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    EL
    Earnings call· Dec 2024(Q2 FY25)

    ESTEE LAUDER COMPANIES INC EL

    Feb 4, 2025 Source

    Executive summary

    The Estée Lauder Companies Q2 FY25 — Beauty Reimagined Strategy & Expanded PRGP

    The Estée Lauder Companies is embarking on its largest transformation, "Beauty Reimagined," to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin. This involves a significant expansion of the Profit Recovery and Growth Plan (PRGP) to reduce costs and strategically reinvest in consumer-facing initiatives. The company aims for greater agility, faster innovation, and improved consumer engagement through a leaner organizational structure, while navigating persistent headwinds in China and Korea and rebalancing its growth drivers globally.

    Highlights

    5

    • Adjusted EPS of $0.62 exceeded the company's outlook.

    • Gross margin expanded 310 basis points compared to last year, driven by PRGP benefits, lower discounts, strategic pricing, and operational efficiencies.

    • Clinique achieved 8 consecutive months of prestige beauty share gain in the U.S. through December.

    • Le Labo and Editions de Parfums Frédéric Malle delivered strong double-digit organic sales growth.

    • The Ordinary successfully launched on U.S. Amazon Premium Beauty stores and is debuting in Mainland China in February.

    Concerns

    5

    • Organic net sales declined 6% in Q2 FY25.

    • Operating income decreased 20% to $462 million, and operating margin contracted 200 basis points to 11.5% compared to last year.

    • The company recorded $861 million of impairment charges related to TOM FORD and Too Faced.

    • Net cash flows from operating activities for the 6 months decreased to $387 million compared to $937 million last year.

    • Q3 FY25 organic net sales are expected to decrease 10% to 8%, primarily driven by a strong double-digit decline in global travel retail.

    Guidance & targets

    11
    CategoryTargetConfidence
    Organic Net Sales
    decrease 10% to 8%
    high materiality
    High
    Currency Translation Impact on Reported Net Sales
    negatively impact by 2 percentage points
    medium materiality
    High
    Effective Tax Rate
    approximately 36%
    medium materiality
    High
    Adjusted EPS
    $0.20 to $0.30
    high materiality
    High
    Currency Translation Impact on EPS
    dilute EPS by $0.04
    medium materiality
    High
    Global Travel Retail Sales
    strong double-digit sales decline
    high materiality
    High
    Adjusted Operating Margin
    solid double-digit
    high materiality
    High
    PRGP Annual Gross Savings
    $800 million to $1 billion
    high materiality
    High
    PRGP Total Charges
    $1.2 billion to $1.6 billion
    high materiality
    High
    PRGP Net Reduction of Positions
    5,800 to 7,000 positions
    high materiality
    High
    PRGP Full Run Rate Benefits Realization
    nearly all
    high materiality
    High

    Segment performance

    7
    SegmentRevenueYoYQoQMargin
    Asia Pacific
    Primarily driven by double-digit declines in Mainland China, Korea, and Hong Kong SAR due to subdued consumer sentiment. Partially offset by double-digit organic net sales growth in Japan.
    		—-11%——
    EMEA
    Reflects continued retail softness in Asia travel retail business, resulting in lower replenishment orders.
    		—-6%——
    Americas
    Mainly due to a 1% decline in North America, offset by double-digit online sales growth, including early shipments for The Ordinary's Amazon launch.
    		—flat——
    Skin Care
    Challenges in Asia Pacific and Asia travel retail business had the greatest effect. This more than offset sales growth in the Americas, led by double-digit growth from The Ordinary.
    		—-12%——
    Hair Care
    		—-8%——
    Makeup
    Collective decline from TOM FORD, M·A·C, and Smashbox more than offset high single-digit growth from Clinique's launch on Amazon.
    		—-1%——
    Fragrance
    Le Labo continued to excel with strong double-digit sales growth across all geographic regions, driven by hero products and innovation.
    		—+2%——

    Operational metrics

    16
    Organic net sales growth
    -6%
    Q2 FY25

    At the high end of the outlook range.

    Adjusted EPS
    $0.62
    Q2 FY25

    Exceeded outlook due to better-than-expected gross margin expansion and disciplined expense management.

    Gross margin expansion
    310YoY
    Q2 FY25
    Operating expenses as percent of sales
    500increased
    Q2 FY25

    Reflects increases in advertising, promotion, innovation, and selling expenses, and sales deleverage.

    Advertising, promotion and innovation expenses
    210increased
    Q2 FY25

    Component of operating expenses, includes investments to fuel performance during holiday and key shopping moments.

    Selling expense
    130increased
    Q2 FY25

    Component of operating expenses, reflects higher costs to support key activations and distribution expansion.

    Operating income
    $462M-20% YoY
    Q2 FY25
    Operating margin
    11.5%contracted 200 bps
    Q2 FY25

    Compared to 13.5% last year.

    Effective tax rate
    42.6%vs 37.7% last year
    Q2 FY25

    Increase primarily due to unfavorable impact of previously issued stock-based compensation and change in global mix of earnings.

    Net cash flows from operating activities
    $387Mvs $937M last year
    6 months

    Lower due to decrease in earnings adjusted for noncash items and unfavorable change in operating assets and liabilities.

    Capital expenditures
    $273Mvs $527M last year
    6 months

    Reduction driven by prior year payments relating to manufacturing facility in Japan and improvements to optimize expenditures.

    Dividends paid
    $366M
    6 months

    Returned to stockholders.

    Impairment charges
    $861M
    Q2 FY25
    PRGP restructuring charges recorded
    $403M
    as of Dec 31

    Primarily relate to initiatives aimed at transforming various functions, brands, and regions.

    Innovation launch speed improvement
    tripling the percentage
    future

    Of innovation launched in less than a year.

    Weighted average forecast accuracy
    reaching new heights
    current

    Result of leveraging AI for demand forecasting and material/production planning.

    Industry KPIs

    8
    MetricValueDetails
    Channel mixdouble-digit online sales growth%
    Portfolio rotation$861MUSD
    Underlying sales growth-6%%
    Brand marketing investment210bps
    Market value share by geography8 consecutive months of prestige beauty share gain
    Productivity cost savings program$800M to $1BUSD
    Developed vs emerging market splitdouble-digit organic net sales growth%
    Underlying operating margin bridge11.5%%

    Product announcements

    3
    ProductTypeDetails
    The Ordinarylaunch
    Clinique CXlaunch
    The Ordinaryexpansion

    Deals & partnerships

    1
    MITCollaboration to accelerate cutting-edge biotechnology innovations.

    Announced in January, this collaboration aims to further accelerate the company's cutting-edge biotechnology innovations.

    Capital programs

    2
    Profit Recovery and Growth Plan (PRGP) Restructuring Programunderway$1.2B to $1.6B
    Period spend: $403M
    Spent to date: $403M
    Start: plan inception

    Benefit: net reduction of 5,800 to 7,000 positions globally; annual gross savings of $800M to $1B before taxes

    Expanded from original plan due to volume deleverage, geopolitical uncertainty, and company-specific issues. Charges recorded as of December 31. Savings to be reinvested in consumer-centric activities. Substantially executed in fiscal '25 and '26, completed in fiscal '27, with nearly all full run rate benefits realized during fiscal '27.

    New BioTech Hubcompleted

    Benefit: accelerate the company's cutting-edge biotechnology innovations

    Opened in Belgium in December.

    Risks & headwinds

    4
    Subdued consumer sentiment and geopolitical uncertaintynear term (for volatility and low visibility); H2 FY25 (for travel retail decline)

    Asia Pacific net sales decreased 11%, with double-digit declines in Mainland China, Korea, and Hong Kong SAR. Strong double-digit sales decline expected in global travel retail in H2 FY25.

    Mitigation: Strategically increasing consumer-facing investments in Q3 FY25; reducing overall dependency on travel retail and rebalancing growth drivers globally.

    Organizational complexity and lack of agilitylast few years

    Operating expenses increased 500 bps as a percent of sales, and operating margin contracted 200 bps to 11.5% in Q2 FY25.

    Mitigation: Implementing 'Beauty Reimagined' strategy for a leaner, faster, more agile operating model; expanding PRGP for expense reduction; establishing a new flatter, leaner executive team to improve decision-making and accountability.

    Underperformance of specific brands and portfolio challengesQ2 FY25

    $861 million of impairment charges related to TOM FORD and Too Faced in Q2 FY25.

    Mitigation: Conducting regular, thorough portfolio reviews to accelerate what works and transform what doesn't, aiming to drive maximum value for each brand.

    Sales volume deleverage and ongoing inflationcurrent headwinds

    Profitability pressured by sales volume declines, mix, ongoing inflation, and a cost base scaled for growth that did not materialize.

    Mitigation: Expanded PRGP to improve operational efficiencies, optimize cost structure, and enhance leverage across the business, especially during periods of volatility and low sales growth.

    What to watch in Q3 FY25

    5

    Global Travel Retail Sales Trend

    Q3 FY25
    Currentstrong double-digit decline expected in H2 FY25
    TargetModeration or improvement in decline rate

    Why it matters

    Travel retail is a significant headwind, and its recovery or stabilization is crucial for overall sales growth and profitability.

    We expect a strong double-digit sales decline in our global travel retail business in the second half of the fiscal year.

    Q&A highlights

    5

    How will the new organizational structure create focus, and how is the company prioritizing its brand portfolio, potentially running some for cash?

    Stéphane detailed the new leaner, faster organizational structure with four regional clusters, including Asia with integrated travel retail, and China reporting directly. He confirmed ongoing thorough analysis and review of the brand portfolio to accelerate successful brands and transform underperforming ones, aiming to maximize value.

    “The realignment of the regions across 4 clusters allow us to have a much more focus, one on the Americas, looking at it on the total region; one in Asia with the integration of travel retail as part of this region, which allows us to have like much further and greater alignment between the local market and travel retail on the activities that we are going to run.”

    asked by Bryan Spillane · answered by Stephane de la Faverie

    2 min read6 chapters

    Detailed Narrative

    01

    Beauty Reimagined Strategic Vision

    The Estée Lauder Companies introduced "Beauty Reimagined," a new strategic vision designed to address past performance challenges and restore sustainable sales growth, aiming for a solid double-digit adjusted operating margin over the next few years. This transformation focuses on a leaner, faster, and more agile operating model, moving away from organizational complexity and a narrow focus on growth drivers that previously hindered the company's ability to capitalize on global prestige beauty opportunities.

    02

    Expanded Profit Recovery and Growth Plan (PRGP)

    A critical enabler of Beauty Reimagined is the significantly expanded PRGP, which now targets annual gross savings of $800 million to $1 billion before taxes, with total charges expected to be $1.2 billion to $1.6 billion. This includes a net reduction of 5,800 to 7,000 positions globally. The savings are intended to be reinvested into consumer-centric activities to fuel top-line growth, with nearly all full run-rate benefits expected by fiscal 2027.

    03

    Shift to Consumer-Facing Investments

    The company is pivoting its investment strategy from fixed costs and capabilities to consumer-facing initiatives, such as visible advertising, optimized marketing programs, and support for new product launches. This shift aims to accelerate retail sales, acquire new consumers, and gain market share. Examples of early success include Clinique's 8 consecutive months of U.S. prestige beauty share gain and Jo Malone London's significant growth with men, driven by targeted investments.

    04

    Transformative Innovation and Agility

    A key pillar of Beauty Reimagined is creating transformative innovation, with a commitment to tripling the percentage of new products launched in less than a year. This includes focusing on dynamic subcategories in Skin Care, Makeup, and Fragrance, and innovating across price tiers. The company is also leveraging AI for demand forecasting and supply chain efficiency, and has opened a new BioTech Hub in Belgium while collaborating with MIT to accelerate biotechnology innovations.

    05

    Organizational Simplification and Cultural Evolution

    To support the new strategy, the company is simplifying its organization, creating a flatter and leaner executive team to improve collaboration, speed of decision-making, and accountability. This involves removing complexity, empowering faster decision-making, and fostering a culture of ownership and consumer-centricity. External partners are being engaged to assist with the operational transformation and guide the execution of the PRGP.

    06

    Market Dynamics and Travel Retail Rebalancing

    The company continues to face challenges from subdued consumer sentiment in China and Korea, significantly impacting its Asia travel retail business. While travel retail remains an important channel for brand desirability, the company is reducing its overall dependency and volatility, seeking new opportunities in Western markets. Despite expected strong double-digit declines in global travel retail for the second half of FY25, retail trends excluding travel retail are anticipated to significantly improve in Q3 FY25 due to increased consumer-facing investments.

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