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    EL
    Earnings call· Mar 2025(Q3 FY25)

    ESTEE LAUDER COMPANIES Q3 FY25 earnings call EL

    May 1, 2025 Source

    Executive summary

    The Estée Lauder Companies Q3 FY25 — Gross Margin Expansion and U.S./China Share Gains

    The Estée Lauder Companies reported a challenging Q3 FY25 with a 9% organic sales decline, primarily due to a significant 28% drop in travel retail. Despite this, the company achieved strong gross margin expansion and outperformed EPS expectations through disciplined expense management. Strategic initiatives under "Beauty Reimagined" are driving market share gains in key markets like the U.S. and China, alongside rapid channel expansion into platforms like Amazon and TikTok Shop. Management is confident in returning to sales growth in FY26, contingent on tariff resolution, by leveraging supply chain regionalization and ongoing productivity programs.

    Highlights

    5

    • Gross margin expanded over 300 basis points for the fourth consecutive quarter, driven by PRGP benefits.

    • Diluted EPS decreased 33%, but was "far better than we anticipated in our outlook," showing disciplined expense management.

    • Gained market share in the U.S. for the first time in many years, driven by Clinique, The Ordinary, and Bumble and bumble.

    • Gained market share in China for 3 of the last 4 quarters, fueled by La Mer, Estée Lauder, and TOM FORD.

    • Online organic sales grew mid-single digit in Q4 (through April), driven by pure-play and third-party platforms like Amazon Premium Beauty and TikTok Shop.

    Concerns

    5

    • Organic sales declined 9% overall, and travel retail declined 28% organically, continuing to shrink.

    • Operating margin contracted 270 basis points to 11.4% due to increased consumer-facing spending and volume deleverage.

    • Weakened consumer sentiment persists in China and Korea, and reduced in the U.S. and parts of Europe, leading to tighter retailer inventory management.

    • Anticipate a steeper decline in net sales in Q4 FY25 for travel retail compared to the 28% decline in Q3.

    • New tariffs are expected to have a "material impact in fiscal '26" unless meaningful resolution is achieved.

    Guidance & targets

    6
    CategoryTargetConfidence
    Total Organic Net Sales
    decrease in the range between 9% to 8%
    high materiality
    Medium
    Gross Margin
    approximately 73.5%
    medium materiality
    High
    Effective Tax Rate
    38%
    low materiality
    High
    EPS
    $1.30 to $1.55
    high materiality
    Medium
    Sales Growth
    return to sales growth
    high materiality
    High
    Adjusted Operating Margin
    solid double-digit
    high materiality
    High

    Segment performance

    7
    SegmentRevenueYoYQoQMargin
    Company-wide (excluding Travel Retail)
    Retail sales growth continued to accelerate sequentially.
    		nulldecreased 3% organicallysequential improvement from 4% decline in Q2null
    Travel Retail
    Expected to see a steeper decline in Q4 FY25 compared to Q3.
    Percentage of business: low teens (shrinking from high period)
    		nulldeclined 28% organicallynullnull
    U.S.
    Clinique, The Ordinary, and Bumble and bumble drove gains. Estée Lauder gained share in skin care and makeup. MAC gained share in U.S. prestige makeup lip subcategories.
    Market share gains: first time in many yearsMarket share gains in 3 of 4 categories in Q3Clinique market share gains: 11 consecutive months through MarchEstée Lauder brand gained share in skin care and makeup: second consecutive quarterThe Ordinary skin care brand: #2 in U.S.MAC makeup brand: #2 in U.S.
    		nulloutperformednullnull
    China
    La Mer, Estée Lauder, and TOM FORD fueled gains. La Mer and TOM FORD fueled double-digit organic sales growth.
    Market share gains: 3 of last 4 quartersMarket share gains in all 4 categories in Q3
    		nulloutperformednullnull
    Japan
    Le Labo, La Mer, and Estée Lauder gained share.
    Market share gains: fourth consecutive quarterFragrances: #1 group in Japan (calendar '24, 3 consecutive quarters)
    		nulloutperformednullnull
    Korea
    Consumer sentiment prolonged weak.
    Fragrances: #1 group in Korea
    		nullnullnullnull
    Emerging Markets
    Need to reignite share gains in many more markets, including Mexico.
    		nullflat (excluding Thailand earthquake and India shipment issues)nullnull

    Operational metrics

    18
    Organic Net Sales Growth
    -9%YoY
    Q3 FY25

    Within outlook range.

    Diluted EPS Decline
    -33%YoY
    Q3 FY25

    Far better than anticipated in outlook, showing disciplined expense management.

    Gross Margin Expansion
    300 bpsYoY
    Q3 FY25

    Driven by PRGP benefits, operational efficiencies, reduction in excess and obsolescence, and strategic pricing actions.

    Operating Margin
    11.4%contracted 270 bps YoY
    Q3 FY25

    Driven by increased consumer-facing spending; volume deleverage offset by PRGP benefits.

    Effective Tax Rate
    30.8%up from 30.5% last year
    Q3 FY25

    null

    Manufacturing Costs In-Period Charge Net Impact
    140 bpsYoY net favorable impact
    Q3 FY25

    Triggered by pulling down production in response to sales volume decline; prior year charge was greater.

    Operating Expenses as % of Sales
    increased 580 bpsYoY
    Q3 FY25

    Reflects continued investments to fuel growth in key areas; non-consumer-facing costs increased as % of sales due to sales deleverage.

    Consumer-Facing Investments Increase
    480 bpsYoY increase as % of sales
    Q3 FY25

    Concentrated primarily in China and the U.S.

    Operating Income
    $403Mdecreased 27% YoY
    Q3 FY25

    null

    PRGP Cumulative Charges
    $498Mnull
    as of March 31

    Recorded under the PRGP restructuring program.

    Capital Expenditures
    $395Mdown 44% compared to last year
    9 months FY25

    Reduction primarily driven by prior year payments relating to Japan manufacturing facility and strong focus on optimizing CapEx this year.

    PRGP Net Positions Reduced
    over 2,600null
    as of late April

    Approved initiatives as part of the PRGP's restructuring program, including natural attrition.

    Executive Team Expense Reduction
    30%null
    null

    Driven by new flatter and more streamlined executive team, while announcing new capabilities.

    U.S. Sales Sourced from U.S./Canada
    about 75%null
    current

    Context for tariff exposure.

    China Sales Sourced from U.S.
    roughly 25%null
    current

    Strategies to reduce this, including leveraging products from Japan and Europe manufacturing plants.

    EMEA Sales Sourced from U.S.
    about 25%null
    current

    Context for tariff exposure.

    Tariff Impact Mitigation
    over 40%of initial impacts
    since November

    Achieved through supply chain adjustments and other proactive decisions.

    Online Organic Sales Growth
    mid-single digitYoY
    Q4 FY25 (through April)

    Driven by new brand storefronts on Amazon Premium Beauty, JD, Notino, Zalando, Tmall, TikTok Shop, and Shopee.

    Industry KPIs

    11
    MetricValueDetails
    Channel mixmid-single digit%
    Portfolio rotationnullnull
    Category concentrationClinique #1, The Ordinary #2null
    Underlying sales growthdeclined 9%%
    Power brands contributionnullnull
    Brand marketing investmentincreased at a greater rate of growthnull
    Brand health superiority scoresnullnull
    Market value share by geographygained sharenull
    Productivity cost savings program$350M-$500MUSD
    Developed vs emerging market splitnullnull
    Underlying operating margin bridgecontracted 270 bpsbps

    Product announcements

    11
    ProductTypeDetails
    Clinique Moisture Surge Active Glow Serumlaunch
    Estée Lauder New Double Wear Concealerlaunch
    MAC Nudes Collectionlaunch
    La Mer Night Recovery Concentratelaunch
    TOM FORD Slim Lip Color Shine Lipsticklaunch
    La Mer Balancing Treatment Lotionlaunch
    TOM FORD Architecture Soft Matte Blurring Cushion Foundationlaunch
    Jo Malone London Cypress & Grapevine Body Spraylaunch
    MAC Studio Fix Powder Plus Foundation (Repositioning)update
    Too Faced Ribbon Wrapped Lash Mascaralaunch
    The Ordinary UV Filters SPF-45 Serumlaunch

    Capital programs

    1
    Japan Manufacturing Facility (Sakura)operationalnull
    Period spend: null
    Spent to date: null
    Funding: null
    Start: null

    Benefit: increase volume levels to service Asia Pacific business; accelerate output for China-bound products

    Relatively new manufacturing facility, ninth manufacturing campus globally. Prior year payments related to this facility drove reduction in current CapEx.

    Risks & headwinds

    7
    Elevated macroeconomic challengesongoing

    null

    Mitigation: Transforming operating model to be leaner, faster, more agile through Beauty Reimagined.

    Continued decline in travel retail businessQ3 FY25, Q4 FY25

    28% organic decline in Q3 FY25; steeper decline expected in Q4 FY25

    Mitigation: Strategic reset of travel retail business underway to better reflect industry trends and market conditions; focusing on retail-driven events and consumer demand.

    Weakened consumer sentimentprolonged in China and Korea; reduced in U.S. and parts of Europe

    null

    Mitigation: Focus on market share gains in key markets, agile channel shifts, and efficient consumer-facing investments.

    Retailer inventory managementcurrent

    null

    Mitigation: Aligning shipments with demand and expecting to end the year at appropriate inventory levels.

    Uncertainty around evolving trade policies and tariffsFY26

    Material impact to FY26 profitability unless meaningful resolution is achieved; over 40% of initial impacts mitigated since November.

    Mitigation: Regionalization of supply chain, optimizing manufacturing networks, leveraging trade programs, expanding local sourcing, exploring additional PRGP savings, strategic pricing.

    Geopolitical landscape volatilityongoing

    null

    Mitigation: Exploring additional PRGP savings to help mitigate potential risks.

    Potential pressure on sales during 618 midyear shopping festival if Chinese consumer sentiment worsensQ4 FY25

    Negative impact on financial performance could exceed current assumptions, making outlook unachievable.

    Mitigation: Broader range for Q4 outlook given volatility; monitoring daily.

    What to watch in Q4 FY25

    5

    Travel Retail Net Sales Decline

    Q1 FY26
    Current28% organic decline in Q3 FY25
    TargetModeration from steeper Q4 decline

    Why it matters

    Travel retail has been a significant headwind; its stabilization and eventual return to growth are crucial for overall company performance.

    Travel retail declined 28% organically, and it continues to shrink as a percentage of our business towards the low teens... we expect a steeper decline in net sales in the fourth quarter compared to the 28% we saw in the third.

    Q&A highlights

    6

    Can the company achieve alignment of trade inventories with consumer takeaway across all categories/geographies by FY25 end, and what are the risks, especially around 618?

    Management is confident in achieving appropriate inventory levels, especially in travel retail where significant progress has been made. They acknowledge retailers are tightening inventory globally, and the Q4 outlook accounts for this. While 618 poses volatility, current guidance reflects their best assessment, and they see strength in China.

    “Overall, we have made significant progress as we communicated in the last quarter as well. And specifically, our biggest challenge was in travel retail, and we have significantly improved our position there.”

    asked by Stephen Robert Powers · answered by Akhil Shrivastava

    2 min read6 chapters

    Detailed Narrative

    01

    Beauty Reimagined Strategic Vision & Progress

    The company is deeply committed to its "Beauty Reimagined" strategic vision, aiming for a leaner, faster, and more agile operating model. This vision focuses on five key action plans: accelerating consumer progress, transformative innovation, boosting consumer-facing investment, fueling efficiencies through PRGP, and reimagining work. Progress includes significant market share gains in the U.S., China, and Japan, driven by specific brands and strategic channel shifts.

    02

    Channel Evolution and Digital Acceleration

    Estée Lauder is actively adapting to evolving channel preferences, launching brands like The Ordinary on Amazon Premium Beauty and TikTok Shop in various markets, and expanding in Southeast Asia via Shopee and TikTok Shop. This strategy resulted in mid-single-digit online organic sales growth in Q4 (through April), with strong performance on pure-play and third-party platforms. The company plans further expansion with these retailers.

    03

    Innovation Across Price Tiers

    Innovation efforts are targeting both new consumer acquisition and wider audiences across prestige price tiers. Examples include Clinique's Moisture Surge Active Glow Serum for price-sensitive consumers, Estée Lauder's New Double Wear Concealer, and MAC's Nudes Collection. Luxury brands like La Mer and TOM FORD also introduced new products, fueling double-digit organic sales growth in China for these brands. AI is being hardwired into marketing launches, as seen with Too Faced's new mascara.

    04

    Consumer-Facing Investment & Retail Strategy

    Consumer-facing investments increased at a greater rate in Q3 vs. Q2, concentrated primarily in China and the U.S. In China, this contributed to retail growth, while U.S. strategies are being refined. The company continues to invest in freestanding stores, opening nearly 10 net new stores globally, led by Le Labo, which saw strong double-digit organic sales growth.

    05

    PRGP and Organizational Streamlining

    The Profit Recovery and Growth Plan (PRGP) is making significant progress, driving gross margin expansion and reducing non-consumer-facing costs. Over 2,600 net positions have been approved for reduction, streamlining middle management by 20% and executive team expenses by 30%. New initiatives in procurement and outsourcing are being accelerated to transform sourcing models and leverage external partners for back-office functions.

    06

    Supply Chain Regionalization and Tariff Mitigation

    The company has been investing in supply chain regionalization for several years, with 9 manufacturing campuses globally. This flexibility is being used to mitigate tariff impact🌐s, with plans to reduce China-bound products sourced from the U.S. to below 10% by the end of FY25, leveraging facilities in Japan and Europe. A task force is actively evaluating scenarios, and while no material impact is expected for FY25, tariffs could materially impact FY26 profitability without resolution.

    AI-generated summary of the company’s earnings call. Not investment advice.