Estee Lauder Companies, Inc. (The)

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2026 First Quarter Conference Call. Today's webcast is being recorded. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Hello. On today's webcast are Stephane De La Fabrie, President and Chief Executive Officer, and Akhil Srivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause the actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations, is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the noncomparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites, and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this webcast. And now I'll turn the webcast over to Stéphane.

Thank you, Rainy, and hello to everyone. It is good to be with you to discuss our first quarter result and share the great work our teams are delivering across the action plan priorities for Beauty Reimagined. Let me begin with the first quarter. We delivered organic sales growth of 3%, a significant sequential acceleration from the 13% decline in the fourth quarter. We are pleased by the diversity of our performance. As mainland China contributed nicely to a return to growth, the rest of our markets in total improved sequentially, including high single-digit growth in our priority emerging market, led by Mexico, Turkey, and India's double-digit growth. And travel retail grew on a favorable comparable compared to last year's low base. We also got off to a strong start, to the fiscal year, with significant improvement in operating profitability. These results reinforce the confidence we have in our fiscal 26 outlook, a pivotal step towards restoring sustainable sales growth and rebuilding our operating margin to solid double digits in the next few years. The first three action plan priorities of Beauty Reimagined, accelerate best-in-class consumer coverage, create transformative innovation, and boost consumer-facing investment, are increasingly amplifying each other to drive accelerating retail sales growth in key markets. In China, we significantly outperformed Prestige Beauty as our retail sales increased double-digit ahead of industry up high single-digit. Seven of our brands grew double digit, with Le Labo nearly triple digits. We gained share in every category, as well as both brick and mortar and online. Impressively, we have gained Prestige Beauty share in five of the last six quarters, which is unparalleled among the biggest Prestige Beauty players. In U.S. Prestige Beauty, our retail sales Growth accelerated sequentially. In the quarter, we grew 8% in skincare versus the category up 6%. The ordinary drove our share gain in skincare, while we also gained share in haircare led by Aveda. All told, we maintain our Prestige Beauty Share calendar year-to-date. The Estée Lauder brand achieved its third consecutive quarter of overall share gain in the U.S., thanks to excellent uptake in innovation. This quarter, it gained share in each of skincare, makeup, and fragrance. Impressively, we delivered strong unit share gain in U.S. Prestige Beauty, demonstrating our strategic action of driving new consumer acquisition. In several of Western European markets, prestige beauty continues to see slow growth, in some cases negative growth. In France, the biggest category in prestige beauty in Western Europe, we gain share in France and Spain. For the UK, the largest market in the region, and where Prestige Beauty is much more resilient, industry sales growth re-accelerated to nearly 10%, and we realized a strong sequential improvement in our retail sales trends. We still have much work to do in the UK, but we are moving in the right direction. Our improving retail sales performance in many key markets around the world is a testament to our team's incredibly strong execution of Beauty Reimagined, starting with accelerating best-in-class coverage. We are advancing with speed to reach consumers where they are, capitalizing on the learnings that we have had with Amazon in the US, Canada, and Japan. We opened Amazon Storefront in Mexico with Clinique, The Ordinary, and Estée Lauder, and the UK with The Ordinary. We announced our presence on TikTok Shop, launching clinic Mac and Dr. Jart in the U.S., as well as The Ordinary in Malaysia and Singapore. Impressively, Mac was awarded TikTok Shop Top Brand Campaign Award for 2025 in Personal Care and Life, recognized for the stellar grand opening and tremendous initial success. Our newest TikTok shop has served to strengthen the performance across channels, given how consumers discover, engage, and transact. This collective action in our online consumer coverage complemented first-quarter growth from our existing presence on fast-growing retailers like Tmall, Jelly, Douing, and Notino. As a result, Global online organic sales growth accelerated to double digits from mid-single digits in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel. For our European travel retail business, we make great progress in expanding our consumer coverage in France through new retail activation, new doors, and upgrading the existing fleet across our luxury portfolio. This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter. We also drove similarly strong retail sales growth in the Americas travel retail for France, in part from our all-new distribution with duty-free Americas. Looking at innovation, newness from Tom Ford, Killian Parrish, Joe Malone London, and RMEs kicked off France's rich pipeline for fiscal 26th. These launches, some of which created halo benefit on existing products, combined with the Le Labo outstanding growth made France our best performing category, rising 13%. We continue to expect France to be Prestige Beauty's fastest growing category for fiscal 26, driven by luxury, the largest mix of our France business and where we are the leader. as well as over the next few years, driven by both domestic markets and the travel retail channel. On that note, we are thrilled to have opened our new France Atelier in Paris, where our team will blend state-of-the-art technology, data-driven intelligence leveraging AI, and olfactive expertise to craft the next generation of extraordinary scents, all while innovating much quicker than we have in the past. Skincare further drove our organic sales growth in the first quarter. We had an exciting slate of innovation in high-growth subcategories and across prestige price tiers, including breakthrough launches in high, acne, and longevity targeting all age groups. These introductions, coupled with newness from earlier in the calendar year, contributed to skincare's growth. We continue to boost our consumer-facing investment to drive new consumer acquisition, focusing on high ROI opportunities like our brand building, freestanding stores, and demand generation media activation. We opened 14 net new freestanding stores for our France portfolio, including a row of new boutiques in New York City's Seoul district for Frédéric Malle, Tom Ford, Jo Malone London, and Kylian Paris. We introduced stunning new campaigns from Tom Ford's debut of Black Orchid Reserve to I Only Wear Mac and La Mer Gives Skin Life. and we are re-engaged in creating new consumer experience across travel retail corridors. To fuel our first three action priorities, we made great strides delivering on the promise of PRGP, which Akhil will describe in more detail. Finally, we are especially encouraged by the momentum we are building as we reimagine the way we work, our fifth action plan priority. Our new executive team is fully in place. Our four newly reorganized regions are fully operational, and throughout the organization, we are empowering faster decision-making. As you will recall, we committed in February to increasingly collaborate with partners in areas of business where they can support us to become the best consumer-centric prestige beauty company in the world. We are therefore thrilled to announce our new partnership with Shopify to modernize and scale our direct-to-consumer business in a phased approach, creating a best-in-class omnichannel consumer experience globally. Looking ahead. For the balance of the fiscal year, we continue executing on our action plan priorities, including investing in exciting holiday activation and expanding consumer coverage. As announced yesterday, this includes MAC entering U.S. Sephora, spanning select stores as well as online stores, and Sephora, of course, which allows us to better connect with younger consumers and accelerate market turnaround in the U.S. Before I close, I want to share a few accomplishments from our just-published Fiscal 2025 Social Impact and Sustainability Report. Since we announced our first set of public goals in 2019, we are proud to have achieved several of them across climate, water, waste, sourcing, ingredient transparency, and impactful social investments. In introducing additional 2030 goals, we are reemphasizing our focus on women and girl advancement, guided in spirit by our founder. with a new commitment to contribute $50 million to support health, education, leadership, and entrepreneurship. In closing, the first quarter marked the beginning of our return to growth, as anticipated for our fiscal 2026 outlook. While the macroeconomic environment globally continues to be dynamic, with a variety of headwinds and tailwinds, we remain vigilant and focused on achieving our ambition for Beauty Reimagined. I am incredibly grateful to our employees around the world who delivered a strong start to Fiscal 26. Onward and upward. I will now turn the call over to Akhil.

Thank you, Stéphane. Hello, everyone, and thank you for joining us today. Overall, We are encouraged with our return to growth and the improvement in margins and cash flow results, thanks to the tremendous efforts of our teams globally. We are determined to continue driving value creation and executing with excellence and urgency across the pillars of beauty reimagined. Before I share an update on a reaffirmed full year outlook, I'll start with a quick recap of our first quarter results. For more detail on a first quarter performance, please refer to a press release issued this morning. Starting with organic net sales, we grew 3% compared to last year. This was driven by double-digit growth in fragrance and low single-digit growth in skincare. Together, these led to high single-digit growth in both Asia Pacific and mainland China. Sales from our makeup and hair care categories declined, partially driving the low single-digit decrease in the Americas. Turning now to margins, our gross margin expanded 60 basis points and was 73.3% in the quarter. This was driven by sales growth as well as strong net benefits from our PRGP. reflecting operational efficiencies, lower promotional activity, and ongoing reductions in excess and obsolescence. These results more than offset the headwinds from inflation and foreign exchange transactions. In terms of operating margin, we expanded 300 basis points to 7.3% compared to 4.3% last year. This expansion reflects net benefits from our PRGP. Specifically, they drove a 3% reduction in non-consumer-facing expenses, even with the normalization of employee incentive costs. As a result, we were able to fund consumer-facing investments, which increased by 4%. We are delivering on our strategic priority to improve operating margin for the full year as we strengthen overall cost efficiency and leverage under our PRGP. We are continuing to fuel consumer facing investments that build brand desirability while maintaining discipline on non-consumer facing expenses. Our effective tax rate for the quarter was 40.5% up from 38.8% last year. The quarterly rate is based on our estimated full year geographical mix of earnings and is expected to improve in the second half of the year as profitability builds throughout the year. In addition, the elevated rate includes the unfavorable impact associated with previously issued stock-based compensation. We are evaluating tax planning opportunities aligned with the strategic changes we have been making to our organizational structure and mix of business. Our return to sales growth combined with strong cost efficiency and leverage more than doubled diluted EPS to 32 cents up from 14 cents last year. In terms of our overall PRGP, building upon the work we did last year, we are continuing to execute with rigor, discipline, and clear purpose to optimize key elements across our cross-structure. We are driving momentum across the P&L, focusing on operational excellence to improve gross margin, streamlining our organization to enhance agility, effectiveness, and efficiency through ongoing restructuring, and leveraging our competitive approach to procurement to reduce costs and maximize ROI across all areas of spend. These efforts continue to advance our PRGP initiatives, creating fuel for growth, improving profitability, and positioning the company for sustainable long-term value creation. Proceeding now to the restructuring component of our PRGP. Through September 30th, we recorded $697 million of total cumulative charges, primarily in employee-related costs. Turning now to cash flows, for the three months, we used $340 million in net cash flows from operating activities, a significant improvement as compared to the $670 million use of cash last year. The improvement primarily reflects higher earnings as well as a favorable change in operating assets and liabilities despite an increase in restructuring payments. We invested $96 million in CapEx, prioritizing consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the quarter, CapEx was down 32% versus the prior year, reflecting the phasing of projects. With a fuller outlook to invest roughly 4% of projected sales in CapEx, we are maintaining a more efficient and normalized level of investment to drive long-term sustainable growth. Also in the quarter, we paid $150 million in deferred consideration associated with the fiscal 2023 acquisition of the Tom Ford brand. Turning now to outlook, we are reaffirming our fiscal 2026 full-year outlook. While we don't expect a linear path, given macro volatility and prior year comparisons, our first quarter results give us confidence as we remain focused on delivering a full year outlook. In terms of organic net sales, we still expect flat to 3% growth for the full year. We anticipate stronger performance in the first half, with favorable comparisons in Asia Pacific, driven by our global travel retail business, as well as in mainland China. We are seeing improvement in consumer sentiment in mainland China. though it remains subdued and has yet to fully recover from historical lows. In our global travel retail business, we have good momentum in the West, fueled by consumer-facing investments and distribution expansion. That said, persistent challenges in the East continue to pressure retail sales. We expect these challenges to have a greater impact in the second half. particularly as we face tougher comparisons to last year, when mainland China returned to growth and our global travel retail business started shipping in line with retail. Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth. Before I close, let me reaffirm our assumptions regarding evolving trade policies and enacted tariffs. Based on information available and net of our planned mitigation actions through October 24th, we continue to expect tariff-related headwinds to impact profitability by approximately $100 million. This does not include any subsequent or future changes. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. In closing, our focus remains on being the most consumer-centric beauty company and creating long-term value through sustainable growth, margin improvement, and cash productivity. To our teams around the world, thank you. Your dedication to executing across all pillars of Beauty Reimagined is reflected in our results and is driving a return to sustainable sales growth and rebuilding our operating margin to solid double-digit over the next few years. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

The floor is now open for questions. If you have a question, you may simply press the star key followed by the digit one on your touchtone telephone. To ensure everyone can ask their questions, we will limit each person to one question. If I'm permitting, we will return to you for additional questions. Just queue up again by pressing the star key and the digit one. And our first question today will come from Lauren Lieberman of Barclays. Please go ahead.

Great. Thanks. Good morning, everyone. I was hoping you could talk a little bit about volume trends versus price picks. I know it's not something you usually talk about regularly, but it is disclosed in your 10Qs. And I think This quarter, given some of the comparisons and the distribution gains, will probably have been a nice move in volumes within your overall organic sales growth. But I'd love to just hear a little bit more about your perspective on the importance of driving volume over time as part of the algorithm. Thanks.

Thank you, Lauren. I'll start, and maybe Akhil can just add some flavors to it. Let me start from the comment that I made on the U.S., Because for us, we saw in the quarter significant share gain from a volume standpoint, which has been driven by several things. Some of the price adjustments that we've done with new launches, And part of the beauty of Imagine, all the new innovation that we've put forward, if you remember, have clearly committed to make sure that we have the right price point at the right price bound for every single of our four categories. And we've done that already with products like Studio Fix, in Mac, but also we've done it in other geographies where we adjusted prices, namely Clinique in UKEM, where we have had great, great success with the repositioning of the DML. But in the US, the most significant part for us was actually the market share gain in units that is showing that we are bringing new consumers. to the company and to our brand. And if you remember, that's part of Beauty Reimagined. It was very important for us that we are investing in the demand generation at the top of the funnel to just bring new consumers to our brands. So, I think we're seeing the momentum from a unit standpoint going on. Obviously, it's driven by also macroeconomic trends that where we see a lot more demand at the entry of prestige and we've seen a strong acceleration with the ordinary. We've seen a rebound also with Mac in the US and starting to see some momentum in many markets. So, I think it's a combination, Lauren, of categories, consumer demand also, but price point that we are driving throughout the organization. And we believe that allows us to just bring a lot new consumer to the company overall and contributing to the market share gain in many markets and the rebound and the growth that we're seeing in the quarter.

Yeah. Thank you, Stéphane. Lauren, as we have spoken, fundamentally the strategy is to start winning more consumers. So as part of that, one of the things we have done, and Stefan has talked about it in many forums, we have looked at our pricing to be in the right bands in many core categories where our pricing, we adjusted pricing and we have seen overall unit response. In addition, after many years of inflationary pricing that we have done, we did take a careful look at our overall portfolio and our pricing this year is lower than overall in the prior years, simply because as inflation has subsided and overall industry have taken a lot of pricing. So we believe, of course, our business is made up of many different categories. I mean, makeup, and so it's hard to make unit comments, but with the 3% organic sales growth and pricing we believe is sub 2%, we expect to have unit growth barring the mix. And of course, we are working to understand the drivers of unit mix and volume by business where it makes the most sense. Because if I'm in a business between fragrance and skincare, it's hard to make an overall comment. But our goal is to drive unit. Our goal is to bring more consumers. And we are starting to see positive results here.

I hope. One quick thing, Lauren, just to add like a very data point that is important. Where we see the biggest move in terms of units is also in the perfume category for us. And we've had a significant influx of innovation. And that's also like linked to what Akira said. And I said about accelerating innovation, accelerating innovation at the right price point. And we're seeing a lot more also smaller sizing driving the growth over the world for perfume. And this is one of the things that we are seeing and we are doubling down on accelerating going forward.

Yeah. We return to unit growth this quarter, which is a great positive.

Thanks so much.

Thank you, Lauren.

The next question comes from Dara Mocinian of Morgan Stanley. Please go ahead.

Hey, good morning. So first, just a short-term clarity. Good morning. You referenced the strong start to the year with 3% organic sales growth in fiscal Q1, but kept the full-year top-line guidance at the high end. That implies the balance of the year is more in line with Q1 or Q2. if you use the lower end of guidance. So just conceptually, is that conservatism more early in the year, trying to understand if the Q1 result gives you more optimism, particularly given the comments about a stronger first half. And then also just longer term, obviously solid share gains in mainland China in the last few quarters, you've made a number of internal improvements. Just as you look out longer term over the next few years, do you think those share gains can continue Maybe give us a bit of a short-term report card on what's driving that and how sustainable those factors may be as you look out.

Thank you, Dara. Multiple questions. Let me start maybe with Diane because I think it's going to be important to really understand the impact of China also on the four-year guidance. I'll start and Akhil will give some flavor about the balancing of our year. First of all, in China, we are really happy with our share gain. As mentioned in our prepared remark, we are well ahead of the market and we are in double-digit growth. We have seven brands in double digit and we have actually many more in positive for the quarter. And that's been really encouraging because for us it is no longer just growth on shoe brands, but it's across the portfolio, across categories, and like I said, also in brick and mortar and online where we are getting significant share. So when I see China, I see obviously a stabilization to a slight acceleration of the market that is mainly driven by us. We're seeing a peak of consumer confidence. on the Chinese consumer starting to rebound, but don't get me wrong, it's still subdued compared to historical peak, but we're seeing all of that moving in the right direction. But if you remember, our balance between the first half and the second half are very different because we're still lapsing in the first half of our fiscal year lower number both in China and travel retail. And in the second half, this is where we're starting to anniversary the beginning of the recovery that we experienced last year in China, which obviously we are early in the fiscal year. And while we are as a team extremely confident in our outlook for the year, we need to understand the balance between the two. And I would say few macro environment things that are taken into consideration. One, there's still a lot of volatility out there, and I said the environment is extremely dynamic. Trade policies are still there. Obviously, it's still very fluid, as we saw even in the middle of the night. Things are changing, and one day it's positive, some days we have to just mitigate new news, but we are navigating a lot of And there's still many areas of the world where, while we are seeing a recovery of consumer confidence, as I said, like in China, it is still very subdued in other areas, mainly in the West and in Europe. So all of that taking into consideration gives us that we still have to navigate early into the fiscal year. A great start, but a lot of volatility. And I think what I wanted is Akhil to just give a little bit more flavor also how do we see the balance of the first half and the second half.

Yeah. Thank you, Stephan. Dara, I mean, when we gave you the full year guidance, It was a very thoughtful guidance, which allowed us to run our long-term play to start investing in a business, start driving retail, and really consistently doing the right thing to build retail. So that guidance was built on. We are pleased to see that we are progressing against that guidance. However, to your question on why we are not reaffirming guidance, first of all, the macro environment continues to overall be challenging. We are pleased to see the progress in China, definitely, and not only pleased to see the overall market progress, a significant outperformance, as Stefan called out, in China. So we are happy to see that, but when you look at the broader beauty market around the world, there are pluses and minuses. So they're still there, and of course, We're also happy to hear the trade news this morning, but the environment continues to be overall macro with significant variability. Secondly, our industry outlook we gave you was 2% to 3%. We still believe that is the outlook. If we see positive to that, our intention, as Stefan has consistently said, is to grow share. So not only do we want to be in line with the market, we want to be ahead of in key places as we have said. And then a last point is our cadence. Our cadence, as you can see, last year our travel retail business was significantly lower in shipments in first half and China also was having significant declines. That is in our first half. So when we see the positives this first quarter and what we expect in first half of the year, that will be helped by that base period. Second half base period would be more challenging in travel retail and China. So all of that was incorporated in our full year outlook. Of course, we are not giving you specific quarter outlooks, but we expect quarter two to see similar type strengths. As we have seen, we have strong holiday plans. We are executing with excellence in all our markets. So there is definitely a front half, back half story. But overall, we are confident that we want to grow in line and ahead of retail, which we said were two to three. And that's why we kept a broader guidance because of the variability. So hopefully this gives you good perspective. And then we will continue to invest when we see the right opportunities because we want this turnaround that we are architecting to be sustainable for many, many years to come.

Great, that's helpful, thanks.

The next question comes from Filippo Falorni of Citi. Please go ahead.

Hi, good morning, everyone. I wanted to ask on margins, obviously performance in Q1, both at the gross and operating margin line. Can you just discuss your outlook for the year? Is it broadly unchanged, both at the gross and operating margin? And just the solid start, does it give you more confidence in potentially being towards the higher end of those margin targets, just given the strength of the business and also like the news this morning on tariffs? And then maybe just lastly, what's embedded from our investment standpoint, if you can talk about that as well. Thank you.

Thank you, Filippo. So overall, when we gave the guidance on margin 9.4 to 9.9, it included that the gross margin will be likely flat to positive. We will offset the tariff impact within the year-on-year and try to build a flat to positive gross margin. So a lot of our gross margin progress was going to come from SG&A, which is what we demonstrated in Q1. So that's the overall picture, which means, as we said in our prepared remarks as well, that consumer-facing, we will invest, which was your other question. So we invested in consumer-facing positive, and non-consumer-facing was down, which is creating the leverage. That's what you saw play out in quarter one. Of course, you have to remember that in quarter one, there is not a lot of tariffs because these things come as a variance release. So there is a lag between when tariffs happen and when they hit a P&L. So you should see that impacting gross margin and rest of the year, starting from Q2, Q3 to Q4. So the guidance we gave on gross margin still broadly stands. Today morning announcements are definitely a favorable welcome. They improve growth. Things not only on tariff, they improve things on consumer sentiment, which is very important for all the businesses operating in both countries. So that we take definitely as a positive, but that tariff amount, dollars, while we haven't done the math, it is not going to be material because we do not bring, I mean, our manufacturing is not coming in from China here. We do bring materials. So overall, we stand by our margin progression. We, of course, want to drive this margin progression quarter on quarter, but as we said, our goal is to deliver it on the year. When we see an investment opportunity, we will reinvest. We have consistently reinvested since Stefan and I started giving guidance in February. We increased consumer-facing last year, as you saw, while the sales was down, and we increased it this year as well. So that is part of our plan to build a sustainable long-term turnaround.

Yeah, and just maybe one thing, like, you know, Filippo, to just, like, you know, confirm all of that. We're not changing our guidance for the time being. We are just, like, reaffirming our guidance. But... it is important that you realize that as a team, we're feeling really confident because of the strong start of the fiscal year, especially with what we've delivered in Q1. Because a lot of the action that we've put as part of Beauty Reimagined, that it is consumer coverage, that is the acceleration and innovation, or as Akhil said, the fact that we've increased consumer-facing investment by 4%, in the first quarter are starting to just really activate the demand. And we've seen, actually, in many places, as we discussed earlier with one of the questions, the unique growth going. And I would say, like, you know, just to give some sign of, like, you know, additional confidence, and Q2 is this big quarter in beauty in general for us because you're going into 11-11. You have, like, you know, Cyber Monday. You have the holidays. So this is just, like, one of the largest quarter. we are basically pleased with the beginning of the quarter. We have very strong holiday programs that are in place. And while it's too early to comment on 11.11 in China, Golden Week, which was the first week of October, was really strong. And we believe that we grew ahead of the market, again, in a very dynamic China. And actually, the interesting also note, it was not only in China mainland, but we've seen actually a recovery of air traffic even in China, where air traffic was up 14% in Hainan, which drove a lot of strong demand. We were in double-digit growth during Golden Week. So all of that gives us the confidence that we are off to a very strong start of the year. It is not about guiding any way, shape, or form Q2, but it is about saying that we're confident and we are refirming our guidance in the year. And as we are seeing all the benefits of beauty reimagined from the consumer facing starting to pay dividends, then we will adjust the year accordingly.

Great. Thank you so much.

Thanks, beautiful.

The next question comes from Bonnie Herzog of Goldman Sachs.

Please go ahead. All right. Thank you. Good morning. I had a question on Asia travel retail. Could you provide just, I guess, a little more color on inventory levels and movements in the quarter? And then overall, I guess, how would you characterize the demand backdrop and, you know, conversion trends that you're seeing within travel retail? I guess I'm trying to get a sense of, you know, if we're past the trough and when we should start to see better conversion trends, especially with some of the benefits of your activations. Thanks.

Thanks, Bonnie. I'll start. Look, travel retail is still very volatile. That's where we start, basically, like, you know, with the market. And you've asked specifically questions for TR Asia, like, you know, in general. But TR West is actually in a good place and we're seeing a lot of positive. But let me focus on, you know, TR East. It's a tale of different cities because I think we are starting to just, like, you know, lapse some of, like, you know, the worst decline. But let me divide Asia in several buckets, because we are seeing a lot of momentum, for instance, in travel retail Japan. We were in double-digit growth in the first quarter, which was good. If you look at the rest of travel retail APAC, if you exclude China and Korea, we also believe that we are getting share with some positive momentum, especially in the emerging market Oceania. Now, when you look at the China ecosystem of travel retail, and I reaffirm what we've said, we are back to the right level of inventory and we are managing the inventory based on the demand, and this is it. This is the way we are doing it for now and for the future, and we are back in line to industry penetration of travel retail that we intend to maintain as long as the demand continues to be what it is. What is interesting within the China ecosystem of travel retail, we signed for the first time, as I said in the past question, traffic starting to be positive again in September. I was myself in Hainan a few weeks ago and experienced actually a high food traffic. Conversion, Bonnie, is still down slightly. I don't want to just say that conversion is picking up, but we as the Estée Lauder company are putting a lot in place to drive retail activation. We are investing in retail podium with Estée Lauder, with Jo Malone, with Le Labo, with Tom Ford. We are really deploying the entire arsenal of our brand, which led us to believe that the strong performance that we've seen during Golden Week, we tend to just drive a lot more traffic showed us actually gaining market share. Now, obviously, Golden Week is October 1st to October 8th, so I'm just not concluding anything for the quarter, but I'm showing a beginning of rebound through strong retail activation on our part, but also traffic resuming and some level of conversion getting better when you provide the right experience to the consumer.

Yeah. Thank you, Stefan. And just to add to it, Bonnie, your comment on inventory. So as we have consistently communicated, both Stefan and I, that, look, our travel retail inventory are now more right-sized relative to the retail we are seeing. And we are working to drive retail, which, of course, as you asked and Stefan commented, is coming back, but not everywhere overall. It's starting to come back in parts of travel retail. So our inventory is, you should feel good that our inventory is in the right range. Of course, we adjusted up and down based on the retailers working capital needs, et cetera, but there is nothing that should concern anybody that our travel retail inventory is elevated or less. It's in the right place and it is significantly lower than where it was one year ago. both in absolute terms and ratios of forward-looking retail. So we feel good about that, which has really allowed us to focus on building the business and really managing it to retail and all of the points which Stefan made. And on travel retail, we are starting to really double down in the West and Americas. So not only our position of strength in East, but now we want to position ourselves in a much stronger way in the global travel retail.

All right. Thank you.

Thank you.

The next question comes from Steve Powers of Deutsche Bank. Please go ahead.

Great. Good morning. Thank you. Stefan, you mentioned in the past several times that you felt coming into the role that Estee Lauder just hadn't moved fast enough into new channels to keep up with the consumer. Clearly, we've We've seen lots of action in recent quarters to close that gap, be it Amazon, Shopify in Southeast Asia, Amazon, or even the move to Mac into Sephora. So I guess, you know, acknowledging that consumers will, you know, continue to move around and you'll have to adjust. I'm curious as to what degree you think you still have opportunities to catch up and how that plays into future planning. And I guess a little bit how that varies across regions, if you could. Thank you.

No, I think, Steve, thank you. First of all, thank you for acknowledging that we are moving with speed, like where the consumer is moving. I've made it very clear to you and to, frankly, first of all, to the entire organization, is we're moving where the consumer is moving. As long as where we go, we can build equity and desirability for our brand. And this is what we've done today. Like you actually yourself mentioned, we are in Amazon in the U.S., in Canada, in Japan, in the UK, in Mexico, and we're continuing to look for other places. We have TikTok Shop, which is really interesting for us because TikTok Shop, I don't necessarily consider it as a channel, I consider it as really an ecosystem that allows us to recruit new consumers and we are able to retain them on the channel and on other channels. It was also shop is in Asia. It was like, you know cacao also where we accelerated our brand You know Mac in the US with Sephora is a major step in the right direction, let alone also the partnership that we've announced 24 hours ago with Shopify that is really going to allow us to be best-in-class direct-to-consumer, where we are really tackling all our online connection and freestanding store connection with this really first-in-class partnership that we've announced. So, I think you're seeing us moving with speed and clarity of what it is. And so, I've been, frankly, like, you know, traveling around the world next non-stop over, like, you know, the past few months, in the past few quarters. There's not a market where the team is not focused on looking at new channels, but also going deeper in the existing channel. I can tell you For instance, that in Europe, continental or even the emerging market, the team is, as we speak, rolling out more distribution for Tom Ford, for Jo Malone, for Kilian. We've added 14 net new freestanding stores across our foreign brand led by Le Labo and Jo Malone. So you're seeing us really moving quickly, and I can tell you this is now deeply embedded in the organization. We are going fast. And the new organization that we've put in place with the new four cluster geographical region and the brand and who does what in the organization allows us, frankly, to just move much faster through the organization and, frankly, deploy the innovation according to the need of the retailers where we move and deploy much more sophisticated media targeting that allows us by age group and by retail and by region to deploy our media and to really go after the highest ROI possible. So you can count on us to see our brand being deployed again in more channels in the future. But, again, as long as this channel maintains, preserves, or amends our brand equity around the world. Hope it helps.

Yes, perfect. Thank you so much.

Thanks, Steve.

The next question comes from Peter Graham of UBS. Please go ahead.

Great. Thank you. Good morning, everyone. So I wanted to go back to Filippo's question just on margins, but more on the phasing. Akil, I think back in August, you mentioned greater operating margin expansion in the back half and that it would build sequentially through the year. And I guess if that were still the case based on what we saw in the first quarter, that would suggest maybe some decent upside relative to the full year guidance. So recognize that you have greater confidence today, but just wanted to ask if there's a change in view on the phasing. Thanks.

I think overall, when you look at our nine and up margin range between 9.4 to 9.9%, I mean our 7% margin, that we had is still lower. So clearly we will build in absolute terms sequentially. And I think in our business, we definitely should continue to look at sequential progress relative to even on a quarter on quarter barring for seasonality. So we are not changing our, it's one quarter of information is not enough information for us to change that phasing. Of course, we are working to make sure every day we are adding things to plan so that we can, of course, deliver a plan in spite of any situations and hopefully be able to come better than that. That would be the ambition of any company, and that's our ambition as well. But at this point, there is not enough information to change our phasing. What you are seeing this quarter definitely is the good work on SG&A. and investment in consumer facing. However, to build consistent sales, we do want to make sure that we have enough fuel to invest so that we can keep driving the business. And the work on PRGP is broad based. I just want to reiterate that while we are focusing on the quarterly points, the bigger point is the company has built a cost muscle in a way that it never had before beyond the growth work, the points we talked. So the cost muscle that we have built is allowing us to look at COGS area, allowing us to look at OPEX area through the enterprise business services work we have set, procurement work, continued restructuring. So we continue to believe the significant long-term opportunity on SG&A. While your question is definitely related to the specific quarter phasing, we believe there is significant opportunity, as both Stefan and I have commented, on expanding margin to solid double digit over the next few years. And that is the work we are every day focused on, while, of course, giving you good guidance on quarter and quarterly phasing. So the overall upside remains, and we are working to bring that home every day, every month.

And Peter, what I would add to just, Akhil, I just want you to just like, you know, see obviously like, you know, what I said like a few minutes ago, very strong confidence of where we started the year. Okay, so we're starting, we're off to a very strong start with the 3% growth and the 300 basis point margin improvement. We, as Akhil said, obviously we are not there yet to the full year profit, which we continue to build, and we have actually a path to get there. I'm absolutely, I reinforce the fact that we are confident in delivering the guidance that we gave, both on the top line, on the bottom line, on the growth margin, investing in our brands and et cetera. What I'm actually really encouraged in what we're seeing is actually the fast re-acceleration of our retail in geographies like China, the ability to maintain our market share in the US, which is the first time in many, many years, as I've mentioned many times, but also our ability to just grow in unit again, which means that we're bringing new consumer. Let alone, we haven't really talked much about innovation. We have a slew of innovation coming in Q1, but we have a lot coming in Q2 and Q3 that we can discuss, which is going to allow us to just connect with the consumer at different price point, different age group, different categories. Every single of our brands and regions are working on deploying new innovation. So I think you are going to see a continuous acceleration of ourselves and the continuous rebuilding of the operating margin towards the guidance that we are giving for the year and towards the solid double-digit operating margin for the future. And that's really what we are laser-focused as a team at delivering sequential improvement and proving the organization and the world that we can do it sequentially, but in a very strong fashion as demonstrated in the first quarter.

Great. Thank you so much. I'll pass it on.

Thanks, Peter.

The next question comes from Chris Carey of Wells Fargo Securities. Please go ahead.

Hi. Good morning, everyone. Good morning, Chris. So I have a question that tracks well potentially with how you answered the prior question. I think as we look over the next few years toward solid double-digit margins, there's a few different ways you can get there. Obviously, growing the top line is paramount. Perhaps you can improve gross margins a bit or you can manage lower your cost structure over time. I think I hear, of course, that you're certainly committed to staying well invested over this time horizon so as to deliver the most important metric, which is sustainable, accelerating revenue growth. So can you just talk about perhaps your ability to sustain stable, let's call it SG&A dollars over the next few years, even while you'll be leaning into consumer-facing investments? I think sometimes with the cost savings program, it's difficult to parse out the net numbers, but just the ability to kind of hold stable costs even as you're investing. And connected to that, you know, there's a pretty significant earnings leverage opportunity in the tax rate. You know, I get a ton of questions about this, and candidly, I don't always have great answers. Can you just give us a sense of how, you know, tax planning will factor over the next three to five years and what the opportunities are? Thanks so much.

Yeah, no, thank you, Chris. Let me take the first part of the question, and Akira will just go into the tax part. Look, I think your question kind of answered already a little bit where we're going. Because if I just take it a little bit like, you know, from beauty or imagine, we're doing all of the above. We are improving gross margin. And if you remember in fiscal 25, we made significant improvement in our gross margin. And this year we say that we are maintaining it while absorbing the impact of, like, you know, the tariff. But actually, you said it. Chris, we're building a lot of leverage in our gross margin for future because I made it very clear that the innovation that we are bringing to market not only is at the right suggested retail price for the consumer, but is also built to be accretive to the category where we are launching it. That is skincare, that is makeup, that is hair, or that is like, you know, perfume. So we are just like, you know, really making sure that we are building it. We've also demonstrated a significant discipline on the management of inventory that also helps us from a cash flow management tremendously. And I really believe that we are going towards like, you know, being best in class and our value chain team is continuing to do a lot, to create a lot of efficiency that when we go to unit growth, as we are starting to expand, we're going to get a lot of leverage. Because that's important. The P&L that we are building is being built for leverage. SG&A, we decreased it 3% in Q1, and through the PRGP, and I can't believe that it's like, you know, Chris, you are like, you know, question number seven, We haven't even mentioned PRGP up to this point. But PRGP is here to create also a lot of leverage to reduce the penetration of SG&A in our total P&L. And there is a strong discipline now the way that we are managing expenses, and we are always putting expense in favor of consumer facing to further accelerate the top line, because with top line, we know we'll get more units, we will get more leverage, gross margin will improve, percentage of SG&A will go down, and then we are able to ignite growth and obviously get a lot of leverage from an operating margin. We haven't really talked about the PRGB today, but PRGB is going in the right direction, giving us actually the right momentum to invest in consumer-facing and to de-layer the P&L of the organization to be much more agile, to be faster, but more importantly also to create a lot more efficiency that is going to allow us to frankly go not only to maintaining share, but to beat and to beat the market and to grow share in the future and to get a lot of leverage. So that's the way I would like you to see the P&L and what we are building and the momentum that we are building, actually quite early. into the process because we are not even at the one-year anniversary of the launch of Beauty Reimagined. We are only in the third quarter, and a lot of progress has been made, and it gives you kind of a sense of where and how the P&L is going to be built. Obviously, tax is something that we are focused on, as Akhil said, and he's just going to say a few more words about it.

Yeah, and before I go into tax, I just want to add one thing on the margin part, which Stefan said. Like with 3% sales growth this quarter, you can see the leverage that we got. So there are multiple paths to the solid double-digit margin. One, like you said, gross margin, where we ended last year at 74%. That still has significant upside on gross margin. And when you break our SGA into consumer-facing and non-consumer-facing, In non-consumer facing, we are already demonstrating to use significant cost reduction. With a company that could be much bigger on sales, that trend on non-consumer facing, we intend to continue. Even within consumer facing, we are bringing significant tools to drive ROI. We intend to buy marketing inputs at much better price and much better effectiveness So not only we will improve non-consumer facing, we intend to improve consumer facing investment ROI in a significant way. So there are three pronged ways to go from the current margin we have to solid double digit and across all of those three pillars as Dipan said. On tax rate, We have commented on our high tax rate. We gave a guidance for 36% this year, which should be lower than last year. So it should start to move in the right direction. But there is significant, we are not happy with this tax rate. It is driven by a geographical mix of earnings. We are looking through our PRGPD structuring to look at tax planning opportunities. A significant part of a business is international markets, as you know. So that is driven by that. Plus the stock comp, effect, negative effect of Stockholm previously has impacted us. So we intend to give you more clarity as we work through this year and drive this favorability on tax rate. I mean, every point of tax rate gives us significant improvement as you're pointing out. And as I commented in last call, this is clearly a piece of work we are doing. These things do take a little bit of time. and have to be done very methodically and in the right way. But this is clearly one of our top priorities. So expect to hear more from us in the coming months.

That concludes today's question and answer session. If you were unable to join for the entire webcast, A playback will be available after 1 p.m. Eastern Time today through November 15th. Please visit the Investors section of the company's website to view a replay of the webcast. That concludes Estee Lauder's conference call. I would like to thank you all for your participation and wish you a good day.