visible in sequential retail sales improvement outside of travel retail and market share gains in key global markets.

The PRGP is already contributing to gross margin expansion and is expected to yield substantial cost savings and operational efficiencies, providing crucial fuel for reinvestment in consumer-facing initiatives and innovation. The strategic focus on high-growth channels, faster innovation cycles leveraging technology like AI, and enhanced precision marketing are key pillars for reigniting growth. However, external risks, including prolonged weakness in key markets, unresolved tariffs with potential material future impact, and ongoing litigation, pose potential challenges to the recovery timeline and magnitude. For investors, the story is one of a prestige leader undertaking a necessary, large-scale transformation. The success of this pivot, particularly in executing the expanded PRGP and adapting to volatile market dynamics while leveraging its core brand strength and technological capabilities, will be critical to realizing the company's stated goal of returning to growth in fiscal 2026 and achieving its long-term profitability targets. Monitoring progress on market share gains, the realization of PRGP benefits, and the impact of external risks will be key indicators of the investment thesis's trajectory.