Executive Summary / Key Takeaways

• The Estée Lauder Companies (EL) is undergoing a significant transformation, "Beauty Reimagined," aimed at restoring sustainable sales growth and achieving a solid double-digit adjusted operating margin in the coming years.
• Fiscal Q1 2026 marked a strong start to this turnaround, with organic sales growth of 3% and a 300 basis point expansion in operating margin, driven by strategic initiatives and the Profit Recovery and Growth Plan (PRGP).
• The company is aggressively expanding consumer coverage through new channels like Amazon and TikTok Shop, leveraging transformative innovation across price tiers, and boosting consumer-facing investments with a focus on high ROI.
• EL's competitive positioning is strengthening in key markets like China and the U.S., evidenced by consistent market share gains and a return to unit growth, while strategic regionalization of its supply chain and integration of AI enhance operational efficiency and competitive advantage.
• Despite macroeconomic volatility and anticipated tariff headwinds, management has reaffirmed its fiscal 2026 outlook, signaling confidence in its strategic execution and long-term value creation.

The Genesis of Transformation: Reimagining Prestige Beauty

The Estée Lauder Companies, founded in 1946, has long been a steward of luxury and prestige beauty, building a formidable portfolio of brands that define global elegance. The legacy of Leonard A. Lauder, son of founder Estée Lauder, who passed in June 2025, profoundly shaped the company's expansion into Europe and Asia and its commitment to research and development. This rich history of brand desirability, high-quality products, and exceptional talent forms the bedrock of its current strategic pivot.

However, recent years presented significant headwinds. Subdued consumer sentiment in China disproportionately impacted the company, given its strong market share in the region. Internally, increasing organizational complexity and a narrow focus on certain markets and channels led to a loss of agility, causing missed growth opportunities, particularly in North America. This was compounded by lower sales in higher-margin areas and an overgrown expense base, as investments in capabilities outpaced actual growth.

In response, Estée Lauder launched "Beauty Reimagined," a bold strategic vision designed to address these challenges head-on. This comprehensive transformation aims to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years. The strategy is built upon five core action plan priorities: accelerating best-in-class consumer coverage, creating transformative innovation, boosting consumer-facing investments, fueling sustainable growth through bold efficiencies, and reimagining the way the company operates.

Technological Edge: Powering Agility and Precision

A critical differentiator and enabler of the "Beauty Reimagined" strategy is Estée Lauder's deepening integration of advanced technology, particularly Artificial Intelligence (AI), across its operations. The company is hardwiring AI into various workflows, from demand forecasting and supply chain management to product development and marketing. This strategic adoption has already yielded tangible benefits, such as achieving new heights in weighted average forecast accuracy, which better synchronizes demand and supply and significantly improves inventory management.

In marketing, AI has driven a 31% increase in Return on Investment (ROI) from North America media campaigns, enabling faster decision-making and real-time market responsiveness. This allows for more precise targeting of consumers with the right assets and media, optimizing spending for maximum impact. Furthermore, the company's new Global Fragrance Atelier in Paris leverages state-of-the-art technology, data-driven intelligence, and olfactory expertise to craft next-generation scents, accelerating innovation cycles. This focus on technological differentiation not only enhances operational efficiency and reduces costs but also strengthens the company's competitive moat by enabling faster, more personalized product development and consumer engagement.

Competitive Landscape: Resurgence in a Dynamic Market

Estée Lauder operates in a highly competitive global prestige beauty market, vying with industry giants like L'Oréal (LRLCY), LVMH (MC), Procter & Gamble (PG), and Coty (COTY). While L'Oréal boasts a broader market presence spanning mass-market to luxury, and LVMH excels in niche, fashion-oriented luxury, Estée Lauder's strength lies in its focused portfolio of high-end, prestige brands like La Mer, Estée Lauder, and Clinique, which command strong brand loyalty and pricing power.

The company's strategic shift towards expanding consumer coverage into high-growth channels, including Amazon Premium Beauty stores (now featuring 11 brands in the U.S. and expanding to Canada, Japan, U.K., and Mexico), TikTok Shop, Shopee, and a new partnership with Shopify for direct-to-consumer business, directly addresses past agility gaps. This aggressive channel diversification helps Estée Lauder compete more effectively against both traditional rivals and nimbler, tech-driven new entrants. For instance, the entry of M·A·C into U.S. Sephora and Sephora at Kohl's aims to connect with younger consumers and accelerate the brand's turnaround.

Recent performance underscores a competitive resurgence. In China, Estée Lauder significantly outperformed Prestige Beauty, with retail sales increasing double-digit ahead of the industry and gaining share in 5 of the last 6 quarters. The company also maintained its U.S. Prestige Beauty share year-to-date, with the Estée Lauder brand achieving its third consecutive quarter of overall share gain across skin care, makeup, and fragrance. Notably, the company reported strong unit share gains in the U.S., indicating successful new consumer acquisition. This contrasts with some competitors who may struggle with broader market access or adapting to evolving consumer preferences. While Estée Lauder's gross profit margin of 74.21% (TTM) is competitive, its operating profit margin of -0.67% (TTM) reflects the ongoing transformation and deleverage, contrasting with L'Oréal's robust 20% operating profit margin in 2024. However, the strategic investments and PRGP are designed to close this gap.

Financial Performance: A Turnaround in Motion

The first quarter of fiscal 2026 demonstrated a pivotal shift in Estée Lauder's financial trajectory. The company reported organic sales growth of 3% for the three months ended September 30, 2025, a significant sequential acceleration from the 13% decline in the fourth quarter of fiscal 2025. This growth was broad-based, with Mainland China returning to growth and other markets, including priority emerging markets like Mexico, Turkey, and India, showing high single-digit growth. Travel Retail also grew on a favorable comparable base.

Profitability saw substantial improvement. Gross margin expanded to 73.40% for the quarter, up from 72.40% in the prior-year period. This was driven by net benefits from the PRGP, including favorable impacts from the mix of business due to reduced promotional activity, lower obsolescence charges from better inventory management, and cost efficiencies within the global supply chain network. The operating margin expanded 300 basis points to 7.3%, compared to 4.3% last year. This expansion reflects a 3% reduction in non-consumer-facing expenses through PRGP initiatives, which enabled a 4% increase in consumer-facing investments.

Net earnings for the quarter were $47 million, or $0.13 per diluted share, a significant rebound from a net loss of $156 million, or ($0.43) per diluted share, in the prior-year period. This improvement was partly due to the favorable year-over-year impact of a $159 million charge in Q1 fiscal 2025 related to talcum litigation settlement agreements.

Segment-wise, Skin Care net sales increased 3% to $1,575 million, with operating income surging 60% to $187 million, driven by La Mer and Estée Lauder in Asia travel retail and Mainland China. Fragrance net sales grew 14% to $721 million, and operating income rose 43% to $86 million, fueled by brands like Le Labo, TOM FORD, and Jo Malone London. Makeup net sales decreased 1% to $1,030 million, while Hair Care net sales declined 7% to $129 million, primarily due to Aveda's strategic repositioning.

Liquidity and Capital Allocation

Estée Lauder maintains a robust financial position, with cash and cash equivalents of $2,219 million as of September 30, 2025. Net cash flows used for operating activities significantly improved, totaling $340 million used in Q1 fiscal 2026, compared to $670 million used in the prior-year period, reflecting higher net earnings and favorable changes in operating assets and liabilities. Capital expenditures were $96 million, a 32% decrease from the prior year, as the company prioritizes consumer-facing investments while optimizing other CapEx. The company also paid $150 million in deferred consideration related to the TOM FORD acquisition during the quarter. Total debt as a percentage of total capitalization stood at 65% as of September 30, 2025.

Strategic Initiatives and Operational Details

The "Beauty Reimagined" strategy is being executed with urgency. The Profit Recovery and Growth Plan (PRGP) is central to this, with cumulative charges of $697 million recorded through September 30, 2025, primarily for employee-related costs. The restructuring program is expected to result in a net reduction of approximately 5,800 to 7,000 positions globally (9-11% of its workforce as of June 30, 2023) by the end of fiscal 2026, with total charges estimated between $1.2 billion and $1.6 billion and annual gross benefits of $800 million to $1 billion. A portion of these savings will be reinvested into consumer-facing activities.

Consumer coverage is rapidly expanding. The company announced a strategic partnership with Shopify (SHOP) in October 2025 to modernize its direct-to-consumer business. Brands like Clinique, The Ordinary, and Estée Lauder have launched on Amazon (AMZN) Premium Beauty stores in multiple regions, and M·A·C is entering U.S. Sephora and Sephora at Kohl's (KSS). This multi-channel approach aims to meet consumers where they are and drive new consumer acquisition.

Innovation remains a key focus, with a commitment to tripling the percentage of innovation launched in less than a year. The new Global Fragrance Atelier in Paris exemplifies this, leveraging AI and olfactory expertise for faster scent creation. The appointment of René Lammers as Chief Research & Innovation Officer, effective October 1, 2025, further underscores this commitment.

Supply chain regionalization is actively mitigating tariff impacts. Approximately 75% of products sold in the U.S. are sourced from North America or covered by trade agreements. The company aims to reduce products sourced from the U.S. for China to below 10%, leveraging its new manufacturing facility in Japan and European plants. This agility, supported by nine global manufacturing campuses, positions Estée Lauder to adapt to evolving trade policies.

Outlook and Guidance: A Confident Path Forward

Estée Lauder has reaffirmed its fiscal 2026 full-year outlook, projecting organic net sales growth of flat to 3%. The company anticipates stronger performance in the first half of the fiscal year due to favorable comparisons in Asia Pacific, driven by its global Travel Retail business and Mainland China. The operating margin is expected to be between 9.4% and 9.9%, with greater expansion in the second half as PRGP benefits build sequentially. The effective tax rate for the year is estimated at approximately 36%, improving after a higher Q1 rate. Diluted EPS is projected to be between $1.90 and $2.10, representing 26% to 39% year-on-year growth.

Management's confidence is rooted in the early momentum of "Beauty Reimagined," particularly the strong Q1 fiscal 2026 results. While macroeconomic volatility, including subdued consumer sentiment in Western Europe and persistent challenges in Travel Retail conversion, remains a factor, the company's strategic actions are gaining traction. Tariff-related headwinds are expected to impact profitability by approximately $100 million in fiscal 2026, but the company is actively evaluating additional mitigation strategies, including further PRGP initiatives and potential pricing actions.

Conclusion

The Estée Lauder Companies is undergoing a profound transformation, strategically repositioning itself for sustainable growth and enhanced profitability. The "Beauty Reimagined" vision, underpinned by aggressive consumer coverage expansion, transformative innovation, and bold efficiency initiatives through the PRGP, is already yielding tangible results. The strong Q1 fiscal 2026 performance, marked by organic sales growth and significant margin expansion, signals a promising start to this multi-year turnaround.

While external macroeconomic headwinds and tariff uncertainties persist, Estée Lauder's proactive measures, including its agile supply chain, strategic channel diversification, and increasing integration of AI, are strengthening its competitive standing. The company's commitment to unit growth and market share gains in key regions, coupled with a clear path to a solid double-digit operating margin, positions it favorably for long-term value creation. Investors should closely monitor the continued execution of the PRGP, the efficacy of new consumer-facing investments, and the ongoing competitive dynamics in a rapidly evolving global beauty market.