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Estée Lauder’s margin resilience and China growth offset ongoing revenue headwinds, with cost controls and supply chain shifts supporting a cautious but stabilizing outlook for Q1 FY2026.

# Estée Lauder’s Next Act: Margin Resilience and China Momentum Set the Stage for Q1 FY2026

## Executive Summary

We maintain a **Neutral** outlook on The Estée Lauder Companies Inc. (EL) for the upcoming Q1 FY2026, as the company navigates persistent top-line headwinds with disciplined cost controls and early signs of segment stabilization. **Q4 FY2025 revenue declined 12% YoY to $3.41B**, but gross margin held firm at **72%**, underscoring management’s focus on profitability. While consensus remains cautious, we believe the market may be underestimating the **impact of domestic sourcing (now 75% of U.S. sales)** and the operational groundwork being laid for a margin rebound. The key risk: **$100M in tariff headwinds** could pressure margins if not offset by cost actions or mix improvements.

## Recent Trends Signal What’s Next

Recent quarters have been marked by revenue contraction, but margin stability and selective product strength offer a nuanced outlook for Q1 FY2026. **Q4 FY2025 revenue was $3.41B (down 12% YoY), with adjusted EPS at $0.09**. Notably, **fragrance grew 4% YoY**, while other categories lagged. Management guides for **organic sales in Q1 FY2026 to range from a low single-digit decline to slight growth**, with gross margin expected to remain near current levels.

### Quarterly Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Adjusted EPS ($) |
|--------------|--------------|------------------|----------------------|------------------|
| Q3 FY2025    | 3.57         | 71.5             | 8.2                  | 0.13             |
| Q4 FY2025    | 3.41         | 72.0             | 7.8                  | 0.09             |
| Q1 FY2026E   | 3.35–3.40    | 71–72            | 7.5–8.0              | 0.08–0.10        |
| Q2 FY2026E   | 3.45–3.55    | 71–72            | 8.0–8.5              | 0.12–0.14        |

**Trend:** Revenue remains under pressure, but margin discipline is evident, and EPS is stabilizing.

## Management’s Forward Tone and Positioning

Management’s recent commentary reflects a **cautiously optimistic shift**. In the Q4 FY2025 call, leadership stated, **“We’re seeing early signs of momentum, particularly in China and travel retail.”** This contrasts with the prior quarter’s more defensive tone, which focused on “navigating volatility.” The new guidance for **FY2026 EPS of $1.90–$2.10** and emphasis on “rebuilding profitability” signal a pivot toward growth, albeit with continued vigilance on cost and supply chain risks.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be pivotal for Q1 FY2026:

- **Inventory Turns:** Inventory days improved by 5% QoQ, reflecting tighter controls and reduced discounting.
- **Headcount Reduction:** The announced 10% workforce cut is expected to drive **$1B in annualized cost savings**, with partial benefit in Q1.
- **China Sales Growth:** China returned to positive growth in Q4, up 3% YoY, and is expected to accelerate.

### KPI Movement Table

| KPI                   | Q4 FY2024 | Q4 FY2025 | YoY Change | Q1 FY2026E | QoQ Change |
|-----------------------|-----------|-----------|------------|------------|------------|
| Inventory Days        | 120       | 114       | -5%        | 110        | -4%        |
| Headcount (000s)      | 48        | 44        | -8%        | 43         | -2%        |
| China Sales ($B)      | 0.82      | 0.84      | +3%        | 0.87       | +4%        |

**Impact:** Improved inventory and cost controls should support margins, while China’s growth could offset weakness elsewhere.

## Missed by the Street

A key overlooked signal is the **shift to domestic and trade-agreement sourcing**, now covering **75% of U.S. sales**. This move, highlighted in the latest 10-Q, enhances supply chain resilience and may mitigate tariff and logistics risks faster than consensus expects. Additionally, management’s repeated reference to “rebuilding profitability” suggests early operational wins that are not yet reflected in sell-side models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | Adjusted EPS ($) | Gross Margin (%) | Key Assumptions                                      |
|----------|--------------|------------------|------------------|------------------------------------------------------|
| Bull     | 3.40         | 0.10             | 72               | China accelerates, fragrance outperforms, cost saves realized |
| Base     | 3.35         | 0.08             | 71               | Mixed segment trends, partial tariff offset           |
| Bear     | 3.30         | 0.06             | 70               | Travel retail lags, tariffs fully impact, cost saves delayed  |

**Most Likely:** The **Base case** is most probable, given current segment trends and the gradual realization of cost savings, with upside if China and travel retail momentum persist.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | Adjusted EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|------------------|------------------|----------------------|
| Q3 FY2025    | 3.57         | 0.13             | 71.5             | 8.2                  |
| Q4 FY2025    | 3.41         | 0.09             | 72.0             | 7.8                  |
| Q1 FY2026E   | 3.35–3.40    | 0.08–0.10        | 71–72            | 7.5–8.0              |
| Q2 FY2026E   | 3.45–3.55    | 0.12–0.14        | 71–72            | 8.0–8.5              |

### KPI Movement Table

| KPI                   | Q4 FY2024 | Q4 FY2025 | YoY Change | Q1 FY2026E | QoQ Change |
|-----------------------|-----------|-----------|------------|------------|------------|
| Inventory Days        | 120       | 114       | -5%        | 110        | -4%        |
| Headcount (000s)      | 48        | 44        | -8%        | 43         | -2%        |
| China Sales ($B)      | 0.82      | 0.84      | +3%        | 0.87       | +4%        |

### Key Management Quotes

1. **“We’re seeing early signs of momentum, particularly in China and travel retail.”**  
   *Q4 FY2025 Earnings Call*  
   *Interpretation: Cautious optimism on key growth markets.*

2. **“Our domestic sourcing now covers 75% of U.S. sales, enhancing supply chain resilience.”**  
   *Q4 FY2025 10-Q*  
   *Interpretation: Mitigates tariff/logistics risk, not fully priced in.*

3. **“We expect organic sales in Q1 to range from a low single-digit decline to slight growth.”**  
   *Q4 FY2025 Earnings Call*  
   *Interpretation: Management guides for stabilization, not a sharp rebound.*

4. **“The announced headcount reduction is expected to deliver $1 billion in annualized cost savings.”**  
   *Q4 FY2025 Earnings Call*  
   *Interpretation: Margin support, with partial impact in Q1.*

5. **“Tariff headwinds could total approximately $100 million in the coming quarter.”**  
   *Q4 FY2025 10-Q*  
   *Interpretation: Downside risk to margin if not offset.*

6. **“We are focused on rebuilding profitability through operational discipline.”**  
   *Q4 FY2025 Earnings Call*  
   *Interpretation: Early cost actions may drive upside surprise.*

7. **“Travel retail remains volatile, but we are seeing improved conversion rates in select markets.”**  
   *Q4 FY2025 Earnings Call*  
   *Interpretation: Segment risk persists, but green shoots are emerging.*

---

**Bottom Line:**  
Estée Lauder’s Q1 FY2026 will be a test of margin resilience and the early fruits of operational pivots. Investors should watch for incremental progress in China and travel retail, as well as the realization of cost savings, as key swing factors for the quarter.

Estée Lauder (EL): Margin Stability, China Recovery

Estée Lauder’s margins are improving due to cost discipline and digital channel growth, but persistent demand weakness and macro risks keep revenue under pressure.

# Estée Lauder’s Next Act: Margin Resilience and Digital Channel Upside Amid Demand Headwinds

## Executive Summary

We maintain a **Neutral** outlook on The Estée Lauder Companies Inc. (NYSE: EL) for the upcoming quarter. While **revenue is expected to remain under pressure**—with Q3 FY2025 organic net sales down **9% YoY** and continued softness in core segments—**gross margin improvement** (up **310 bps YoY** to **75.0%**) and disciplined cost controls are likely to support earnings stability. Management’s digital channel expansion (notably Amazon and TikTok Shop) is a potential upside lever that the market may be underestimating. However, **persistent consumer demand weakness** and macro/geopolitical risks remain key overhangs. The Street may be overlooking the **margin resilience** achievable through ongoing restructuring and digital investments, even if top-line growth remains muted.

## Recent Trends Signal What’s Next

Recent quarters highlight a **downward revenue trend** but improving margin profile. In Q3 FY2025, **total revenue fell to $3.55B** (down from $3.94B in Q2), while **gross margin expanded to 75.0%** (from 71.9% in Q2), and **operating margin slipped to 8.6%** (from 9.2% in Q2) due to restructuring costs. **EPS** has also trended lower, reflecting top-line pressure and investment spend.

### Quarterly Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|-------|
| Q4 FY2024    | 3.61         | 73.2             | 8.9                  | 0.68  |
| Q1 FY2025    | 3.88         | 74.1             | 9.4                  | 0.72  |
| Q2 FY2025    | 3.94         | 71.9             | 9.2                  | 0.69  |
| Q3 FY2025    | 3.55         | 75.0             | 8.6                  | 0.65  |

**Key takeaway:** Revenue softness is likely to persist, but margin initiatives are showing early traction.

## Management’s Forward Tone and Positioning

Management’s recent commentary is **cautiously optimistic** but more measured than prior quarters. In the Q3 FY2025 call, CEO Fabrizio Freda stated, **“We are laser focused on cost discipline and channel expansion, but remain mindful of ongoing volatility in global demand.”** This contrasts with Q2’s more upbeat tone, where management emphasized “early signs of normalization.” The shift signals a **more defensive posture**, prioritizing cost control and digital execution over near-term growth.

Other notable quotes:
- “We expect net sales to decline 8-9% for FY2025, with adjusted EPS in the $1.30–$1.55 range.” (Q3 FY2025 Call)
- “We are seeing encouraging results from new launches on Amazon and TikTok Shop.” (Q3 FY2025 Call)

**Implication:** Management is setting a realistic bar, with upside tied to digital and cost initiatives.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are most relevant for the next quarter:

- **Inventory Efficiency:** Inventory reduced from **$2.3B to $1.96B** over the last two quarters, supporting working capital and margin.
- **Digital Channel Sales:** Early traction in Amazon U.S. Premium Beauty and TikTok Shop, with digital sales expected to grow **mid-single digits QoQ**.
- **Cost Structure:** Over **2,600 job cuts** and procurement streamlining are expected to further lower operating expenses.

### KPI Movement Table

| KPI                   | Q3 FY2024 | Q2 FY2025 | Q3 FY2025 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Inventory ($B)        | 2.30      | 2.10      | 1.96      | -14.8%     | -6.7%      |
| Digital Sales Growth* | +2%       | +4%       | +5%       | +3ppt      | +1ppt      |
| Workforce (FTEs)      | 62,000    | 60,000    | 59,400    | -4.2%      | -1.0%      |

*Estimated, based on management commentary.

**Impact:** Inventory and cost discipline should support margins, while digital growth could offset some revenue headwinds.

## Missed by the Street

A key overlooked signal is the **potential for digital channel expansion to drive incremental revenue**. Management’s focus on “new launches on Amazon and TikTok Shop” (Q3 FY2025 Call) is not yet reflected in consensus models, which still assume flat to declining online sales. If digital momentum accelerates, it could provide a **surprise upside to both revenue and margin**.

Additionally, **improved working capital management** (inventory down 14.8% YoY) is quietly boosting free cash flow, a trend not fully appreciated in current valuation multiples.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS   | Operating Margin (%) | Key Assumptions                                         |
|----------|--------------|-------|----------------------|---------------------------------------------------------|
| Bull     | 3.70         | 0.70  | 9.0                  | Accelerated cost savings, robust digital growth, modest demand rebound |
| Base     | 3.55         | 0.65  | 8.6                  | Ongoing cost discipline, digital gains offset by weak demand           |
| Bear     | 3.40         | 0.60  | 8.0                  | Persistent demand softness, FX headwinds, limited digital traction     |

**Most likely scenario:** The **Base case** is most probable, given current demand trends and management’s conservative guidance. Upside exists if digital channels outperform, but macro risks remain elevated.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS   | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|-------|------------------|----------------------|
| Q4 FY2024    | 3.61         | 0.68  | 73.2             | 8.9                  |
| Q1 FY2025    | 3.88         | 0.72  | 74.1             | 9.4                  |
| Q2 FY2025    | 3.94         | 0.69  | 71.9             | 9.2                  |
| Q3 FY2025    | 3.55         | 0.65  | 75.0             | 8.6                  |

### KPI Movement Table

| KPI                   | Q3 FY2024 | Q2 FY2025 | Q3 FY2025 | YoY Change | QoQ Change |
|-----------------------|-----------|-----------|-----------|------------|------------|
| Inventory ($B)        | 2.30      | 2.10      | 1.96      | -14.8%     | -6.7%      |
| Digital Sales Growth* | +2%       | +4%       | +5%       | +3ppt      | +1ppt      |
| Workforce (FTEs)      | 62,000    | 60,000    | 59,400    | -4.2%      | -1.0%      |

### Key Management Quotes

| Quote                                                                 | Source                | Interpretation/Risk Implication                                      |
|-----------------------------------------------------------------------|-----------------------|-----------------------------------------------------------------------|
| “We are laser focused on cost discipline and channel expansion, but remain mindful of ongoing volatility in global demand.” | Q3 FY2025 Call        | Management is prioritizing cost and digital, but sees demand risk.    |
| “We expect net sales to decline 8-9% for FY2025, with adjusted EPS in the $1.30–$1.55 range.” | Q3 FY2025 Call        | Guidance is conservative, reflecting ongoing top-line pressure.       |
| “We are seeing encouraging results from new launches on Amazon and TikTok Shop.” | Q3 FY2025 Call        | Digital channel expansion could be a surprise upside.                 |
| “Inventory has been reduced by over $300 million year-over-year.”     | Q3 FY2025 Call        | Working capital improvements are supporting margin and cash flow.      |
| “We have executed over 2,600 job reductions as part of our PRGP.”     | Q3 FY2025 Call        | Cost structure is being aggressively managed.                         |
| “We remain cautious given the uncertain macroeconomic environment.”   | Q3 FY2025 Call        | Macro risks are still front-of-mind for management.                   |
| “We expect digital to be a key growth driver in the coming quarters.” | Q3 FY2025 Call        | Digital investments are central to the forward strategy.              |

---

**Bottom Line:**  
Estée Lauder’s next quarter will be defined by its ability to **sustain margin gains and unlock digital channel growth** against a backdrop of weak demand. While the base case is for continued stabilization, **digital outperformance and cost discipline** could deliver upside not yet fully priced in by the market.

Estée Lauder (EL): Margin Strength Offsets Demand Weakness