ESTEE LAUDER COMPANIES INC Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Beauty Reimagined Strategy: Five action plan priorities: accelerate best-in-class consumer coverage, create transformative innovation, boost consumer-facing investments, fuel sustainable growth through bold efficiencies with expanded PRGP, and reimagine the way we work.
• PRGP Expansion: Significant progress made with over 60% of fiscal 2025 objective achieved in the first half, but further expense reduction needed. Now expanded PRGP includes redesigning expense structure, rationalizing non-consumer-facing investments, and outsourcing select services.
• Organizational Changes: Established new consumer-centric executive team, realigned regions into clusters for better focus, and simplified work streams across brands, regions, and functions.
• Innovation and Consumer Coverage: Brands like The Ordinary launched on U.S. Amazon Premium Beauty stores, Clinique launched in Canada Amazon stores, and La Mer grew in Mainland China. Le Labo and Editions de Parfums Frédéric Malle had strong double-digit organic sales growth.

Segment Performance:

• Product Categories: Organic net sales decreased 12% in Skin Care, 8% in Hair Care, 1% in Makeup, and increased 2% in Fragrance.
• Regions: Asia Pacific net sales decreased 11% primarily due to subdued consumer sentiment in Mainland China, Korea, and Hong Kong SAR; EMEA net sales fell 6% due to retail softness in Asia travel retail; Americas net sales were flat with a 1% decline in North America offset by double-digit online sales growth. Revenue contribution percentages weren't explicitly stated in absolute terms but the performance by segment and region is as outlined.

Guidance:

• Third Quarter Outlook: Expect organic net sales to decrease 10%-8% globally, primarily driven by a strong double-digit decline in global travel retail. Moderate gross margin expansion expected with benefits from PRGP offsetting sales volume deleverage and consumer-facing investments. Third quarter adjusted EPS expected to be $0.20-$0.30.
• Long-Term: Aim to restore sustainable sales growth and achieve solid double-digit adjusted operating margin over the next few years.

Risks:

• Subdued consumer sentiment in China and Korea pressuring Asia travel retail.
• Evolving global geopolitical uncertainty causing continued volatility and low visibility.
• Challenges in Asia Pacific and Asia travel retail impacting certain brands like TOM FORD and Too Faced.

Q: Bryan Spillane from Bank of America asked about portfolio prioritization and organization structure.

A: Stéphane de La Faverie discussed the new organization structure designed to be leaner and faster, with regions realigned into clusters for better focus, and mentioned regular portfolio reviews of brands to accelerate what works and stop what doesn't.

Q: Lauren Lieberman from Barclays inquired about the change in approach to spending ahead of sales growth.

A: Stéphane de La Faverie and Akhil Shrivastava explained shifting investments to consumer-facing activities, distinguishing between consumer-facing and fixed costs, and focusing on ROI and pivoting quickly.

Q: Dana Telsey from Telsey Group asked about markers for proof of success and thoughts on travel retail.

A: Stéphane de La Faverie outlined tracking markers like consumer coverage, transformative innovation, consumer-facing investments, PRGP progress, and simplification of ways of working, and stated travel retail remains important but dependency is being reduced.

Q: Dara Mohsenian from Morgan Stanley asked about cultural changes and external help.

A: Stéphane de La Faverie emphasized cultural change through a new executive team, commitment to values, and use of external partners, while Akhil Shrivastava highlighted building a culture of ownership, consumer focus, and value creation.

Q: Oliver Chen from TD Cowen asked about prestige market future and innovation pipeline.

A: Stéphane de La Faverie discussed the strong fundamentals of the beauty market, distribution expansion, and tailored innovation, while Akhil Shrivastava spoke about margin improvement through gross margin expansion, procurement, and shared services.

Q: Olivia Tong from Raymond James asked about discussions with retailers and capturing consumers in Asia.

A: Stéphane de La Faverie talked about tailoring innovation to connect with consumers, differentiating through tailored innovation by consumer, distribution, and price point.