The Estée Lauder Companies Inc. Q4 FY2025 earnings call

• Remembrance of Leonard A. Lauder, Chairman Emeritus, who shaped the company and beauty industry. - Fiscal '25 results in line with revised outlook, travel retail down 28% with healthier trade inventory. - Progress on PRGP: gained prestige beauty share in China, Japan, US; online sales reached 31% of reported sales. - Portfolio review ongoing, engaging external advisers to align with Beauty Reimagined strategy. - Fiscal '26 outlook: low single-digit organic sales growth, aim to reduce discounts, accelerate consumer coverage, focus on high-growth emerging markets.

Fiscal '25 full year organic sales declined 8%. Nearly 2/3 of this decline came from travel retail, which decreased 28% and represented approximately 15% of reported sales, down 4 percentage points from fiscal '24. Gross margin expanded 230 basis points to 74%. Segments like La Mer, The Ordinary, Estée Lauder showed share gains in various markets globally. For example, La Mer and Estée Lauder fueled share gain in China, while The Ordinary had high single-digit retail sales growth in Q4.

• Fiscal '26 expects low single-digit organic sales growth. - Intends to maintain gross margin despite incremental tariffs and expand operating margin by 165 basis points at midpoint. - Aim to significantly reduce discounts, accelerate best-in-class consumer coverage, put greater emphasis on high-growth emerging markets. - In Q1 '26, The Ordinary launched AI-powered flagship store on Tmall, expanded Amazon presence to UK and Mexico.

• Volatility in travel retail, which previously had high exposure and now is more aligned with global prestige beauty share. - Impact of incremental tariffs on profitability. - Consumer sentiment softening in Europe, particularly in key markets like France and Germany. - Challenges in markets with significant department store exposure, which may remain more challenging to drive sales growth.

Q: Decompose the gap between retail sales and shipments?

A: Akhil Shrivastava said inventory has been reduced meaningfully across markets. The gap is expected to narrow as net sales start to track retail more closely.

Q: How to think about the balance of channels in North America?

A: Stéphane de la Faverie mentioned focus on e-channels like Amazon, with 11 brands on Amazon, and working on department stores to gradually improve. Akhil added North America has a more diversified channel mix with e-channels, DTC, etc.

Q: Interplay between gross margins and SG&A for operating margin guidance?

A: Akhil said gross margin is expected to be flat to positive despite tariffs, and growth in operating margin in '26 will come primarily from SG&A, especially nonconsumer-facing costs, with opportunities in both gross margin and SG&A.