Estee Lauder Cos. Inc (EL) — Q3 2025 Earnings Call Transcript

Hello. On today’s webcast are Stéphane de La Faverie, President and Chief Executive Officer; and Akhil Shrivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results, and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors' section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers’ websites. Throughout our discussion, our Profit Recovery and Growth Plan will be referred to as our PRGP. During the Q&A session, we ask that you please limit yourself to one question, so we can respond to all of you within the time scheduled for this webcast. And now, I’ll turn the webcast over to Stéphane.

Thank you, Rainey, and hello to everyone. It's great to be with you today to review our third quarter results, share the progress that we are making on our Beauty Reimagined strategic vision, and discuss our fiscal 2025 outlook. Amid elevated macroeconomic challenges, our commitment to transforming our operating model to be leaner, faster, and more agile as the most consumer-centric prestige beauty company globally has only deepened. The executive team, our Board of Directors, and the organization remain committed to restoring sustainable sales growth and achieving a solid double-digit adjusted operating margin over the next few years. First, let me briefly review our fiscal third quarter performance. Organic sales declined 9% as expected. Our business, excluding travel retail, decreased 3% organically, a sequential improvement from the 4% decline in the second quarter. Travel retail declined 28% organically and continues to shrink as a percentage of our business towards the low teens. Diluted earnings per share decreased 33%, far better than we anticipated in our outlook, showing disciplined expense management. Gross margin was a bright spot, expanding over 300 basis points for the fourth consecutive quarter as the PRGP continued to deliver meaningful benefits. The operating margin of 11.4% contracted 270 basis points, driven by increased consumer-facing spending as volume deleverage from the decline in travel retail was offset by PRGP benefits. We struck a good balance between reducing certain SG&A expenses and increasing consumer-facing investments. We pivoted quickly as volatility increased, choosing to spend less than what we expected towards incremental consumer-facing dollars, showing new discipline in how we're operating our business as we focus on higher ROI opportunities. We've been laser-focused on improving our retail sales trends and delivering a sequential acceleration in global retail sales growth, excluding travel retail. We outperformed in the U.S., China, and Japan and gained share in a couple of emerging markets in Southeast Asia. This marks the first share gains in the U.S. in many years. For China, we have now gained share in three of the last four quarters. And for Japan, it is our fourth consecutive quarter of share gains, showing the tremendous strength of our brands in these key markets. Clinique, The Ordinary, and Bumble and bumble drove gains for the U.S. Clinique now has gained share in 11 consecutive months through March. La Mer, Estée Lauder, and TOM FORD fueled China, while Le Labo, La Mer, and Estée Lauder gained share in Japan. Through the Beauty Reimagined framework, we are focused on expanding gains in these key markets while also reigniting share gains in many more markets, including the U.K., Korea, and Mexico, where we have a lot more work to do. Next, let me turn to Beauty Reimagined and discuss our progress across the five action plan priorities beginning with the first, accelerate best-in-class consumer coverage. If the consumer has endorsed a retailer and provided it is brand-building, we are moving there without debate. We will not let evolving channel preference be a disruptor to us like it has been in the past. During the third quarter and through April, we moved quickly across brands and platforms. Let me give you a few examples. The Ordinary launched in the U.S. Amazon Premium Beauty store and in the U.K. ticked up shop. The Ordinary also expanded in Thailand, China, and Turkey. In Southeast Asia, more brands launched on Shopee and TikTok Shop across various markets. As a result, in the fourth quarter, online organic sales grew mid-single-digit, driven by pure play and third-party platforms. Across pure players, our new brand storefront on the U.S. Amazon Premium Beauty store showed growth along with JD, Notino, and Zalando. Our third-party platform, strong performance on Tmall in China was further amplified by TikTok Shop and Shopee's strength globally. We are incredibly pleased with the results we are delivering across Amazon Premium Beauty stores in the U.S. and Canada, as well as TikTok Shop in the U.S., U.K., and Southeast Asia. We are exploring expansion with these and other retailers, so more to come with this action plan priority. Moving to our second action plan priority, create transformative innovation and innovate across prestige price tiers to reach a wider audience. In the third quarter, we introduced innovations aimed at new consumer acquisition at both the lower and higher end of our brand portfolio. Among the innovations, Clinique's new Moisture Surge Active Glow Serum, strategically priced to recruit at a time when consumers are more price-sensitive, is driving significant share gain in the U.S. prestige serum subcategories. Estée Lauder's new Double Wear Concealer realized strong uptake, benefiting from and further amplifying the popularity of its namesake foundation, such that the franchise delivered share gains across the facial subcategory of U.S. prestige makeup. M·A·C had a blockbuster commercial innovation with the new collection, bringing back fan-favorite shades alongside new ones, driving significant gains in U.S. prestige makeup lip subcategories. For our luxury brands, La Mer successfully expanded its nighttime portfolio with a new night recovery concentrate to capitalize on its highly sought-after rejuvenating night cream. TOM FORD's new Slim Lip Color Shine lipstick at entry luxury pricing proved highly compelling for new consumer acquisition. This innovation by La Mer and TOM FORD fueled double-digit organic sales growth in China for each brand. In the fourth quarter, we are working hard to keep the momentum going, already launching new products in China from La Mer and TOM FORD. Building on the iconic success of La Mer's Treatment Lotion, the brand is launching the Balancing Treatment Lotion, designed for oily skin, capturing the multi-generational consumer. TOM FORD's Architecture Soft Matte Blurring Custom Foundation achieved the top rank for new product launches in custom foundation on Tmall in April. This month, Jo Malone London is introducing a body spray for Cypress & Grapevine to build upon the strong global momentum of its scents with new formats. M·A·C repositioned Studio Fix Powder Plus Foundation; we strategically lowered its suggested retail price in the U.S. and U.K. to capture a larger customer base alongside indie brands. Too Faced's new Rebel Rock Lash Mascara pioneered an AI-driven marketing launch, reducing the typical six-month creative process to just 16 days. This is one example of many where we are integrating AI throughout the organization. The Ordinary is soon to launch UV filters SPF-45 Serum as it reenters the high-growth suncare subcategory of skin care. Our third action plan priority is to boost consumer-facing investment to accelerate new consumer acquisition. We increased consumer-facing investment at a greater rate of growth in the third quarter versus the second quarter. We concentrated our incremental investment primarily in China and the U.S. In China, this contributed to retail growth organically, while in the U.S., we deployed multiple strategies, with some performing better than others. We are taking our learnings and adjusting our strategies for the fourth quarter. We continue to invest in our freestanding stores, which drive brand equity and act as valuable media channels. We opened nearly 10 net new stores globally, led by Le Labo in the U.S. and China. Le Labo leveraged this investment exceptionally well, achieving strong double-digit organic sales growth due to both like-for-like store growth and expansion. Our fourth action plan priority is to fuel sustainable growth through bold efficiencies. In the third quarter, we made significant progress in the PRGP, which Akhil will describe. As of late April, as part of the PRGP's restructuring program, we have approved initiatives to reduce over 2,600 net positions. With these actions, along with natural attrition, we are streamlining our middle management by 20% compared to February 2024. Likewise, through our new flatter and more streamlined executive team, we achieved a 30% reduction in expenses while also introducing new capabilities needed for the future. For procurement and outsourcing, which were two new PRGP initiatives announced in February 2025, we are moving swiftly to transform our sourcing models to drive efficiencies of scale with top suppliers and leverage external partners for selected back-office functions. Our final action plan priority is to reimagine the way we work. Our new executive team, with reduced layers, has been in place since April 1st. Brands now drive global strategy and innovation, while regions handle planning, scaling, and go-to-market execution, with functions enabled accordingly. Starting in fiscal 2026, the P&L will be owned by the regions, creating a greater degree of accountability and simplification. Since February, we have cascaded our Beauty Reimagined vision, strategized, and aligned on the way forward through global and regional talents, in-person leadership team meetings, and market visits in the U.S., Western Europe, and Asia-Pacific. Before I close, I want to speak briefly about our fiscal 2025 outlook. We expect the headwinds we faced in our travel retail business in the third quarter to be even greater in the fourth quarter. Outside of travel retail, we expect organic sales declines to moderate further but for retail sales growth to continue. One of the primary drivers of the gap between organic and retail is weakened consumer sentiment in the U.S. and Europe, along with prolonged weak consumer sentiment in China and Korea. This results in tighter inventory management as retailers manage their working capital. With the strategic reset of our travel retail business well underway, provided there is a meaningful resolution of the recently enacted tariffs to mitigate potential related negative impacts, we are confident in our ability to return to sales growth in fiscal 2026. Regarding the new tariffs, outsourcing and manufacturing are strategically regionalized worldwide. Supply chain agility has always been and will remain a priority. This is a valuable asset, although there will still be pressures. Our supply chain footprint affords us decision-making flexibility, and we've been working since last November on how to best leverage our existing regional capabilities and multiple scenarios to partially cushion the direct impact of tariffs on profitability. We have already increased North America production to meet U.S. demand from its already high level. We also accelerated plans to increase volume levels at our relatively new manufacturing facility in Japan to service our business in Asia-Pacific. Our plan in Japan is our ninth manufacturing campus globally, with five in North America and three in Europe. In closing, we are moving decisively and building momentum as we bring our Beauty Reimagined strategic vision to life across its five key priorities. To our employees around the world, thank you for making Beauty Reimagined a reality through your significant contributions. I will now turn the call over to Akhil.

Thank you, Stéphane, and hello everyone. Thank you for joining us today. We remain focused on long-term value creation and are determined to better position the company for sustainable long-term growth, margin improvement, and cash productivity. Encouragingly, we are starting to see progress on Beauty Reimagined priorities, reflected in the share gains in some key markets, gross margin expansion, CapEx optimization, and the execution of a PRGP restructuring program to become a leaner and more agile company. Looking at our third quarter results, organic net sales declined 9% and was within the outlook range we provided in February. We delivered $0.65 EPS, exceeding our outlook, and the operating margin was 11.4%. Now, let me take a few moments to highlight the progress we have made across key areas, and then I'll walk you through our full year outlook. For results by product category and geographic region, please see the press release issued this morning. On the top line, we are encouraged by the share gains we saw in the U.S., China, and Japan this quarter, and we are committed to doing this more sustainably and broadly in more markets around the world. On margins, for the quarter, we again expanded our gross margin by 310 basis points compared to last year. This reflects net benefits from our PRGP and was driven by operational efficiencies, the reduction in excess, and obsolescence, and benefits from our strategic pricing actions. Over the course of the fiscal year, we have scaled down production in response to a decline in sales volume. As a result, we recognized certain manufacturing costs in the current period rather than deferring them until the products are sold. You may recall that we took a similar in-period charge in Q3 of last year. The charge recognized last year was greater than the one recognized this year, resulting in a year-over-year net favorable impact of 140 basis points. Moving to operating expenses, OpEx increased 580 basis points as a percentage of sales during the quarter. This reflects continued investments to fuel growth in key areas of the business. This resulted in a 480 basis points increase in consumer-facing investments. With PRGP, we also made progress to reduce non-consumer-facing costs year-on-year, but this increased as a percentage of sales due to our sales deleverage. Operating income decreased 27% to $403 million, and our operating margin contracted 270 basis points to 11.4% compared to 14.1% last year. Our effective tax rate for the quarter was 30.8%, up from 30.5% last year. Diluted EPS declined to $0.65, down 33% from $0.97. Proceeding now to our PRGP restructuring program. As of March 31st, we have recorded $498 million of cumulative charges under the program, primarily in employee-related costs. On the overall PRGP, we are executing with excellence and are making solid progress on initiatives that target pressure points in our business. The plan's net benefits drove gross margin expansion every quarter. We are building momentum and driving progress to reduce non-consumer-facing costs through OpEx efficiencies and our restructuring program. Given the heightened macro and geopolitical volatility, we are exploring additional PRGP savings to help mitigate some potential risks. Moving now to our cash generation, for the nine months we generated $671 million in net cash flow from operating activities compared to $1.471 billion last year. This decrease is due to the decrease in earnings adjusted for non-cash items, greater restructuring payments, and an unfavorable change in operating assets and liabilities. This includes the fact that last year we made a significant reduction in our inventory, which drove very strong cash flow from operations in the base period. We invested $395 million in capital expenditures, down 44% compared to last year. The reduction was primarily driven by prior year payments relating to the manufacturing facility in Japan. It also reflects a strong focus on optimizing capital expenditures this year as we are determined to improve our free cash flow. Before I turn to outlook, let me first address uncertainty around evolving trade policies and tariffs that is adding volatility to an already complex global landscape. As you know, we have been investing in the regionalization of our supply chain for the last several years and are using this new flexibility to help mitigate some of the impacts of the higher tariffs. To provide some context on our exposure, about 75% of what we sell in the U.S. is either sourced from our manufacturing plants in the U.S. and Canada or covered under existing trade agreements. Roughly 25% of what we sell in China is currently sourced from our manufacturing plants in the U.S., but we have strategies to potentially reduce that to below 10%, including leveraging products made in our manufacturing plants in both Japan and Europe. Similarly, in EMEA, about a quarter is sourced from our manufacturing plants in the U.S. As Stéphane mentioned, our task force is closely tracking developments and evaluating a range of scenarios to help mitigate some of the impact of tariffs. Scenarios include optimizing a regionalized and third-party manufacturing networks, leveraging available trade programs, and executing further mitigation strategies over the next 12 months, including expanding our local sourcing. Based on what we know today and given our deferral period for certain manufacturing costs, we do not expect a material impact on fiscal 2025 profitability. However, unless a meaningful resolution of trade negotiations is achieved, we do anticipate high tariff rates to materially impact fiscal 2026. We are also exploring additional PRGP savings and strategic pricing to help further mitigate some of these impacts. We are working to give you a comprehensive update on our tariff mitigation plans during our August earnings call. Given that context, let me walk you through our specific outlook for the full year. We want to acknowledge the risks associated with the geopolitical landscape, specifically tariffs and the uncertainty of their impact on consumer sentiment. If conditions worsen, particularly regarding Chinese consumer sentiment and the potential pressure on sales during the 6/18 midyear shopping festival, the negative impact on our financial performance could exceed what we have factored into our current assumptions. In that case, achieving the outlook we are providing today may not be possible. In February, we indicated that growth in our travel retail business would decline sharply in the second half of the fiscal year, and that we would maintain appropriate trade inventory levels. Retail softness has persisted since then, and we expect a steeper decline in net sales in the fourth quarter compared to the 28% we saw in the third. However, despite this pressure, we continue to align shipments with demand and still expect to end the year at appropriate inventory levels. Our assumptions for the full year are total organic net sales to decrease in the range between 9% to 8% compared to last year. This reflects the continued softness in our global travel retail business, as well as ongoing pressure in Asia-Pacific, despite the recent improvements we saw in our Mainland China third quarter results. Currency translation is not expected to materially impact reported net sales. Gross margin of approximately 73.5%, an effective tax rate of 38% compared to 31% last year, and EPS of $1.30 to $1.55. Currency translation is expected to dilute EPS by $0.03. In closing, we are proud of the meaningful progress we are making in executing our strategic priorities and remain confident in our Beauty Reimagined vision to restore sustainable sales growth and to achieve a solid double-digit adjusted operating margin over the next few years. To our talented employees around the world, thank you for your leadership and dedication. Together, we are better positioned to become the best consumer-centric company and a leaner, more agile business. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

Thank you very much. Good morning everybody.

Good morning Steve.

Good morning Stéphane. I think this question is probably targeted for Akhil, but maybe for both of you. Just picking up on the commentary late in your comments that you were targeting trade inventories exiting fiscal 2025 to more or less align with consumer takeaway. That's obviously been an ongoing project, and it's become increasingly difficult. So, can you talk about whether you expect that to be true kind of across all categories and geographies or whether you see outliers? And then also kind of frame the risks around that outlook. You mentioned the June, the 6/18 variable, but just in general, your level of confidence that you can actually achieve that alignment exiting the fiscal year? Thank you.

Thank you, Steve. We have made substantial progress, as mentioned in our last quarter. Our primary challenge has been in travel retail, but we have significantly enhanced our position there. We ended last year with high inventory levels, which we have notably reduced by December, and Stéphane and I committed to maintaining those levels moving forward. As a result, we are in a much stronger position in travel retail now. Due to fluctuations in retail, we are continuously monitoring our inventory levels on a weekly and monthly basis. Globally, retailers are tightening their inventory, and we are making adjustments, particularly in North America, where some retailers are facing difficulties, which affects our outlook. Thus, trade inventory remains a challenge, although much of it is behind us. In our guidance, we aim to incorporate our best insights regarding shipping to retail. Regarding June 18, we have provided a wider range for the fourth quarter due to the current volatility, which is a prudent approach. Predicting day-to-day volatility is quite challenging; however, we believe our guidance reflects our current observations. We experienced strong results in Q3, especially in China, as Stéphane detailed in his remarks. We feel confident in our business strength as we approach April. While we have offered a broader range, it acknowledges everything we observe today. Meanwhile, Stéphane, would you like to add anything?

No, no, I think you said it all. Also, Steve, I think one of the things that is important to take into consideration is the significant and gradual improvement of our retail sales quarter-over-quarter when you exclude travel retail, which allows us to deplete a significant level of inventory and rebalance it to align with our committed levels. As Akhil mentioned, we are confident in our guidance today, always seeking to deliver on our targets. More importantly, we aim to effectively realign retail and net sales next year to resume growth, as I mentioned in my opening remarks.

Very good. Thank you, both. Appreciate it.

Alright. Thank you. Good morning everyone.

Good morning Bonnie.

Good morning. I had a question on your FY 2026 planning assumptions. While I recognize it's pretty early to talk about detailed guidance, I was hoping you could just talk through a little further some of the moving pieces as we start to think about modeling the year. I'm thinking about the context of retailer inventory destocking headwinds, which, as you just touched on, are weighing on the second half trends this year, and then trends in China, broader concerns around U.S. consumption. I guess, ultimately, do you see end market trends improving relative to the second half of this fiscal year? Or is it reasonable to assume similar trends persist as we think about your return to growth in the year? Thank you.

Thank you, Bonnie, for your question. Let me address it thoroughly as it encompasses various aspects of the market and our performance. First, I want to emphasize our confidence in returning to positive growth in fiscal 2026. There are several reasons for this confidence. We are observing significant market share gains in key regions, particularly in the U.S., China, and Japan, where we've met with considerable success across multiple brands. Our commitment to achieving positive net sales is crucial, and we are already seeing improvements from Q2 to Q3. Travel retail has become less of a risk for us, now representing a smaller portion of our operations, which helps reduce volatility. Our strategy for driving the PRGP is essential to our advancement. As mentioned in our prepared remarks, we are making noteworthy progress in gross margin improvements by reducing our workforce, particularly in middle management, and accelerating outsourcing initiatives. We are closely monitoring the tariff situation and expecting a significant resolution. Our team is proactively making decisions to maintain control, and we believe we have a solid plan for growth in fiscal 2026. Additionally, our agility in responding to new channels, along with a focus on innovation and efficient investment, particularly in areas with the best returns, is critical. We are effectively targeting new consumers, which reinforces our belief in a return to overall growth. However, we do acknowledge the external risks related to consumer confidence, especially in China and the U.S. We are actively monitoring these conditions while preparing to leverage our successful strategies from stronger markets in others. Looking ahead, we are optimistic as we approach fiscal 2026.

Okay. Thank you.

Thanks Bonnie.

Great. Thanks. Good morning.

Morning.

I understand you mentioned anticipating a significant change in the current tariff landscape, but I’d appreciate more clarity on a few points. First, when do you expect to have less than 10% of your products sourced from China in the U.S.? I know you have plans for many facilities worldwide, but what is the timeline for achieving this? Additionally, regarding the other 25% of U.S. sourcing, can you clarify how much is from the U.S., Canada, or other regions? Lastly, what is the expected timeframe for reducing the China-sourced products in the U.S. to below 10%? Thank you.

Yes. Thank you, Lauren, and good to hear from you. So, for China, we are confident, by the end of the fiscal year, we will be able to reduce sourcing from the U.S. to China significantly. The majority of the products will come from our newly established factory in Japan, Sakura, which is operational and producing effectively. Additionally, we will continue to source products from Europe and Canada, which will also support our operations in China. Regarding the sourcing in the U.S., the majority of the 25% comes from Europe. So, there's minimal risk of exposure to the tariffs, which are not material in the overall context. As for finished goods, we are in a good position today, and we're working diligently to mitigate the impact of tariffs. Since we initiated this task force in November, we have mitigated over 40% of the initial impacts of the tariffs and continue to adapt our strategies as needed. Akhil, do you want to add anything?

The only thing I would add, Stéphane, is that, hello Lauren. Our exposure to tariffs is comparatively low due to our network. The high rates create exposure for all companies engaged in cross-border business. However, the regionalization efforts that we have implemented should help in managing that risk. We remain hopeful for a resolution in trade talks, as we navigate this complex landscape. We’ve been very diligent with our team about doing the right things in this area.

Additionally, I want to emphasize that while our focus is on ensuring competitive pricing, the progress we are making with improving our gross margin gives us additional pricing power. This, along with the adjustments we are making in our supply chain, allows us to mitigate the impact of tariffs. So, in conclusion, we are confident in our plans moving forward.

Thanks so much.

Thanks Lauren.

Hi, good morning everyone. I wanted to ask about the TRGP and broadly, what are your expectations for savings for fiscal 2025 relative to your total program? As you think about fiscal 2026, Stéphane, you mentioned that you're evaluating other PRGP plans. So, give us a little bit of insight into what other areas you will be looking for potential savings? And then from a reinvestment standpoint, can you give us a sense of how much of the investment is expected to be on a net basis for those savings? Thank you.

Yes, hi Filippo. Akhil and I will tag team on this one to provide you with more clarity. We are very pleased with the progress we are making in the PRGP. If you remember, there are two phases to the PRGP, referred to internally as PRGP 1.0 and 2.0. We are confident that we are on target for the year. We've seen sequential quarter improvements in our gross margin by approximately 300 basis points, and as Akhil referenced, we are targeting a gross margin of 73.5%. We will continue to focus on improvements while being mindful of potential tariff impacts. In fiscal 2025, we are on track to deliver on our internal objectives. When it comes to the expansion of the PRGP into fiscal 2026 and beyond, we are focused on creating efficiency through outsourcing initiatives. We will come to you with more specifics during the August earnings call regarding growth plans. We are exploring partnerships with outside vendors for various services, including HR, financial, and marketing services to ensure maximum efficiency. Our procurement projects will yield cost savings while improving our effectiveness in indirect materials. So, I am optimistic that we are positioned to deliver a solid double-digit operating margin over the next few years as we continue to make progress.

Yes, thank you, Stéphane. So, Filippo, hello. We are leveraging these efficiencies to fuel the Beauty Reimagined agenda, which focuses on growth and solid double-digit margins. We believe there is significant room for improvement in both gross margin and operating expenses. Given our current state and anticipated sales growth, we are committed to achieving strong operational results. Our PRGP has already delivered savings across various areas. We are also investing strategically using the savings we achieve to meet our growth objectives. Ultimately, our focus remains on achieving a compelling return on investment while meeting our growth targets.

Great. Thank you very much.

Thanks Filippo.

Thank you operator. Good morning everyone. Hope you're doing well. So, I just wanted to ask around the commentary regarding sales growth in fiscal 2026. Should there be a resolution related to tariffs, I know this is a bit specific, but is that a full-year comment or is that just that you would anticipate returning to organic sales growth at some point in the year? And then, totally getting that this is probably hard to answer, just given the many moving pieces; should the tariffs remain in place, could you provide any guardrails in terms of how this may impact your ability to return to growth? Thanks.

Yes. So, I'll take the first one and Akhil can address the second point. So hi Peter. Yes, the comment on the return to positive growth is a full fiscal year commitment. It is too early for us to offer specifics by quarter. We will provide more visibility during the August call. But the commitment is for the entire year. I want to reiterate that we are seeing sequential improvement in net sales from Q2 to Q3, and we are already in positive retail territory excluding travel retail. As I mentioned, we are resetting our travel retail business to reduce volatility and we are also gradually overcoming lower base comparisons as we move into fiscal 2026. All these factors lend us high confidence in our growth expectations for the upcoming year. Akhil, do you want to address possible impacts of tariffs?

Yes, absolutely. So, overall, Peter, to start from the top, markets are growing outside of travel retail, our retail is growing, and we are starting to gain share. Those factors bode well for our top line, especially going into next fiscal year. The tariff situation presents a challenge, particularly concerning consumer sentiment in the U.S. and China. We're closely monitoring the situation. Our brands are strong and have remained highly desirable amidst these challenges, which gives us a level of confidence. The tariff rates will certainly create impacts, and while we do not aim to downplay those effects, we are actively working through scenarios to navigate through them. The implementation of multiple strategies will include focusing on our regionalized sourcing and increased local manufacturing to minimize exposure. We are also working on strategic pricing where feasible. Overall, we are confident in our ability to manage these risks while striving for growth.

Thank you so much. I'll pass it on.

Thanks Peter.

Hey, good morning guys.

Morning Dara.

You mentioned the share gains in the U.S., China, and Japan in the quarter. Clearly, there are also some areas of weakness—travel retail, the U.K., as you mentioned, and some emerging markets. So, I was hoping you could spend some time on how you think about your market share performance as you look out to fiscal 2026. What are the most important building blocks in your mind to get back to better market share performance consistently across the organization? And how much progress do you think you can make in share, particularly in some of the areas that haven't seen a recovery yet? Thanks.

Thanks, Dara, for your question. I want to provide you a deeper insight into what's happening specifically in the U.S., China, and Japan markets. We are finally gaining market share in the U.S. after many years, particularly in three out of four categories. Clinique has gained share for 11 consecutive months in the U.S. The Estée Lauder brand has gained share in both skin care and makeup for two consecutive quarters. The Ordinary has returned to gaining market share as well. M·A·C is performing strongly as the number two brand in makeup in the U.S. behind Clinique. Our aim for fiscal 2026 is to maintain and further accelerate this position. We know we have work to do in the fragrance category, but we also have significant luxury brands with growing momentum, like Jo Malone and TOM FORD. Our goal is to replicate our success in China in the U.S. by applying our learnings. In travel retail, although it presents a challenge due to anniversarying significant declines, we have marked improvements in Hainan, with signs of market share recovery. We’re focusing on being a retail-driven organization globally and will continue that approach. I believe our ability to act quickly and decisively will help us capture market share more effectively.

Great. Thanks, guys.

Thanks, Dara.

Hey. Thanks operator, and good morning everyone. Thank you for a lot of disclosure today, which is really helpful and just trying to understand the story as it evolves. I had a question about how you're balancing the margin target, the margin aspiration over the next few years with some of the incremental actions you're taking like increasing the size of the restructuring versus just making sure it doesn't interfere with a reacceleration and sustained acceleration on revenue. There's a lot of moving components to your story right now, especially trying to reboot some brands and refocus kind of the center of equilibrium geographically and at the same time, chasing a margin target. So, can you just kind of give us some sense of how you're thinking about the choices that are involved in that and really safeguarding at the end of the day that we've got a model that will grow revenue, which ultimately is more important than the margin target? Thank you.

Thanks, Bryan. This is indeed a great question. The challenge of finding the right balance between transformation and achieving our ambitious margin aspirations over the next few years is significant. Thank you for acknowledging our commitment to providing increased visibility. As you see from today’s conversation, we are gaining momentum and seeing positive outcomes in many areas. One of the most significant transformations we are driving is the clarity of organizational roles. This allows us to define the responsibilities of brands, regions, and functions more clearly. By being clear about who does what, we can deliver accelerated innovation that meets consumer demands effectively. At the same time, we are ensuring that our functions enable this strategy and execution. Our focus is on making our functions more efficient, lean, and agile, specifically in how we operate in the supply chain. The delegation of the P&L responsibilities to regions, set to be effective starting July 1st in the new fiscal year, will accelerate our decision-making processes and allow us to allocate funds more effectively. As Akhil pointed out, growth, margin, and cash remain our guiding principles. We are investing wisely, focusing on initiatives that drive the highest ROI while keeping a close watch on the industry's performance. The PRGP is aimed at optimizing and creating efficiencies. I’m confident that we can achieve double-digit operating margin while fostering revenue growth.

Correct, Bryan, that’s an excellent question. We are clear that growth is our primary objective, which naturally drives our value creation approach. I want to emphasize that we have a clear vision focusing on growth, margin improvement, and cash generation. This strategic engagement is aimed at navigating the business challenges we’ve encountered. We are optimistic that our business model will continue expanding in the right direction with positive market reception, while our efforts on the cost side proceed. While there are certainly external market pressures that we are mindful of, we remain confident in our strategic approach to meet consumer demands while enhancing our financial performance for all stakeholders.