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

Great. So it's my pleasure to welcome Stephane de la Faverie, Estée Lauder's CEO; and Amber English, President of Digital and Online to the Americas, to our conference, Amber -- both of you for the first time actually. So thank you so much for being here. We have a ton of ground to cover, but before we do, Estée has a video -- a short video they want to present for. So we're going to roll to that, please. [Presentation]

Great.

Everything is done.

We're done, and now we break. Okay. Great. So thank you so much for being here. And one more thing I just wanted to reference is the forward-looking statements disclosure, so everyone read this as we talk. Okay. So Stephane, Amber, again, thanks so much for being here. The video just helped a lot, was laying out the 5 pillars of Beauty Reimagined, which you first shared with everyone externally anyway in February. And a lot of these things have been on par with things that we've written about thinking this is what the company needs to do. It's only been 7 months, but I would love it if you could maybe offer some perspective on which of these pillars you're kind of where you're the furthest along, what maybe requires more time to see through. And then, Amber, I thought it would be cool if you could offer some perspective on what Beauty Reimagined means in the Americas organization.

No. Thank you for having us today to share the strategy. I think, look, I would start by saying we are entering fiscal '26 with momentum and somebody wrote a very smart headline at the beginning of the year saying, Be Your Own Activist. And this is what we have been doing since I moved into the position. Joking aside, there was a lot of like saying, are we going to be as a team to just do the level of transformation that the Estée Lauder company requires for a transformation. I'd say across the 5 pillars that we've made some progress, I think the first one, which is certainly the most proud of is the ability now to move where the consumer is moving. And the first thing has been the consumer coverage, making sure that we put our brands where the consumer is, which is Amazon Premium Beauty store in the U.S., but now also in Canada, in the U.K. and in Mexico more recently, Shopee in Southeast Asia, TikTok Shops around the world and has allowed us, frankly, to just really change the trajectory of our market share, especially in the U.S. and China. And that was the most important for me and the team to be able to say, is the strategy working, is this ability after many, many years of market share loss in the Americas to turn that around and to be now in market share gain? And with the stabilization of China, not only stabilizing the business, but also going into market share gain. The one that certainly will take a little bit more time, but we are already seeing some green shoots is innovation because innovation, you don't turn it around in 2 minutes. Even though we've been saying that we are going to triple the innovation bringing to market in less than a year, breakthrough takes time. It's just like you can't just like bring something like we've done for Estée Lauder with longevity in less than 6 months to market. So you're going to see a lot more innovation. And what I've committed for this fiscal year, we will be already north of 25% of the total business coming from innovation. And what I would say also from an investment standpoint, I was very clear that we could have taken a very different position at the beginning, which is say, cut the investment, drop to bottom line, improve the overall margin. But the important thing was for us to reignite growth to just get long-term sustainable growth and reignite solid double-digit operating margins. So we are investing, but Amber will talk about it. We are investing a lot more efficiently that we've done it before and also making sure that it's more balanced between the brand and the region, so making sure that we don't rely only on geography and few brands and few products around the world. And last but not least, PRGP, our transformation for the company is going in the right way. It is difficult. It is transformative. It is the biggest operational transformation of the company history, but we are moving in the right direction. And I think we're seeing a lot more simplification as the video is highlighting it and a lot more fast decision-making throughout the organization.

Yes. From an Americas perspective, I think consumer-facing spend and investment as well as consumer coverage have been the 2 themes. We're super excited that we have gained market share for the first time in a really long time as Stephane and I keep saying. And I think the momentum of that is giving us confidence in the pillars of the Beauty Reimagined strategy. And I think launching on Amazon, we've been very public. We have 11 brands on Amazon U.S., as Stephane mentioned, we've launched Amazon Mexico, Canada, U.K., and we've developed this playbook that now in the U.S. is being scaled across multiple different markets. And the stat I just looked up over the weekend as I was preparing is, our launches in the U.S. at the pace we were launching, we launched a new brand every 5 weeks. And so we've gotten really good at this, and we've gotten to understand the platform. And the other KPI that I would share is really giving us confidence in this decision is the brand halo impact that it is having not just on the Amazon channel, but our business in other channels of SMC, department stores, et cetera. And so it's having this all boats rise impact in terms of the market. Moving a little bit to our media model. We have been very drastic with the changes we've made there. I'll be quite honest. It needed a bit of a revolution in how we were thinking about it. And we broke the funnel, the traditional funnel up into 2 parts, demand generation and demand capture. I think in the past, we were really good at demand capture and focusing on the ROI that we could get there. But we really maybe took our eye off the ball from a demand capture perspective. And so not only launching on Amazon from a megathon perspective and it being the world's largest media platform, it's also allowed us to sort of think differently about how we create demand generation for our brands, not only from just a voice, but narrative and equity and new product launches. The other interesting stat I'll share is the 2 brands we launched on TikTok Shop a couple of weeks ago, both M·A·C and Clinique. Our search term of Clinique doubled on Amazon within 10 days of launching on TikTok Shop. And so there's this very different ecosystem that is now really in this market around how you have to think about distribution decisions, but then also the media amplification that all of those can drive. It's not just did you launch in a certain store or a certain outlet. And so we've really harnessed, I think, the power of both TikTok Shop and Amazon to reinvent our media model in a way that's allowing us to acquire new consumers and then also have a really big halo impact on our total business, not just our Amazon business.

Okay. Great. Let's keep moving at innovation. So in beauty, like you said, it takes time to build an innovation pipeline. But at the same time, everything you've been talking about is the need to be faster generally. So how do you ensure you aren't cutting corners in the important area of new product development, breakthrough innovation. And one of the things that we think about and have heard about from other beauty players is that there just hasn't been a lot of breakthrough innovation, real molecule technology in beauty in a very long time.

Yes. I think the first thing that we have to say like cut -- first of all, we don't cut cost. We're finding some efficiencies because one thing we never mortgage is quality and performance of the innovation that we're going to bring to market. To a certain extent, I agree with you, there's been like a lack of true innovation coming to market. There's been a lot of renovation of known product with some announcement to it. But I think recently, when you look at what we've done with Estée Lauder and Re-Nutriv surfing on the wellness trend and bringing the first true longevity beauty product that has had like a resounding success in many places around the world. And we intend to -- we look at innovation in 2 buckets, one, which is really the big breakthrough innovation and which requires a lot more investment from R&D and time to development, which I call almost the advanced technology. And then there's the on-trend innovation. You need to be there where the conversation is happening at a moment in time. And for that, what we found actually, the efficiency we've built through AI have been absolutely amazing. When I say that we're going to triple the innovation that we bring to market, it's less than a year, it's not by cutting corner, it's by simply building efficiency. Just to give you 2 really important stats. On products, you need stability. You need roughly 6 months of stability. Now I can get 6 months of stability view in 72 hours. Now it's not that I'm just not doing the 6-month stabilities, but after 72 hours, I have a 95% plus guarantee of what is going to be the outcome. So I can trigger purchase of components, raw materials and et cetera, without taking risk, which allows to reduce the time of development. The second thing is also we've used AI to reduce the critical failure of engineering of new packaging because we want to bring new packaging. It's not only new molecule, but it's also delivery for new packaging, how you bring it. There's a risk of packaging failure. It exists in the industry. We've reduced by 94% the critical risk by simply using AI and doing it throughout the company. So cutting corner is not -- is actually building efficiency via AI that reduce the risk, increase the predictability of the result that allows us to just bring more product to market. And you've seen products like the new Clinique Moisture Glow that we are bringing or the Double Wear Concealer that has become the #1 makeup launch this year by a brand that is turning 80 years old next year. So our ability to just bring new innovation faster to market at a higher impact, you're going to see more of that going forward.

Great. We've also noticed and it was highlighted in the video, but an emphasis on more accessible price points when it comes to products that you've launched particularly over the last year. So how should we think about it? Is it about attracting new consumers to your brands? Or is there an element of repositioning some of your brands and given -- and in the backdrop of the beauty market where you've had some high-quality new entrants at different price points than what was the case historically?

I think it's a fantastic question. I think it's both, Lauren. I think the reality is that we -- in a post-COVID era, I think a lot of like the beauty products have increased dramatically their price of brands around the world. So in some instances allow us and the decision we're taking this year is to reposition some products. You've seen the new foundation of M·A·C Studio Fix that we've decreased the price. We've relaunched the JML with a new SPF product in Europe where we decreased also the price. And we're seeing the moment we do that a lot more consumer that we are reengaging with the brand. I think on this one, it's more like lapsed consumer. But new innovation, we are also conscious that there's a lot of pressure on the consumers around the world, that it is in China or in the U.S., in Europe, in the emerging markets, being able to bring small sizes or innovation at the right price point allows us to win. Again, the example that I used earlier of the Clinique Moisture Glow at less than $50 position in the right channel has allowed us to just like bring back a lot of consumers to the brand and position Clinique to consistently be in market share growth. So you're going to see, we have a strategy, a clear strategy of where the growth exists by price band today, by category, subcategory brand. And I'm very clear with the team, unless we play in 70% to 80% to 90% of where the growth is at the right price point, we don't go. And the other KPIs which we've put in place, all innovation that we bring to market needs to be accretive to the category or the brand that we are going to play in. So it's the right price point with the right accretiveness to recruit new consumer and to reengage lapsed consumers that we may have lost over the years.

Okay. Great. Time to talk about China. We made it 15 minutes. So both just over the next 12 months and also medium to long term. So first, just a very simple question, and then we'll get into maybe a more interesting. But you've talked about the maturing of China, making it a more predictable market. I just want to know what you're assuming for growth for China in the medium term beyond the mid-single digits you've talked about for the fiscal year and kind of what underpins that assumption?

I think, look, like you said, we just guided to mid-single digit for us, and we want to gain market share. So I believe like the Chinese market is maturing and is stabilizing to a low single digit for the market in the moment where we are. Obviously, predicting what will happen in the next 2 to 3 years in China in the current context, before even the new program of President Xi Jinping that will be announced in March is a little bit presumptous like not to do it. But what I'm really encouraged is our ability quarter-over-quarter to gain market share and do it in a way that is more balanced. Again, it is not just the Estée Lauder brand and the La Mer brand. La Mer continues to be market share gain. Lauder is back into positive, but we're seeing TOM FORD in makeup, Jo Malone and Le Labo has been absolutely a runaway success. And lately in -- a few months ago, we've launched The Ordinary in exclusivity with Sephora that is already a top 10 brand in Sephora in China. And now we are rolling out a new platform like Tmall. So we are diversifying our portfolio to be able to gain market share and to deploy at the top of the luxury but also at the entry of Prestige in China.

Okay. What can you tell us about the competitive environment currently in China, just local versus multinational brands and promotionality in the market?

I think there's been a lot of focus on like the disruption of the market. Will the local brand disrupt like the work that the international brand. And I think it is true that in a post-COVID era, we've seen a rapid acceleration of the local brand, which is not dissimilar to what we've experienced in Korea and in Japan or frankly, we are also experiencing in India as we speak. But the difference is it's interesting in the last 6 months, the international brands are growing faster than the local brands. And they're growing faster through the top tier of like the luxury, meaning like Estée Lauder, Re-Nutriv, La Mer, Le Labo, but also Clinique now, which we haven't talked a lot in China is in double-digit growth, thanks to some products that we've tailored and designed for the market. So I think you have a rebalancing of the market where depending on the data, anywhere between 30% to 40% of the market is in the end of the local brand, which still basically leaves anywhere between like 50, 60-plus percent in the end of the international brand. The exciting data also in China, there's still excess of 100 million to 200 million consumers that are going to graduate to the middle class between now and 2030. And our ability to capture this consumer having been in China for more than 30 years is high. We have the credibility. We know how the market works. 99% plus of my team in China is Chinese, knows the ecosystem that is becoming increasingly complex. And I think we have the right tool to win in the market.

Okay. Great. You mentioned a few other emerging markets in that answer. So I'm curious to talk about your strategy for accelerating growth in those other emerging markets. Where is areas of particular focus? And how should we think about the profitability of these markets and investment needs? Like where do you have significant scale that you're already quite profitable and others where it's more of a time to build?

I think we can tag team with Amber on this one, having her part of like in Latin America and the emerging market. But I would say the emerging market is critical and central to our strategy. And I've been very vocal on the fact that I'm not yet happy of what is the penetration of emerging markets in the total, about 10% of our global business is in emerging markets. The largest market being India and obviously, Southeast Asia is growing very fast, but still very small. We are nurturing this market. I want at least in the foreseeable future that the sum of the emerging market to be at least mid-double digit, like 15%, 16% penetration to the total business, led by India. Now you've asked the question of profitability. This market tends to be very profitable, a lot of growth from -- accretive from a growth and from the bottom line. But they require a lot more investment. They require different strategy. For instance, in India, one of the winning strategy has been the deployment of small sizes across our brands, like it's a small Double Wear, small A&R, a small DDML because the ability for consumers to get access to a luxury product is still limited. In India, 90% of the market is still mass, 10% is prestige. Prestige is growing faster, but it's very limited the number of consumers. So our ability to bring the luxury product at a more affordable price point, the future innovation is going to be critical for us to win in the market. But we are committed. We just approved a massive investment in India to really accelerate the market because the market has tremendous momentum. And as you may know, also, we have a minority in Forest Essentials in India, which is one of the largest brand, at least from a DTC standpoint, it is actually the largest prestige brand in India, and we are working with our partners there to just continue to expand that presence. So a lot of potential equally in Latin America.

Yes. From a Latin America perspective, it's really about sort of where the consumer is from a distribution standpoint. So looking at both Mexico and Brazil, Mercado Libre, Amazon, Ulta is entering the Mexico market. And so we're really encouraged by the early signals we've seen both from an Amazon Mexico perspective, but then also some of the new platforms that have emerged that our brands are already on. So overall, I think it's a great growth engine that I think we're excited to invest in.

Okay. Sorry, one more question. So looking at your outlook for the company, Stephane, over the next 12 months, what markets, categories, channels, where do you feel the most confident versus where do you think there's risk to your outlook as it stands today?

It's a very good question because the world is not growing at the same speed of all the category at the same speed. What I'm really encouraged is how robust the U.S. market is in this moment in time, not only us being able to gain market share, but the market continues to be very strong. And I think it's linked to the fact that beauty, especially luxury beauty is still affordable luxury and a lot of people are gravitating towards it, while they may not be able to just buy new homes or new cars because interest rates are still very high. But like this little luxury, the famous thing that Leonard Lauder used to call the lipstick index in this moment of high or subdued consumer confidence, I think luxury beauty tends to perform greater than many other consumer goods category or other luxury good company. China, I'm encouraged about the stabilization if we can just get as an industry and us as a company to continue to gain market share. And the early signal of July and August are extremely strong about our performance in China. So we're very excited about it. Where I think there's a little bit more risk is Continental Europe and especially Northern Europe, think about France, Germany, the U.K. There is a rapid slowdown of like consumption. I think consumer confidence is also very subdued. We have a lot more work also to do as a company. And the playbook that we've created for the U.S. and China, we are in the process of deploying it in this market because the truth is that when you understand the ecosystem that now we are creating and operating under in the U.S. with Amazon, TikTok, the department store, specialty-multi. It's not dissimilar to what is happening in the U.K. and in many of the Continental Europe market. But we need to make sure that we deploy it, we invest, we're consistent. But the consumer confidence is a little bit worrying. On the other hand, you have also markets like Japan that have been absolutely a bright spot of the luxury industry, and we've been gaining market share, but Japan has basically very quickly reduced. The yen gets stronger. There's less basically tourism happening. There was also some phenomenon this summer where there was like rumors of earthquake and et cetera, which frankly, we've seen a dramatic reduction of the tourism in Japan, which have hurt a little bit like consumption. So I think it's overall rebalancing, positive on the U.S. and China, which happens to be the two largest beauty market in the world, which is good, but some challenges in more Continental Europe and more mature market in Asia, which we still have some work to do.

Okay. In your guidance, at the lower end of the range, you'd be below market. So I'm just curious, is that being part of the guidance range? Is that about share loss? Or is it about shipments versus consumption and continued destock?

I want for everybody here to differentiate, especially in this year of transition because still fiscal '26 is a year of transition for us. And I want to disconnect share loss that is a retail KPI versus what we guide, which is net sales. We've guided 0% to 3%, but our retail is stronger than our net because we're still rebalancing a little bit of the retail to gross to net by optimizing inventory. Remember, the first big commitment that Akhil and the team made to all of you is like rebalancing the inventory in Travel Retail. And that was the commitment that I made in February at the first call and say by the end of the fiscal year, we will be back to the right level of inventory. Promise made, promise kept. We are like in the right place, and we've reduced dramatically the penetration of Travel Retail. That being said, we still have pockets around the world, especially in North America, where the inventory, we're still working through it and create a bit of a disconnect between the retail and the net. But our commitment is to gain share in retail and hopefully, by time, reducing the gap between the retail and the net to just be able to make sure that the retail and the net are a reflection of our market share gain.