Detailed narrative
Margin inflection: the core Q3 story
The quarter's defining feature was profitability. Gross margin reached 76.4%, up 140 bps YoY, and operating margin expanded 360 bps to 15% (from 11.4%), lifting diluted EPS 40% to $0.91. Gross-margin gains came from PRGP net benefits across operational efficiencies, including zero-waste initiatives that cut excess and obsolescence, plus 95 bps of favorable lapping of a prior-year underabsorbed-overhead charge and improved sales leverage — enough to offset incremental tariffs and inflation.
Operating leverage was aided by a 4% reduction in non-consumer-facing expenses, which funded a 9% increase (5% ex-FX) in consumer-facing investment even as employee incentive costs normalized.
Restored organic growth led by fragrance
Organic net sales rose 2% YoY, driven by double-digit growth in fragrance that was broad-based across most brands and all geographic regions, led by luxury brands and by both the Americas and Mainland China. Fiscal-year-to-date, fragrance rose double digit organically, skin care grew low single digits, hair care stabilized and the makeup decline slowed.
Skin care lacked the breadth of newness it carried in the prior-year Q3, though management flagged a rich FY27 innovation pipeline. Nine-month online organic sales grew 10%, which management believes outpaced Prestige Beauty in the channel.
China and Travel Retail recovery
Mainland China delivered mid-single-digit net sales growth and high-single-digit retail sales growth, outperforming Prestige Beauty for the third consecutive quarter (fifth consecutive quarter of share gains cited), with 6 brands growing double digit including La Mer, TOM FORD and Le Labo.
Travel Retail returned to low-single-digit growth, a sequential improvement; Hainan retail grew over 30% with 10 brands up double digit, aided by Lunar New Year activation. Management said the feared Beijing/Shanghai airport retailer-transition and online disruption had a smaller impact than initially expected, and is rebalancing growth toward Hainan and Travel Retail West (Singapore, Bangkok and other key airports).
North America stabilization and channel pivot
North America net sales declined low single digits on continued brick-and-mortar pressure, retailer bankruptcies and shop-in-shop closures — bankruptcies alone cost up to ~2 pts of growth. Yet U.S. retail sales grew mid-single digits with volume share gains across all four categories, and value share loss narrowed to just 6 bps YoY.
The company is aggressively rightsizing department stores and freestanding doors (70% of the restructuring workforce expansion) while pivoting to Amazon (12 brands in the U.S.), TikTok Shop, Ulta and Sephora — where MAC launched in early March and was the #1 makeup brand in the Sephora stores where it launched, gaining ~10 points of share.
Reporting also suggested Bobbi Brown may exit U.S. department stores, consistent with the stated channel strategy.
One ELC operating model and enterprise transformation
Management said it has fully established One ELC — aligning brands, regions and functions under one operating ecosystem — and is layering an AI-enabled enterprise transformation on top. It selected Accenture for enterprise business services (go-live completed across consumer care, CRM and tech infrastructure, full deployment targeted by end of calendar 2026), Shopify for DTC omnichannel modernization, and in April appointed WPP for a unified enterprise media-buying approach.
Management framed these partnerships as building a P&L 'built for leverage.'
Portfolio moves and PRGP expansion
In March, the company agreed to acquire the remaining shares of Forest Essentials, India's #1 prestige skin-care brand (already a minority owner), with close expected in the second half of the calendar year; in April it made a minority investment in luxury skin-care brand 11.11 Skin for the pre- and post-procedure segment.
On costs, PRGP reached a milestone with approved initiatives to hit the high end of the target gross-savings range; in April the program was expanded (raising the gross-savings target range) and total restructuring/other charges were lifted to $1.5B-$1.7B before taxes ($1.1B cumulative through March 31), with the vast majority of run-rate benefit expected in FY27.