Estee Lauder Q3 EPS beats 40% as China, fragrance drive margin rebound

Estee Lauder Cos. (EL) reported fiscal third-quarter adjusted earnings of $0.91 per share, beating the $0.65 analyst consensus by 40 per cent, as a rebound in Chinese demand and double-digit fragrance growth drove the strongest margin expansion in three years. Revenue of $3.71bn edged past the $3.69bn forecast, and the stock surged as much as 8 per cent in aftermarket trading to $85.37 from a close of $81.33.

The headline beat, however, masks a widening gulf between the company’s adjusted and reported results. Net income on a GAAP basis was just $89m, or roughly $0.24 per share, depressed by $1.1bn in cumulative restructuring charges under the Profit Recovery and Growth Plan. Full-year reported EPS guidance was lowered to $0.69 to $0.83, while the adjusted outlook, the number management wants investors to track, rose to $2.35 to $2.45, implying 56 to 62 per cent year-over-year growth. The $1.6bn gap between the two figures is the cost of CEO Stephane de La Faverie’s multi-year turnaround.

The results landed in a week when consumer-facing earnings have largely held up against tariff and inflation headwinds, much as Marriott International showed in its own first-quarter print.

What the print showed

Fragrance was the standout category, posting double-digit organic sales growth across every region. The unit is “significantly outperforming the industry,” executives said on the post-earnings call, with luxury and artisanal scents driving the bulk of the gains. Skin care, Estee Lauder’s largest and highest-margin business, accounting for roughly half of group revenue, grew in the low single digits and accelerated over the nine-month period, helped by the La Mer and Clinique franchises. Makeup’s rate of decline slowed as the company lapped easier comparisons in North America, while hair care stabilised, with Aveda showing early signs of a turnaround after multiple quarters of contraction.

Revenue from Mainland China rose at a high single-digit rate in retail terms, marking a fourth consecutive quarter of market share gains. Travel retail in Hainan was the surprise: retail sales grew over 30 per cent in the quarter, accelerating from a high single-digit pace in the second quarter, as Daigou normalisation and domestic travel demand aligned. The Americas stabilised, with US retail sales up at a mid-single-digit clip. In Europe, the Middle East and Africa, priority emerging markets posted double-digit growth, though the Middle East conflict shaved roughly one percentage point from the region’s consolidated growth rate and cost an estimated $0.02 in diluted EPS in the quarter.

The margin story

Gross margin reached 76.4 per cent, up 140 basis points from the prior year, driven by mix shift toward higher-margin skin care and fragrance plus lower promotional intensity after two years of discounting to clear excess inventory. Operating margin expanded 360 basis points to 15.0 per cent, from 11.4 per cent a year earlier, the widest single-quarter expansion since the post-pandemic recovery. The trailing nine-month operating margin is tracking toward 10.7 to 11 per cent, up from 8 per cent in fiscal 2025.

Cash generation improved sharply. Operations produced $1.2bn in cash over the first nine months of the fiscal year, nearly double the $671m recorded in the comparable period. Capital expenditure fell 23 per cent to $306m. The company affirmed its quarterly dividend of $0.35 per share.

“Margin recovery is a marathon, is not a sprint,” de La Faverie told analysts. CFO Akhil Shrivastava added that “there’s still significant runway, as Stephane said, on margins,” crediting the cost program and mix improvement as dual drivers. “We have a very strong cost program, which of course depends on growth.”

China’s comeback

The China recovery is no longer a hope story. Four straight quarters of market share gains, high single-digit retail growth, and a Hainan travel retail business growing at over 30 per cent suggest the world’s second-largest beauty market is structurally recovering for Estee Lauder. The company has been adding beauty advisors in the market while competitors pulled back, betting that demand normalisation would reward counter investment.

“For me, it was about reactivating recruitment, and we are doing it,” de La Faverie said, describing the North America and China hiring push. The strategy mirrors the pre-pandemic playbook: own the counter, own the consumer, and let the brand equity do the rest when the cycle turns.

Online organic sales grew 10 per cent fiscal year-to-date and accelerated to double digits in the fourth quarter. The gains reflected spending on direct-to-consumer channels and a Shopify partnership announced earlier in the turnaround. The digital mix shift is margin-accretive: DTC carries meaningfully higher gross margins than wholesale department-store counters, which the company is actively pruning as part of the restructuring.

Restructuring enters a harder phase

The PRGP is getting larger and more painful before it delivers. Cumulative charges through March stood at $1.1bn. The total is now expected to reach $1.5bn to $1.7bn, up from prior guidance. The expansion includes exiting “select unproductive doors in department stores and freestanding stores.” Roughly 70 per cent of the incremental cost is tied to reducing the beauty advisor workforce in channels the company has judged dilutive to returns.

“These are some of the tough decisions that we have to make,” de La Faverie said of the workforce component. The full run-rate benefit from the program is expected by fiscal 2027, when the company is targeting 3 to 5 per cent organic sales growth and an operating margin of 12.5 to 13 per cent, roughly 400 to 450 basis points above the current trailing rate.

Partnerships with Accenture for enterprise business services, Shopify for direct-to-consumer infrastructure, and WPP for media buying underpin the cost-out plan. The company also agreed to acquire the remaining shares of Forest Essentials, India’s largest prestige skin care brand, and made a minority investment in 111SKIN, a luxury pre- and post-procedure skin care line. Both transactions are bets on the premiumisation trend in emerging markets, where Estee Lauder’s household penetration remains well below developed-market levels.

What comes next

The fourth quarter carries headwinds. Management flagged a sales drag from the Middle East conflict of roughly two percentage points and an EPS impact of $0.06. The full-year hit is estimated at less than 1 per cent of consolidated revenue and roughly $0.07 per share. The effective tax rate rose to 31.8 per cent from 30.8 per cent a year earlier, another modest headwind to reported earnings.

The preliminary fiscal 2027 outlook of 3 to 5 per cent organic growth and a 12.5 to 13 per cent operating margin is the signal de La Faverie wants the market to absorb: the cost cuts are real, the China recovery has legs, and the steady state of the business is a double-digit margin with consistent mid-single-digit top-line growth. Organic sales growth for fiscal 2026 is now expected at roughly 3 per cent, at the high end of the prior range, with gross margin of about 75 per cent.

Wall Street has lifted price targets toward $85 following the print, according to 24/7 Wall St., and the consensus is that the margin recovery story now carries enough evidence to outweigh restructuring noise. Whether the stock, at roughly 20 times adjusted earnings after the post-print surge, already prices that recovery is the question the market spent the after-hours session debating.

The company also disclosed a proposed CA$1.52m settlement of a Canadian class-action data breach claim, a footnote-scale item that did not feature on the earnings call but appeared in the filing. Separately, speculation about a potential tie-up with Spanish beauty group Puig, a recurring market rumour, was not addressed in the release or on the call.