The Estée Lauder Companies Inc. (EL) Earnings Call Transcript & Summary

Next up this morning, we are pleased to welcome back Estee Lauder's President and CEO, Stephane de la Faverie; and Executive Vice President and CFO, Akhil Shrivastava. Stephane is going to first take you through a short presentation, and then we'll do Q&A, and Stephane and Akhil will both join me for that. Thank you.

Okay. Good morning, and thank you very much, Lauren. Akhil and I are very grateful to Barclays for hosting us again like 12 months after and to be back on stage and having the opportunity to share some of the updates as we are kicking off our fiscal '27 fiscal year. Many of you know The Estee Lauder Companies, hopefully, maybe some of you are new to the story. So I'll just take a few minutes to highlight a little bit where we are in our turnaround and the momentum that we are seeing. I need to do -- remind me to just do that. So the team remind me, I have to say that kindly note that the information on this slide regarding forward-looking statements and non-GAAP disclosure, which applies to this presentation as well as Q&A with Lauren. So I have to say it. It's not the most glamorous things to do, but now it's done. Okay. So it's been really an exciting and busy 12 months since we were on stage here like last year. And last year, when we were discussing it with Lauren, we were moving with urgency to deploy the 5 action priorities of Beauty Reimagined. And really today, what I'm really happy is to say how different of a company we are 12 months later. And this is true Beauty Reimagined. We made our amazing brand portfolio even stronger. Jo Malone London and Tom Ford joined an amazing portfolio of brand of Clinique, Estee Lauder, La Mer and Mac into the $1 billion club. This is actually unprecedented into the prestige industry and beauty industry. Now we have 6 brands in the $1 billion club. And as you may have listened during the earnings calls, we have one The Ordinary that is coming very close to that for the near future. 5 of the 6 delivered sequentially improved organic sales performance in fiscal '26, and with their scale -- sorry, premier brand desirability, breakthrough innovation and consumer reach, these brands are poised to just continuous acceleration in the near future. We also radically transform our company. One other thing I'm extremely proud of what we've done is through our One ELC, which is our new model, our new operating model. We are now better positioned to compete in prestige beauty, accelerating our speed at which we are driving the pace of the demand of the consumers, but also the competition of the indie brands today. And as we move further, we won't just match the speed of the indie brand. Our intention is to push past their speed. So really like speed of innovation for us is really absolutely key, and I'm sure we'll talk about it with Lauren in more detail. So we are a simpler organization today, much more agile as one team. We have fewer layers and silos and greater accountability as we are exiting the PRGP 2-year restructuring program, as you know, that we've just concluded on June 30. We're also a nimbler organization with refined ownership between who does what in the organization between brand, between region and between the operation within the company. That has really helped us to strengthen our brand building between brand and around the world and also to be much more strategic on how and where we are spending our consumer-facing investments. We are a much bolder organization, more united and transformative oriented organization through all the beauty commitment that we've deployed that now have been cascaded to all the retail organization around the world. And finally, we are a more efficient organization, having evolved how, and how we intend to work between us, but also with our partners. And it's not always the most glamorous thing when we talk about our enterprise business services. But today, I have to say like the deployment and the work that we've done with our partners has helped us to consolidate dramatically the number of partners that we are working with, and we are already seeing a lot more agility, simplification and speed with the ability to scale. So in a certain way, think about like a lot of the back of house that is not visible to our consumers are becoming increasingly efficient, so we can deploy more resources towards investment into consumer-facing. Now also, I'm really proud, frankly, of what we've achieved in fiscal '26. Many, many things have been achieved with great momentum. You're seeing here on the screen, reported sales rose 5% and organic like 3% with positive sales performance in every single quarter. Gross margin expanded 150 basis points, primarily driven by the benefit of the PRGP, our profit recovery and growth plan. Operating margin expanded 320 basis points as operating leverage enhanced the gross margin expansion. Diluted EPS grew 66%. We also increased our consumer-facing investment by 7%. And this is something that was very clear last year, and we'll continue to just accelerate our consumer-facing. And cash flow from the operation increased 39%, and that's despite much higher restructuring costs, obviously, due to the PRGP. So I think, frankly, it shows that the -- our strategy, Beauty Reimagine is really in motion. And obviously, the PRGP has given us the benefit that we were looking for to just reinvest into the business. And as we are exiting fiscal '26, we're exiting with like strong momentum into fiscal '27. So we have an amazing portfolio of brands today. We have an exceptional portfolio of like 25-plus brands that spans across entry Prestige with The Ordinary to Prestige, with Estee Lauder to name a few, and obviously, luxury with brands like La Mer, Le Labo and many others that we have in the portfolio. But I just wanted to highlight 3 examples that are very important. Take MAC as the long-standing #1 makeup brand in the world. MAC had strong brand love, always had very strong brand love, but the sales has been declined for many years, especially in fiscal '25. So here, we've deployed every single pillar of Beauty Reimagined that is, one, making sure that we have the right distribution, especially in the U.S. with like the deployment of MAC at Sephora, but also in the Middle East, accelerating Sephora's deployment on TikTok Shop with the U.S., the U.K. and Germany, but also really, frankly, accelerating innovation in makeup that is highly demanded by the consumer. All of that, we've seen actually MAC organic sales growth improved from a high single-digit decline in fiscal '25 to mid-single-digit increase in fiscal 2026, but also going back to market share gain and the #1 position in Q4 in the U.S. And that's really like the proof that, again, when we apply Beauty Reimagined to all our brands, it's basically working. The second one, KILIAN PARIS, while a much smaller brand in our portfolio is another great case study of how powerful Beauty Reimagined is. During the course of '26, we've really deployed the brand in more channels, like more retailers around the world. We've invested in innovation. And today, we are proud to say that we have a 19 percentage point acceleration in organic sales growth from fiscal '25 to fiscal '26. So again, from a large brand to a smaller brand, the model is working. And last but not least, The Ordinary, certainly the biggest of the indie brand that we have in the portfolio of The Estee Lauder Companies, it shows really the power of Beauty Reimagined, as it really works as an indie brand. We are accelerating best-in-class consumer coverage. We are continuing to just like deploy more innovation. And as a result, The Ordinary has been 1 of the 3 fastest-growing brands in the company alongside KILIAN and Le Labo. Now I just wanted to highlight all of that because it's very important for us, even the last 2 brands, KILIAN and The Ordinary are 2 examples that the brand has created an alternative model to be able to accelerate indie brand within the portfolio of The Estee Lauder Companies. That's new from the model that we had in the past and mainly operationalized by Beauty Reimagined, so we can create the next big brand for the future that will add more building block of growth for the company in the future. So we think that we really have a winning playbook. We expect to accelerate growth sales in fiscal '27 from 3% to 5%. And this is what we said at the earnings call, and we confirm today again that the range of 3% to 5% on organic sales growth is what we are working towards. We are looking at operating margin expansion of 150 to 230 basis points on top of the great improvement that we've done in '26 and diluted EPS to increase 24% to 34% over the prior year. So again, great expectation, great ambition that we have for fiscal '27. And I could go on a lot on the outlook, but then there will be nothing for Lauren to ask me. So I'll just leave it at that. And just -- I'll conclude soon. I just wanted before we start the discussion and Lauren grills me and Akhil on stage, just wanted to give a few other things on innovation because I think it's very important that part of the second pillar of Beauty Reimagined was this acceleration on innovation. And across basically all category, we are accelerating it, and we are seeing actually really good momentum at the beginning of the fiscal year. To give you a few examples, like obviously, the PDRN innovation that we have both on Clinique and The Ordinary. You know that the industry is moving to longevity at the speed of light, and this is actually also showing the speed at which we are adapting and bringing the right innovation to market. But also in night with like Lauder and luxury, Bobbi Brown, you name it. We have like innovation in skin care, very, very strong throughout fiscal '27. When you look at the next categories, we have great innovation coming in MAC, which is fueling the momentum that we are seeing like today. In fragrances, we have many, many innovation that is coming from luxury fragrances from Tom Ford to KILIAN with cocktail or even Jo Malone, but also -- and we were very clear, the acceleration in Prestige fragrances, especially with brands like Estee Lauder Glimmer that is off to a very strong start or the continuation of the push that we are making with Tom Ford that has been one of the highlights for us in '26, and we're expecting it to just continue. And Balmain in Prestige Beauty that is off to a very, very strong start. So we are really continuing to build strong momentum throughout our brands. What you are seeing here on screen in the room and sorry, on the webcast, you won't be able to see like the videos is also for us, for these launches and all our hero product, we are really capitalizing on the new unified global media model that we've deployed with WPP. And this is -- if you remember, as of April 1, we've moved to a global agency, and we are already seeing positive momentum, which allows us to buy at scale through centralized and AI-enabled system, and we have like media agents that are allowing us to optimize always in real time. We have real-time analytics that allows us to just like pivot all the time and to adapt our campaign to just be much more efficient. And again, as I said, we are already seeing the strong benefit of that. And building on this exciting work with WPP, we've also created momentum with Shopify, setting the stage for agentic commerce, which is like very important. Again, another thing that is disrupting and changing the industry to be much more targeted for the consumers. And that allows us in our direct-to-consumer business that is increasingly important for us to be much more targeted. And we're seeing today, we've done it when we were at the earnings calls, we've announced the deployment of mac.com on Shopify in the U.S. Since then, we've already also deployed it in the brick-and-mortar stores of MAC, especially in our freestanding stores and cliniquusabrand.com is launching soon. We are seeing actually the benefit with much higher conversion already, which is going to make our direct-to-consumer even stronger. So when you all put it together, the transformation is very clear. I want you to -- if there's one thing or 2 things that I want you to retain. We are a very different company at the moment where we're addressing yourself today, and we have like a momentum as we're exiting fiscal '26 into '27. And now I'll be very happy to take some questions with Akhil from Lauren. Thank you.

Great. Thanks so much for that. So last year, when we were sitting here, I'd asked you what success would look like a year later. And you mentioned being able to prove more consistent market share gains beyond the U.S. and China. In the fourth quarter, you started to see much more diversified growth and market share gains in Korea, Japan and the U.K. So how would you assess progress on the breadth and what breadth should look like another year from now?

Yes. First of all, thank you, Lauren. I think, look, like I said earlier, I'm very proud of the momentum and the improvement that we've done throughout fiscal '26, and we have many proof today, and it was very important that we have, as we discussed last year, throughout the year that we can prove ourselves and prove the world that we are capable of growing in multiple geographies around the world. China has been a highlight for us, obviously 9% like sales growth in net sales last year, but more importantly, 6th consecutive quarter of market share gain in the market. And I just come back from China 2 weeks ago, I was in Beijing and I was in Shanghai. And frankly, we have strong momentum, great presence of our brand, and we are continuing to do so. Korea, you mentioned it. I was also in Korea after China. Now we are in market share growth. We have actually in Korea, 11 brands in growth, of which 9 are in double-digit growth in the last quarter. So it's been absolutely phenomenal. Japan is also in market share growth. So throughout Asia, I think we are very well diversified. And just one thing in China, it's no longer just a story of La Mer and Lauder. We have a very diversified growth across many of our brands where we have 6 brands in double-digit growth and many more brands in positive. Now when you just like move to the West, we see great momentum in Europe now starting especially at the beginning of the fiscal year. I'm happy to report that we have, I would say, great momentum in many of the European markets, mainly Italy, Spain, France and Germany, which has been challenged, but we are actually seeing like great momentum. And in the U.S., the most important one, and I'm sure we'll deep dive more into this one. We're seeing continuous improvement in our results. And it's true that July was a little bit -- the market was a little bit tempered because of like the move of Prime Day, Amazon Prime Day from July to June, but the market is back to single-digit growth in August, and we are seeing continuous momentum for us in the market. So I think it is very broad-based, and we intend to just like continue this momentum throughout the year because the problem is behind Beauty Reimagined, it is really a balanced growth between East and West and frankly, also like North-South depending on the region and what we're looking at.

Lauren, if I could add one thing to what Stephane said. So when we started on this journey, we talked about long-term value creation focus. And of course, we have famously kept repeating growth margin and cash. Stephane talked about the breadth of sales growth and the acceleration of sales growth. We are also very much driving the breadth of profit pools and pillars in the company. You know that skin care, Asia and China are very strong profit-wise. We are committed to driving significant acceleration also on other geographic segments, and from a category perspective, makeup and fragrance. In our margin guide of 12.7% to 13.5%, this is included, but this is not only for this year. This is something we should see sequential progress in years to come.

Okay. Great. So let's talk more about North America. You said clearly you have made progress moving from decline into stabilization in fiscal '26. Volume shares are growing. But what needs to happen to realize value share growth and to the gap between retail sales and organic sales to narrow in North America? I know Amazon and platform, as they become a bigger part of the mix, some of this gap may remain, but what does it take to get into value share growth?

Yes. So I think, first of all, the first part of the question is really the value share growth. And don't get me wrong. We are not there yet, and we are just like working towards it. I mean there's still some work to do. And I'm happy to see the acceleration and the momentum that we are seeing. I would say simply, we need to continue to deploy the playbook of Beauty Reimagined. The first thing we are accelerating innovation. The U.S. is actually a very interesting market in the sense it's very well balanced between the 3 main categories between skin care, makeup and fragrances. And in the past, while we have very strong position in skin care and makeup, we have a relatively smaller position, especially when you look at Circana because many of our sales in fragrances is not reported, especially brands like Le Labo that are more direct to consumer. But we are accelerating actually the deployment of our Prestige fragrances, Balmain, the new launch of Estee Lauder Glimmer, but also all the collection of the signature collection from Tom Ford. And I'm happy to report that everywhere, we're seeing strong momentum on this new innovation. So this is definitely going to help us. The second thing is we need to continue to deploy our brands into the fast-growing channels. When I talked about MAC, we're not done with the full rollout at Sephora into the U.S. We have a plan working with our partner to just continue to roll out. So we'll certainly continue to see great momentum. But we have more opportunity with TikTok Shop. We are just at the beginning of the journey. And today, we have clear indication that TikTok Shop may well be the first point where consumer shop or discover the brand and the entire ecosystem. Today, we know that, for instance, when we do great activation on Clinique, we have repurchased on Amazon. When we do great activation on Mac, we see great repurchase at Sephora on our freestanding stores. So we have a real indication of the consumer journey through the ecosystem. So it was almost like we were looking at a puzzle, and we were missing a few pieces. And today, we have all the pieces in place for us to just accelerate. And the one thing that is less visible from the external, we just completed a complete revamp and realignment of the sales force in North America. We had a few misalignment on where we could support the brick-and-mortar. As you know, our online business is doing really well, and we continue to accelerate. But our brick-and-mortar is where we needed to just like make some changes. And this realignment of the sales force that is now in place as of September 1 is allowing us to be closer to our partner, closer to the retailers and to accelerate what I call the retail payment on top of like great conversion that we're having online, especially with partners like Shopify.

Okay. Okay. So that revamped sales force, you should think about seeing the impact in department stores.

Department stores, Ulta, Sephora, pretty much the entire brick-and-mortar network, including our freestanding stores. Now we are rationalizing some of our freestanding stores also as we are accelerating distribution in specialty malls, especially for MAC. But on the opposite, we are accelerating the deployment of freestanding stores in the U.S. with brands like Le Labo or KILIAN, Frederic Malle, et cetera, because we're seeing great potential to be able to enhance the retail experience in this category.

Okay. Great. Let's switch and talk about China and the broader China ecosystem. So you've already had a meaningful improvement in China. You've emphasized the growth is now more balanced across brands, channels and categories. What are you doing differently in China today that gives you confidence that the share gains can continue?

Okay. Just like I said, I just came back from a few days in Beijing and Shanghai. First of all, I think our team is doing a fantastic work there and to be able to be consistently gaining market share for 6 quarters in a row is really fantastic in such a competitive market. I think what is interesting is many of what we are doing for Beauty Reimagined around the world, we tested it early on in China. We were the first to move to Tmall. We were within the first one to just move to Jelly, one of the first one to move like to Douyin. We're also now accelerating freestanding store that is a preferred brick-and-mortar model. We were the first market where we unified our media with WPP also before we did it in the rest of the world. So many of the element of Beauty Reimagined are visible. The one thing that is actually announcing our growth today is the efficiency of the R&D center that we've opened in Shanghai. So if you remember, we inaugurated the R&D center in March 2023. Obviously, at the beginning, we had to just like set the operation. Today, 30% of the innovation for the world is coming from China. And 2 of the top 10 biggest innovation that we have in the world came from China. We have one on Lauder, on the treatment lotion and also an emulsion for La Mer that are going to be extremely successful and have been helping to drive momentum there. So now we are putting more brand into -- also in our innovation center. It's not only Lauder, La Mer, but we have a plan to deploy more innovation for our brands in makeup and in skin care, in innovation for China, for China. And I really believe many of this innovation that we're going to do in China or doing will have benefit for the rest of the region and frankly, for the world and will help like travel retail. So I would say we are in a really good position. Consumer confidence is slightly bouncing back in China. So it's still not to the pre-COVID number, don't get me wrong, but at least it's best since the Shanghai lockdown. And we are seeing consumers, especially younger consumer coming back to the category and our strong position, both in distribution, in consumer-facing and now innovation is helping us to really accelerate the market share gain in the market.

Great. So let's switch to Travel Retail and Chinese travelers. So travel has now moved from being a source of major volatility at the total company level. It's reset to a more manageable size. How should we think about the role that travel retail plays within the business from here?

Yes. When you say it's more manageable, I think it's perfectly manageable at 15%. And we've clearly -- we've reset the business to be 15%, which is in line with industry trend. I think it's important to see that travel retail is no longer just a story of the Chinese consumer. And same as we are trying to rebalance growth between geographies, between brands and so on, we are doing the same thing in Travel Retail. The fast deployment of especially our perfume brands in the West, in the Americas, in Europe, is helping us in this moment in time to just continue to just do the rebalance. But what I find very encouraging in the China ecosystem or the overall East ecosystem of Travel Retail is, one, Hainan is back to be very, very strong. If you remember, we were -- I think even last year, foot traffic was high, but conversion was low. Now conversion is picking up. And we have double-digit growth and gaining market share in Hainan. Very happy to see also that it is broad-based between our brands. But the Chinese consumers are trying to travel within the region again, prime destinations are Korea, Hong Kong and Thailand. And we are seeing the direct impact. And we've always been ready to welcome the Chinese consumer within the ecosystem. So it's a much more balanced model now that is not only within the China ecosystem. And I think there is a clear stabilization because of -- if you remember, all the transfer of operators, Shanghai, Beijing, the operation -- the apps, all of that now is set and is really set for acceleration, but we're seeing Korea, Thailand, Hong Kong and then the West being up to a strong start. And I want to be very clear on Travel Retail, as I said it, we are shipping to the demand, but we are really pushing experiential retail in a massive way. So Travel Retail is more than ever becoming a window for our brands. And we are investing, but we are investing behind, obviously, a strong foot traffic and retail demand in the channels.

Lauren, if I may add to what Stephane said, that's an important point there he made about shipping to retail demand. So travel retail is super critical for the industry and for us because of discoverability of the brands and consumer acquisition. The other aspect that we have done specifically, the 3 things we have instituted is really strong discipline and operating controls, which Stephane alluded to. Secondly, it's really the accountability, and I'll double-click on that in one moment and then oversight. So this was critical as we came through on Beauty Reimagined, this is what we promised. And what we have done here is what Stephane announced a brand-new team for Travel Retail. So that's a total new team, and it's really performing well. It's reflected in our results. Secondly, this team works very closely with Mainland China team so that we have a 360 view of the traveling Chinese consumer, and we really build our activations in a close coordination. And we're doing that in every place Chinese travelers are traveling or other traveling cohorts. Thirdly, we are shipping to forecasted retail. And then we have corrective mechanisms to see -- to test this constantly. And every time we feel there is a variance, we are making the correction. So we made significant progress not only on the business, but also on the operating discipline that was necessary to drive value in this channel.