The Estée Lauder Companies Inc. (EL) Earnings

Management highlights

Overall Business Transformation and Strategic Direction - The company's 18-month 'Beauty Reimagined' transformation, the largest organizational, leadership, and cultural change in its history, has been successfully completed, resulting in a flatter, less siloed, more accountable and empowered organization with new high-quality talent across creative, marketing, R&D, and technology functions. - The company will not pursue large transformational M&A for the foreseeable future, remaining focused on growing its core business. It will only continue to target small minority or single-brand acquisitions that enhance its existing portfolio and can deliver attractive returns on invested capital, following the successful model of Kylian Paris, Le Labo, and The Ordinary (the company's three fastest growing brands in Fiscal 26), with 4S Essentials the next announced addition to the portfolio. Full-Year Fiscal 26 Core Financial Performance - Full-year organic net sales grew 3% year-over-year (reported sales grew 5%), with positive sales growth in every quarter, and sequential improvement across most regions. Gross margin expanded 150 basis points, operating margin expanded 320 basis points, and diluted EPS grew 66% year-over-year, significantly exceeding the company's initial outlook, as profit recovery and growth plan (PRGP) benefits were realized faster and were larger than expected. - Online organic sales grew double digits year-over-year, reaching 34% of total reported sales (up 3 percentage points from Fiscal 25, an all-time high), driving strong prestige beauty share gains across major markets including China and the US. - 23% of full-year Fiscal 26 sales came from new product innovation, meeting the company's transformation target of faster speed-to-market for breakthrough products. Geographic Performance - All regions improved from negative to positive organic sales growth in Fiscal 26. Mainland China delivered 9% broad-based organic sales growth (skincare +high single digits, makeup +mid single digits, fragrance +double digits), with the company outperforming the market and gaining prestige beauty share for the full year, led by La Mer, Le Labo, and Tom Ford. - Global travel retail returned to growth in Fiscal 26, representing ~15% of total reported sales (in line with global industry share), with growth supported by experiential retail investments in mainland China and Korea. Priority emerging markets saw organic sales growth accelerate from mid-single digit (Fiscal 25) to high single digit (Fiscal 26), despite disruption from the Middle East conflict. - The US returned to organic sales growth in Q4 Fiscal 26, with mid-single digit retail sales growth and full-year prestige beauty volume share gains across all categories. The UK/Ireland and Korea each delivered three consecutive quarters of organic sales growth ending in Q4, with the company returning to prestige beauty share gain in both markets.

Guidance

- Organic net sales growth for Fiscal 27 is expected to accelerate from Fiscal 26, coming in between 3% and 5%. Growth is projected to be stronger in the first half of Fiscal 27 than the second half, due to an earlier larger innovation slate, earlier travel retail shipments, and a lower prior-year shipment base; the Middle East conflict is not expected to have a material impact on full-year Fiscal 27 results, with stronger second-half growth as the company laps 2026 conflict-related disruptions. - The company has upwardly revised its Fiscal 27 operating margin outlook to a range of 12.7% to 13.5%, up from its earlier preliminary outlook, driven by stronger-than-expected Fiscal 26 results, continued operating leverage in non-consumer-facing expenses, and modest gross margin expansion. Adjusted effective tax rate is expected to be between 33% and 34%, and diluted EPS is projected to range between $3.10 and $3.35. - Net cash from operating activities is projected to be between $1.3 billion and $1.4 billion for Fiscal 27, down from Fiscal 26 due to higher remaining PRGP restructuring payments and increased working capital needs to support growth; after Fiscal 27, the vast majority of PRGP-related cash payments will be complete. Capital expenditures are expected to equal ~4% of total sales, prioritizing consumer-facing growth investments including brick-and-mortar and online channel upgrades. - Innovation as a percentage of sales is expected to increase 200 to 250 basis points in Fiscal 27, led by the skincare category.

Segment performance

By product category: 1. Skincare: Delivered 4% organic sales growth in full-year Fiscal 26, with balanced growth across all price tiers (entry via The Ordinary, mid-prestige via Estée Lauder, luxury via La Mer). This is the company's most profitable product category. 2. Fragrance: Delivered 10% organic sales growth in full-year Fiscal 26, outperforming industry benchmarks. Growth was driven by new product launches from Le Labo, Tom Ford, Kylian Paris, and Jo Malone London; the newly launched Balmain Beauty also entered the prestige price tier successfully. Jo Malone London and Tom Ford achieved billion-dollar brand status in Fiscal 26. 3. Makeup: Stabilized performance in full-year Fiscal 26, improving organic sales momentum by 500 basis points, led by MAC and Tom Ford. MAC saw a successful renaissance, while Tom Ford's new face and eye innovation powered growth. The category remains a work-in-progress but has shown encouraging early progress. 4. Hair Care (Air Care): Has not yet returned to organic sales growth, but early signs of a successful Aveda turnaround are visible in the US (the brand's largest market), per in-salon sales tracking. The Ordinary's viral hair density serum delivered strong organic and retail sales growth.

Risks & headwinds

- The ongoing conflict in the Middle East created 2% headwinds to UK/Ireland growth in Q4 Fiscal 26, and created disruptions to business in the region during the second half of Fiscal 26. While the company does not expect the conflict to have a material impact on Fiscal 27 full-year results, the situation remains dynamic. - Uncertainty around macroeconomic conditions and trade policy (including potential tariff changes) remains, as these factors are outside of the company's control. - The makeup and hair care categories still have room for further profitability improvement, and require continued strategic work to deliver consistent growth and margin expansion. - The company faces ongoing sales volatility from broader market trends, requiring continued scenario planning to manage unexpected changes.

Analyst Q&A

• Q: What factors allowed management to upgrade the Fiscal 27 margin outlook, and what is the plan for expanding profitability across underperforming categories? /

  A: The upward revision reflects the strong over-delivery of results in Fiscal 26, with those gains flowed through to the next fiscal year. Completion of PRGP approvals also revealed additional SG&A optimization opportunities that are included in the updated outlook. While skincare and Asia already have strong profitability, the company has an explicit plan to deliver sequential profitability improvement in underperforming categories including makeup, hair care, and fragrance over the coming years, with most PRGP cost savings ramping through Fiscal 27 and the full annual run-rate benefits hitting in Fiscal 28.

• Q: Why is the organic sales growth guidance range 3-5% when management says growth will accelerate from Fiscal 26's 3%? What is the state of travel retail inventory in Asia? /

  A: The midpoint of the 3-5% guidance range represents a 100 basis point improvement over Fiscal 26's 3% growth, and the top end represents a 200 basis point improvement, driven by accelerated growth in Western markets especially North America. Inventory in Asian travel retail is in a very good position, as the company now strictly ships to match consumer demand. Global travel retail returned to positive year-over-year growth for the first time in three years as of June-July 2026, led by double-digit growth in Hainan, with strong momentum across Korea, Hong Kong, and Southeast Asia, and share is stable at 15% of total sales in line with industry levels.

• Q: What drove the strong turnaround and consistent share gains in Mainland China, and what changes to execution enabled this performance? /

  A: The overall prestige beauty category in China is now growing at high single digits, providing a strong market tailwind, and the company has gained share across six consecutive quarters across all categories. Diversified growth across multiple brands (not just core luxury brand La Mer) has supported performance, with six brands delivering double-digit growth, and Le Labo growing over 50% annually. Key execution changes include localized innovation for China, with 30% of the company's global innovation now developed in China for Chinese consumers via the local Shanghai R&D center, and early adoption of high-growth channels, with 11 brands now live on Douyin where the company is outperforming expectations. The company has also reduced promotional activity to improve brand value, supporting sustained investment in the market.

• Q: What are the key opportunities for continued margin expansion after Fiscal 26's strong gains, and how will the company deploy cash now that transformational M&A is off the table? /

  A: Fiscal 26's 320 basis points of margin expansion came from both gross margin improvements and non-consumer-facing cost cuts (including employee cost reduction, infrastructure rationalization, and procurement improvements). For Fiscal 27, most additional margin expansion will come from further SG&A optimization, with the full annualized benefits of completed restructuring flowing through to Fiscal 28, so there is significant additional runway for margin gains beyond the 2027 guidance. The top priority for cash deployment is paying down outstanding debt, with near-term debt maturities planned to be paid off, followed by continued funding of growth capex and small tuck-in M&A aligned with the company's strategy.

• Q: What is the outlook for returning makeup category to growth, and how confident is management in this turnaround? /

  A: The company owns some of the category's leading brands including MAC and Clinique (the top makeup brand in the US), and is already seeing improving sales momentum. Key strategic changes include expanding distribution of makeup brands into fast-growing channels like specialty multi retailers and social commerce (the key driver of MAC's recent turnaround, after its successful Sephora rollout), accelerating the pace of new innovation (exemplified by MAC's blockbuster new lip stain launch), and rationalizing unprofitable low-productivity freestanding store locations to pivot to higher-growth channels. The company expects makeup to not only deliver improved sales growth but also improved profitability as these changes take hold.