Estée Lauder(EL) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Organic sales declined by 9%, with business excluding Travel Retail decreasing by 3% organically, showing sequential improvement from a 4% decline in the second quarter [6][30] - Diluted earnings per share decreased by 33% to $0.65, which was better than anticipated, indicating disciplined expense management [6][30] - Gross margin expanded over 300 basis points for the fourth consecutive quarter, driven by the Profit Recovery and Growth Plan (PRGP) [6][30] - Operating margin contracted by 270 basis points to 11.4%, influenced by increased consumer-facing spending [6][30] Business Line Data and Key Metrics Changes - Travel Retail experienced a significant decline of 28% organically, continuing to shrink as a percentage of the overall business [6][30] - Retail sales trends improved sequentially, with notable share gains in the U.S., China, and Japan, marking the first share gains in the U.S. in many years [7][9][31] - Clinique, The Ordinary, and Bumble and Bumble contributed to gains in the U.S., while La Mer and Estee Lauder drove growth in China [9][10] Market Data and Key Metrics Changes - The company gained market share in three of the last four quarters in China, with Clinique achieving eleven consecutive months of share gains in the U.S. [8][9] - Japan saw its fourth consecutive quarter of share gains, indicating strong brand performance in key markets [9][10] - Emerging markets in Southeast Asia also showed growth, with online organic sales growing in the mid-single digits [12][21] Company Strategy and Development Direction - The company is focused on its Beauty Reimagine strategic vision, aiming to transform its operating model to be leaner and more agile [5][30] - The PRGP is a key initiative, with plans to reduce over 2,600 net positions and streamline middle management by 20% [23][30] - The company is exploring expansion with new retailers and enhancing its online presence through platforms like Amazon and TikTok [10][12] Management's Comments on Operating Environment and Future Outlook - Management acknowledged elevated macroeconomic challenges but expressed confidence in returning to sustainable sales growth and achieving a solid double-digit adjusted operating margin in the coming years [5][30] - The outlook for fiscal 2025 anticipates continued headwinds in Travel Retail, with organic sales expected to decline between 9% to 8% [41][42] - Management is closely monitoring consumer sentiment, particularly in the U.S. and China, and is adjusting inventory levels accordingly [25][41] Other Important Information - The company generated $671 million in net cash flow from operating activities for the nine months, a decrease from $1.471 billion the previous year [35][36] - Capital expenditures were reduced by 44% to $395 million, reflecting a focus on optimizing capital expenditures [36][30] - The company is actively working on tariff mitigation strategies and regionalizing its supply chain to reduce exposure [37][39] Q&A Session Summary Question: Inventory alignment across categories and geographies - Management noted significant progress in reducing inventory levels, particularly in Travel Retail, and emphasized ongoing monitoring of retail inventory [46][48] Question: FY 2026 planning assumptions and market trends - Management expressed confidence in returning to positive growth in FY 2026, citing market share gains in key regions and ongoing improvements in retail sales [56][58] Question: Tariff sourcing and mitigation strategies - Management indicated plans to reduce the percentage of products sourced from China to below 10% by the end of the fiscal year, leveraging manufacturing capabilities in Japan and Europe [72][75] Question: Expectations for PRGP savings and reinvestment - Management confirmed they are on target for PRGP savings and are exploring further efficiencies, with a focus on outsourcing and procurement [84][87] Question: Sales growth and tariff impact on FY 2026 - Management clarified that the expectation for returning to growth in FY 2026 is a full-year comment, with ongoing monitoring of external risks related to tariffs and consumer sentiment [94][96]