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EL

ESTEE LAUDER COMPANIES INC (EL)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 net sales fell 6% to $4.00B while gross margin expanded +310 bps to 76.1% due to PRGP benefits; GAAP diluted EPS was a loss of $1.64, and adjusted EPS was $0.62, with adjusted operating margin contracting 200 bps to 11.5% .
  • Management launched “Beauty Reimagined” and significantly expanded the PRGP restructuring (total charges $1.2–$1.6B; annual gross savings $0.8–$1.0B) to restore a solid double-digit adjusted operating margin over the next few years .
  • Q3 2025 outlook: organic net sales down 10–8% and adjusted EPS $0.20–$0.30; GAAP EPS $0.04–$0.17; FX dilutes EPS by $0.04; tax rate ~36%—driven by persistent Asia travel retail weakness and soft consumer sentiment in China/Korea .
  • Stock-relevant drivers: significant asset impairments ($861M) tied to TOM FORD and Too Faced weighed on GAAP results; management plans to increase consumer-facing investments near-term while using PRGP savings to offset deleverage—catalyst path is tied to execution on channel mix shifts (Amazon/TikTok), fragrance freestanding stores, and AI-driven supply chain/marketing efficiency .

What Went Well and What Went Wrong

What Went Well

  • Gross margin expanded to 76.1% (+310 bps YoY) despite lower sales, driven by PRGP benefits (reduced excess/obsolescence, pricing actions, operational efficiencies) .
  • Fragrance delivered +2% organic net sales growth, led by Le Labo’s strong double-digit growth across regions and targeted consumer reach expansion .
  • Clinique continued high-single-digit growth in Makeup and U.S. market share gains; The Ordinary expanded into Amazon’s U.S. Premium Beauty store and social commerce, supporting recruitment at entry prestige .

Notable quote:

  • “Adjusted EPS was $0.62 in the quarter, exceeding our outlook…reflects better-than-expected gross margin expansion… and disciplined expense management” .

What Went Wrong

  • Asia travel retail and China remained weak; Skin Care -12% and Asia/Pacific net sales -11% YoY, pressuring category mix and profitability .
  • GAAP operating margin fell to -14.5% from 13.4% YoY, driven by $861M goodwill/intangible impairments and $181M restructuring charges; adjusted operating margin contracted 200 bps to 11.5% .
  • Cash generation deteriorated: operating cash flow for six months decreased to $387M vs $937M prior year, reflecting lower pre-tax earnings and unfavorable working capital .

Analyst concerns:

  • Management flagged continued strong double-digit decline in global travel retail in Q3 and low visibility—implying further EPS pressure and potential deleverage near-term .

Financial Results

MetricQ2 2024 (Oldest)Q1 2025Q2 2025 (Newest)
Net Sales ($USD Billions)$4.279 $3.361 $4.004
Gross Margin (%)73.0% 72.4% 76.1%
Operating Margin (GAAP, %)13.4% -3.6% -14.5%
Adjusted Operating Income ($USD Millions)$577 $144 $462
Adjusted Operating Margin (%)13.5% 4.3% 11.5%
Diluted EPS (GAAP, $)$0.87 -$0.43 -$1.64
Adjusted Diluted EPS ($)$0.88 $0.14 $0.62

Segment breakdown (Q2 2025):

CategoryNet Sales ($MM)YoY Reported %Organic %Operating Income/Loss ($MM)YoY %
Skin Care$1,921 -12% -12% $306 -26%
Makeup$1,150 -1% -1% -$211 (100+)%
Fragrance$744 +1% +2% -$446 (100+)%
Hair Care$159 -8% -8% -$3 —
Other$30 0% — -$45 (100+)%

Geography (Q2 2025):

RegionNet Sales ($MM)YoY Reported %Organic %
Americas$1,223 -2% ~Flat
EMEA$1,494 -6% -6%
Asia/Pacific$1,287 -11% -11%

KPIs (Q2 2025 and YTD):

KPIValue
Effective Tax Rate (GAAP, Q2)9.2%
Adjusted ETR (Q2)42.6%
Operating Cash Flow (6M)$387M
Capital Expenditures (6M)$273M
Dividends Paid (6M)$366M
Cash & Equivalents (12/31/24)$2,586M
Long-term Debt (12/31/24)$7,276M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Organic Net Sales GrowthQ2 2025-8% to -6% Actual -6% Met high end; maintained outcome
Adjusted EPSQ2 2025$0.20–$0.35 Actual $0.62 Raised vs outlook (beat company outlook)
GAAP EPSQ2 2025$0.02–$0.19 Actual -$1.64 Lower (impairments/restructuring)
Organic Net Sales GrowthQ3 2025N/A-10% to -8% (GAAP -12% to -10%; FX +2 pts) New: Lower vs Q2 trajectory
Adjusted EPSQ3 2025N/A$0.20–$0.30; FX -$0.04; ETR ~36% New
Dividend per ShareOngoingReduced to $0.35 on 10/31/24 $0.35 declared for 3/17/25 Maintained current payout

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’24, Q1’25)Current Period (Q2’25)Trend
AI/technology initiativesBuilt precision marketing, trend AI; planning supply-chain agility, DC in Hainan “Hardwiring AI” across forecasting, product dev, marketing; improved forecast accuracy; plan to scale AI to free up brand creativity Increasing adoption
Supply chain/zero-wastePull-down of production, inventory normalization; PRGP focused on gross margin recovery Zero-waste supply chain, improved demand forecasting; outsourcing select services to global partners Structural revamp
Travel retail & ChinaTR inventory higher than desired; China softness; expect declines; rebalancing exposure Strong double-digit TR decline expected Q3; Hainan trends improved sequentially; Korea policy pressure Persistently weak near-term
Product performanceLa Mer/Clinique share gains; luxury fragrance strong; The Ordinary momentum Clinique high-single-digit growth; Le Labo double-digit; The Ordinary expanded reach; MAC lipstick, Clinique CX Mixed: strength in fragrance/Clinique
Organizational changeStrategy reset; CEO/CFO succession New consumer-centric exec team; regional cluster realignment; brand group leads Accelerating change
Regulatory/legal—Talcum settlement charge noted in Q1; impact on EPS One-time impact absorbed

Management Commentary

  • “We are significantly transforming our operating model to be leaner, faster, and more agile… to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years.” — CEO Stéphane de La Faverie .
  • “We have delivered over 60% of our fiscal 2025 objective in the first half…greater expense reduction is necessary… expanding PRGP with competitive procurement, supply chain efficiencies, and outsourcing select services.” — CEO .
  • “Adjusted EPS was $0.62… exceeding our outlook… better-than-expected gross margin expansion… disciplined expense management.” — CFO Akhil Shrivastava .
  • “We expect overall soft retail trends to persist in Asia travel retail… significantly pressuring organic net sales… we are strategically increasing consumer-facing investments in the third quarter.” — CEO .

Q&A Highlights

  • Portfolio prioritization and brand focus: Management will regularly review brand/category/region allocation, “accelerate what works… stop what is not working” to drive value; China elevated to report directly to CEO .
  • Reinvestment vs fixed cost: Shift spend from fixed cost capabilities to variable consumer-facing investments with faster learning/pivot; protect A&P and selling where ROI is proven .
  • KPIs for Beauty Reimagined: Consumer coverage velocity, transformative innovation speed (tripling launches <1 year), ROI tracking on consumer-facing spend, PRGP-driven margin rebuild, simplification to restore agility .
  • Margin path: Gross margin progress from zero-waste supply chain; OpEx savings via restructuring, procurement, shared services underpinning return to solid double-digit margin over next few years .
  • M&A and balance sheet: Near-term priority to delever; M&A only if complementary and balanced with balance sheet considerations .

Estimates Context

  • Street consensus from S&P Global was unavailable at time of analysis due to data access limits; therefore, formal beat/miss vs Wall Street cannot be presented.
  • Company context: Organic net sales decline (-6%) landed at the high end of management’s range, and adjusted EPS ($0.62) exceeded the company’s own outlook for Q2 2025 .

Key Takeaways for Investors

  • Near-term caution: Expect Q3 organic sales down 10–8% on persistent Asia travel retail weakness; EPS compressed despite moderate gross margin expansion—positioning is defensive until travel retail stabilizes .
  • Structural margin story: Expanded PRGP (charges $1.2–$1.6B; annual savings $0.8–$1.0B) is integral to regaining a solid double-digit adjusted operating margin; monitor execution on procurement, outsourcing, and zero-waste initiatives .
  • Mix pivot: Strength in luxury/artisanal fragrance (Le Labo, Jo Malone London) and Clinique’s momentum in U.S./Amazon/social commerce offset Skin Care softness in Asia—channel mix shift should improve ROI and consumer acquisition .
  • AI as an execution edge: Company-wide AI (demand forecasting, marketing) is improving forecast accuracy and inventory—watch for sustained working capital and gross margin benefits .
  • Impairment reset: $861M impairments (TOM FORD, Too Faced) reset brand carrying values; expect disciplined portfolio management and reduced fixed cost footprint to improve leverage over time .
  • Cash discipline: Operating cash flow fell to $387M YTD; CapEx reduced; dividend maintained at $0.35—cash deployment prioritizes deleveraging and reinvestment in consumer-facing initiatives .
  • Trade setup: Shares likely sensitive to signs of Asia travel retail stabilization, U.S. momentum (Amazon/TikTok), and tangible PRGP savings flow-through; monitor Q3 retail trend commentary and segment margins .