Estee Lauder Cos. Inc (EL) — Q4 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'll 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, references to net sales refer to organic net sales which excludes the noncomparable 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 that 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. Before we discuss our results for fiscal '25 and '26 ambition, let me begin with a moment of remembrance of our beloved Chairman Emeritus, Leonard A. Lauder, who passed in June. On behalf of myself, Akhil, the executive team, Board of Directors and the Lauder family, we extend our heartfelt gratitude for the sympathy shared. We were profoundly moved by the outpouring of compassion for employees, consumers, peers, retailers, suppliers, media, analysts and investors. Your condolences celebrated a life beautifully lived and a legacy deeply felt, recognizing how Leonard uniquely shaped and revolutionized not just our company, but also the beauty industry. Leonard was a mentor to me and as he was to so many others. He was a strong advocate for Beauty Reimagined when he entrusted us to lead. We are more committed than ever to regaining prestige beauty leadership in his honor and upholding the company's values he championed. Turning to our fiscal '25 full year performance. Our results were in line with the revised outlook we provided in May and the expectation Akhil and I set in our first earnings call in February. Nearly two-thirds of our 8% organic sales decline came from travel retail as it decreased 28% driven by a strategic decision and prolonged weak conversion. Importantly, we ended fiscal '25 much better positioned than fiscal '24 with healthier trade inventory, especially in travel retail Asia for currently forecasted demand. Travel retail represented approximately 15% of reported sales, down 4 percentage points from fiscal '24 and 14 percentage points below its fiscal '21 peak reached during the pandemic, making it more similar to the channel global prestige beauty share and reducing our exposure to its volatility. Gross margin expanded 230 basis points to 74%, driven by PRGP benefits and better by 50 basis points than the outlook given in May despite significant volume deleverage. Operating margin of 8% contracted 220 basis points, driven by sales declines and increased consumer-facing investments. Diluted EPS decreased 42%. Since I became CEO, we have acted with urgency to operationalize our strategic vision of Beauty Reimagined, making strong initial progress across all five action plan priorities from January through June. In the second half of fiscal '25, we gained prestige beauty share in China, Japan, and the U.S., demonstrating not only our ability to return quickly to share gain by building on our brand's high desirability, but also early wins from new consumer coverage and uptake of enticing innovation. Globally, Le Labo and La Mer gained prestige beauty share in the second half, confirming their strong desirability, and The Ordinary accelerated to high single-digit retail sales growth in the fourth quarter. La Mer, TOM FORD, and Estée Lauder fueled our second half share gain in China, while Le Labo, Estée Lauder, and La Mer powered Japan. In the U.S., The Ordinary, Clinique, and Estée Lauder drove share gain, while Estée Lauder's new Double Wear Concealer ranked #1 product launch in prestige makeup by Circana from January through June. In our first action plan priority, accelerate best-in-class consumer coverage, we achieved many accomplishments in the second half of fiscal '25, particularly for our online business. Following The Ordinary's launch in the U.S. Amazon Premium Beauty store in the third quarter, Origins and Aveda launched in the fourth quarter, while Estée Lauder and Aveda opened in the Amazon Premium Beauty store in Canada. We now have 11 brand stores found in the U.S. and three in Canada. And in Southeast Asia, we built scales on Shopee and TikTok Shop across the third and fourth quarters. This action complemented second half growth from our existing presence in fast-growing online retailers like Tmall and Douyin. As a result, online organic sales growth accelerated from low single digit in the first half to mid-single digit in the second half. Online reached 31% of reported sales for fiscal '25, up 3 percentage points from fiscal '24 to an all-time record, and we expect online mix to climb higher still. We continued our expansion in pharmacy in Europe and began entering the pharma channel in Latin America with clinic responding to rising demand for derm brands. Moving to our second action priorities, create transformative innovation and innovate across prestige price tiers to reach a wider audience. Throughout the second half of fiscal '25, we introduced a robust slate of breakthrough on-trend and commercial innovation aimed at new consumer acquisition, as you can see on the slide. We are realigning our innovation portfolio to deliver gross margin accretive products quicker and better capture faster-growing industry trends in skincare within night, longevity, and derms as well as across makeup and the still in-demand luxury fragrance segment as well as hair care. Let me share a few highlights from the fourth quarter, beginning with skincare. La Mer built upon the iconic success of its Treatment Lotion with the Balancing Treatment Lotion, which along with the brand's third quarter launch of Night Recovery Concentrate fueled La Mer's second consecutive quarter of double-digit organic sales growth in Mainland China. Clinique and The Ordinary showcased their unique derm and scientific brand equities at entry prestige pricing. For Clinique, the brand launched a Supercharged SPF version of its renowned dermatologist recommended DDML. For The Ordinary, its new UV Filters SPF 45 serum offered consumers sun care protection in its signature serum formats. In makeup, Clinique built upon its blockbuster Almost Lipstick franchise with a third shade, Nude Honey. Since 2021, Clinique has driven strong sales growth of Almost Lipstick with volumes over 30 times greater than four years ago, demonstrating our ability to leverage social media virality to further fuel demand and attract younger consumers. M·A·C's Born Famous commercial innovation paired with the new Lipglass Air contributed to strong share gain in the U.S. prestige makeup lip color and lipglass subcategory in the second half. Aveda introduced Miraculous Oil, which is significantly outperforming initial sales expectations. For our third action plan priority, boost consumer-facing investment to accelerate new consumer acquisition. We increased consumer- facing investment at a greater rate of growth in the second half versus the first half to reignite retail growth. In Mainland China, this contributed to high single-digit retail sales growth and share gain in each of the third and fourth quarters, solidifying share gains for the fiscal year with every category improving share. In the fourth quarter, ten brands grew at retail to fuel share gains in every category and every channel. The incremental investment, coupled with innovation drove outstanding performance for 618 for La Mer, Lauder, and Jo Malone London across the online platform and powered The Ordinary's successful launch in China with Sephora. We invested in our freestanding store as we strategically drive a more productive fleet. For the full year, we opened nearly 40 doors for our fragrance brand to much success and closed unproductive doors, primarily for M·A·C, Aveda, and Origins for over ten net new stores globally. Le Labo continued its spectacular expansion with new stores, including the Beijing and Seoul Experience Center, while Jo Malone London, Hainan store navigation and experience to meet evolving consumer needs. Next, let me share an update on our portfolio review. We recently engaged external advisors as we consider evolving the portfolio to best align with the strategic vision of Beauty Reimagined and focus on our highest return opportunities over the medium to long term. We will share updates in due course. Let me now turn to our fiscal '26 outlook. With three fiscal years of sales decline and operating margin erosion behind us, we enter fiscal '26 with signs of momentum and the start of our turnaround, a return to top line growth in fiscal '26 and the pursuit of a solid double-digit operating margin in the years ahead. For fiscal '26, we expect to deliver low single-digit organic sales growth, maintain our now stronger gross margin despite the headwind of incremental tariffs and expand our operating margin by 165 basis points at the midpoint. Akhil will describe the drivers in detail, but let me share a few of our achieving themes. For sales, we intend to significantly reduce discounts. We made good progress in this front in fiscal '25 and believe there is much more that we can achieve. Our sales growth will also benefit from accelerating best-in-class consumer coverage, recognizing we still have a lot of work to do in markets with a high penetration of department stores. Finally, we are putting greater emphasis on accelerating in high-growth emerging markets given our still untapped potential as emerging markets only represent 10% of reported sales. For operating margin, the organization has embraced PRGP, and its momentum is very encouraging. We achieved much more from PRGP than we expected in fiscal '25, which gives us confidence that we can deliver meaningful cost savings in fiscal '26 and fund incremental consumer-facing investments. To fuel our '26 outlook, we are focused on executing with excellence in Beauty Reimagined. Already in the first quarter, we are further accelerating best-in-class consumer coverage. The Ordinary launched on Tmall in China with a breakthrough service, the first AI-powered flagship stores co-developed with Tmall. And we are excited to be expanding on Amazon Premium Beauty store success beyond the U.S. and Canada, starting with The Ordinary in Amazon U.K., which launched in July, as well as Clinique in Amazon Mexico this month. In travel retail, we are greatly expanding our presence in the Americas through the all-new distribution with Duty Free Americas. This builds on progress in EMEA to expand the presence of our luxury fragrance brand in airports. Moving to our second action plan priority, create transformative innovation. We have identified our external hire for the new leader of R&D and expect to make this announcement in the coming weeks. For fiscal '26, we are targeting innovation to represent over 25% of sales. With this pipeline, we are well on our way towards tripling the percentage of innovation launched in less than a year from 10% to 30%. In fiscal '26, we are set to have 16% of our innovation that is launched within a year. Here are a few fiscal '26 innovations already in the hands of consumers. In skincare, reflecting our imperative to innovate from the entry prestige through luxury tiers, The Ordinary launched Sulfur 10% Powder-to-Cream Concentrate, a breakthrough formula. Further up the prestige tier, Estée Lauder Advanced Night Repair franchise introduced a new eye cream, while Re-Nutriv launched a watery lotion powered by longevity science. In makeup, we are rebuilding on our gain in lip with M·A·C Lipglazer Glossy Liner and Bobbi Brown's Cashmere Luxe Matte Lipstick. And following TOM FORD's recent success with Cushion Foundation, the brand launched Architecture Radiance Hydrating Foundation. In France, Jo Malone London's Raspberry Ripple, this year's seasonal limited edition cologne, is outperforming last year's limited edition runaway success. TOM FORD extended the hall of its Oud collection with Oud Voyager and expanded to its popular Black Orchid franchise with Black Orchid Reserve. We are also proud to mark the exciting relaunch of the Aramis brand with Intuition, a new fragrance fronted by Global Ambassador, NBA Hall of Famer, Dwyane Wade. For our third action plan priority, boost consumer-facing investment, we are deploying a new media model that puts greater focus on demand generation through broader media tactics. We made significant shifts in the mix of media budget to enhance consumer acquisition and improve ROI accountability. Our investments in AI have begun to show meaningful impact, transforming how we engage with consumers and operate internally. From personalized marketing and media optimization to agile go-to-market execution, AI has driven a 31% increase in ROI from our North America media campaigns, enabling faster decision-making and stronger real-time market responsiveness. For our fourth action plan priority, fuel sustainable growth through bold efficiencies. Among our newer initiatives when we expanded the PRGP in February '25 is outsourcing. Our analysis revealed a significant gap versus the industry benchmark, and we are rapidly advancing these initiatives. For our final action plan priority, reimagine the way we work. As of July 1, brands own global strategy, innovation and long-range planning, while regions have full responsibility for the P&L, allowing for greater local agility and consumer focus. We introduced new ways of working playbook aligned to this structure to drive brand region collaboration, and we are very encouraged by the elevated engagement so far. In closing, we are energized as we are transforming our company through Beauty Reimagined. To our employees, thank you for bringing Beauty Reimagined to life in six short months through your tremendous passion and commitment. Together with all of you, I am excited for what we will accomplish. I will now turn the call over to Akhil.

Thank you, Stéphane. Hello, everyone, and thank you for joining us today. Before discussing our outlook, I'll briefly recap our fourth quarter results and highlight progress in key areas of the business. For more information on a full year and fourth quarter performance, please refer to our press release issued this morning. Overall, we delivered fourth quarter and second half results at the top end of our implied guidance range. Starting with the top line, organic net sales declined 13% in the fourth quarter, reflecting declines across all product categories, except fragrance, as well as across every geographic region, primarily driven by global travel retail, as we expected. Encouragingly, we are seeing positive results with share gains in some key markets, notably in Mainland China and Japan. In the U.S., we made significant progress in narrowing our share losses during the fiscal year and gained share in the second half. Now looking at margins, our gross margin for the fourth quarter was relatively flat, even as we faced the steepest sales volume decline of the year. For the full year, we delivered 230 basis points of gross margin expansion despite our sales deleverage, landing at 74%. This meaningful expansion was driven by the relentless execution of our PRGP. Turning to operating margin for the fourth quarter, we delivered 4% compared to 9% last year. This was driven by a 580 basis points increase in consumer-facing investments as a percentage of sales. On the full year, consumer-facing investments increased 400 basis points as we invested in our brands as part of Beauty Reimagined to fuel growth and long-term value creation. These investments were enabled through our PRGP, which fueled our continued progress in reducing non-consumer-facing costs in the fourth quarter, ending the year with a 6% reduction. In the fourth quarter, we also recorded $425 million of impairment charges relating to Dr.Jart + and Too Faced. This reflects challenges in Mainland China and Korea for Dr.Jart+ and continued underperformance in geographies and channels from Too Faced. Our effective tax rate for the full year was 38.8% compared to 31% last year. This reflects a higher effective tax rate on our foreign operations due to our geographical mix of earnings and the unfavorable impact associated with previously issued stock-based compensation. Our diluted EPS was $0.09 in the fourth quarter as compared to $0.64 last year. Looking now at the PRGP restructuring program. As of June 30, we recorded $610 million of total cumulative charges, primarily in employee-related costs. Moving to our cash generation, for the year, we generated $1.3 billion in net cash flow from operating activities compared to $2.4 billion last year. This decrease is primarily due to lower earnings adjusted for noncash items and an unfavorable change in operating assets and liabilities. This also reflects that last year, we made a very significant year-on-year reduction in our inventory, which drove very strong CFFO in the base period. We invested $602 million in capital expenditure, down 34% compared to last year, which reflected prior year payments relating to the manufacturing facility in Japan. This level of CapEx reflects a strong focus on optimizing capital expenditures and prioritizing consumer-facing investments. Free cash flow generation remains a strategic priority, and we are focused on driving improvements in working capital, CapEx, and operational efficiency to strengthen free cash flow going forward. Now turning to outlook, our priority is to execute our Beauty Reimagined action plans with excellence. The strategy is designed to drive long-term valuation and restore growth, improve margins, and drive cash. We are focused on driving sustainable sales growth in fiscal '26 and beyond, as well as achieving a solid double-digit adjusted operating margin over the next few years. Beginning with fiscal '26, we are providing only an annual outlook. This approach gives us more agility and flexibility to navigate ongoing volatility while better aligning with a long-term value creation and strategic priorities. Also, as you may have seen in our press release issued this morning and consistent with prior years, we continue to develop our strategy and allocate resources by product category. Beginning with the first quarter, we will be reporting our fiscal '26 and comparable fiscal '25 results by reorganized geographic regions that align with our recent leadership changes. We plan to share more detailed financial information based on our new regional structures in the coming weeks. Now let me update you on our assumptions regarding evolving trade policies and enacted tariffs. As I mentioned in May, our task force has been moving with urgency, closely monitoring developments and evaluating various scenarios to mitigate some of the tariff impacts. Since then, our teams have acted swiftly to implement mitigation actions, including leveraging available trade programs and further optimizing our regional manufacturing footprint to bring production closer to the consumer, including through a facility in Japan. These efforts, along with the agility we have built into our supply chain, are helping to offset more than half of the expected impact and better position us to adapt quickly to address the evolving trade policies. Based on what we know today and net of our planned mitigation strategies, we expect tariff-related headwinds to impact profitability by approximately $100 million. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. Turning now to our industry expectations. For fiscal '26, we assume modest global prestige beauty growth in the range of 2% to 3%, which is an improvement versus fiscal '25. While there are early signs of stabilization in Mainland China, travel retail conversion continues to be weak, and challenges persist in the West, including subdued consumer sentiment in the U.S. and Western Europe. In terms of retail sales, our expectations assume retail sales growth in line with or ahead of prestige beauty in key markets. We also remain focused on improving our performance and narrowing the gap between retail and net sales growth globally. In fiscal '26, we aim to achieve this through tighter monitoring of inventory in trade and a significant reduction in discounts. That said, progress may take longer in some markets and is unlikely to be linear. Particularly in North America, we ended fiscal '25 with an approximate 5 percentage point gap between retail and net sales growth for the full year. While we expect the gap to narrow throughout the year, a greater disconnect is anticipated in the first quarter. Moving to the top line, for the full year, we expect organic net sales to be flat to up 3%. Our outlook assumes mid-single-digit net growth in Mainland China as well as meaningful improvement in our global travel retail business. It also assumes more broad-based improvements across the rest of the business compared to last year. Let me now share a few details. We expect full year organic net sales in our global travel retail business to return to growth at the midpoint of our outlook. This reflects the improvement in shipments compared to last year in Asia travel retail, particularly in the first half as we anniversary the impact of actions taken to improve retailer inventory levels, along with the strategic decision to reduce our exposure to reseller activity. However, this improvement is expected to be offset to some extent by persistent challenges in the broader retail environment, including weak conversion. As a result, we expect a wider range of net sales growth in global travel retail in the second half, reflecting ongoing uncertainty. In the rest of the business, we expect to deliver low single-digit organic net sales growth for the full year, reflecting improvement in year-on-year growth rates across most markets relative to fiscal '25. In terms of the first quarter, we expect organic net sales to be down low single digits to slightly positive. This reflects high single-digit growth in our global travel retail business while maintaining a strategic initiative to keep the mix of business in line with industry norms. In addition, we anticipate a return to solid growth in Mainland China and a more moderate decline in the remainder of the business. Turning now to our PRGP. In fiscal '26, we are continuing to execute with rigor, discipline, and clear purpose to optimize key elements across our cost structure to improve margins and profitability as well as create fuel for growth. We are pleased with the meaningful progress we have made in fiscal '25 and remain focused on advancing our PRGP initiatives in fiscal '26. Through our PRGP, we expect continued benefits in fiscal '26 to gross margin and to operating expenses, specifically non-consumer-facing expenses as we enhance overall productivity and rightsize our cost base. Now looking at our restructuring program. We remain on track and continue to advance key initiatives inclusive of approvals through August and relative to the high end of the total expected ranges we previously communicated. We have approved initiatives accounting for over 60% of expected gross benefits and nearly 50% of both anticipated charges and net reduction in positions. With that backdrop, let me walk you through our other full year assumptions. We assume an operating margin between 9.4% and 9.9%, reflecting greater expansion in the second half of the year as we expect benefits from our PRGP to build sequentially each quarter. In fiscal '26, we expect margin progression despite year-on-year headwinds from incremental tariffs and normalized bonus levels. Our estimated geographical mix of earnings is expected to drive an effective tax rate of approximately 36%. This assumes a higher rate of approximately 40% in the first quarter with improvement over the course of the year as we expect to build profitability. In addition, we are monitoring certain provisions in global tax legislation that may expire in fiscal '26, which if not extended, could increase our effective tax rate. Diluted EPS is expected to range between $1.90 and $2.10, assuming a weighted average share count of approximately 365 million shares. This reflects year-on-year growth of 26% to 39%. Turning now to cash generation. In fiscal year '26, we expect to generate net cash flows from operating activities between $1 billion to $1.1 billion. While this reflects a slight decline from last year driven by the anticipated peak in restructuring payments, we are confident in our ability to mitigate some of the pressures through a strong focus on managing working capital. We expect capital expenditures for the full year to be approximately 4% of sales, reflecting a more efficient and normalized level of expenditures along with our focus and determination to optimize CapEx overall and target the investments in consumer-facing areas to fuel growth. In closing, we remain confident in Beauty Reimagined, grounded by our consumer-centric mindset that prioritizes growth-driving investments, cost discipline, and operational efficiency. While we are not providing an outlook beyond fiscal '26, we are determined to down-cost leverage through sales growth in fiscal '27, and bring to bear with urgency PRGP benefits from optimizing our end-to-end operating model to drive cost savings, including through ongoing outsourcing initiatives, tax planning consistent with the strategic changes we are making in our mix of business and a more competitive approach to procurement. To our employees, thank you for your dedication and excellence through this period of meaningful transformation. Your resilience and commitment drive our progress. Together, we are turning strategy into execution and execution into long-term value creation. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

There has been a lot of hard work happening as part of Beauty Reimagined, with substantial plans in place across the five key action areas you mentioned. I would like to specifically discuss the simplification of the organizational structure and the ongoing restructuring. How much progress have you made so far? What changes still need to be implemented in fiscal '26? Additionally, I would like to know how the organization is adapting to these changes culturally, both within the organization and in a broader context. There is clearly a lot of change taking place in a company with a rich heritage and tradition. Are you satisfied with the pace at which the organization is progressing, and how do you believe this change is being embraced culturally?

Thank you for your question, Dara. This is central to the changes we're making and our vision of Beauty Reimagined, which focuses on five key action priorities. From an organizational standpoint, I mentioned in the prepared remarks that we will announce the Head of R&D in the coming weeks, completing our new leadership team within just six months since restructuring. Additionally, we've consolidated the seven regions into four, with the new geographical reporting structure now including the Americas, U.K., Asia, travel retail, and China as a separate region. I'm very pleased with the progress we're making. The team is dedicated to the changes and we've maintained consistent communication throughout the organization. I've held numerous town halls, and my executive team has engaged similarly, connecting with our suppliers and retailers about the changes we're implementing globally. I've stated multiple times that this is the largest organizational transformation in our history. We're also adjusting compensation to ensure everyone is rewarded based on the overall execution of Beauty Reimagined, and we're focused on the remaining time to successfully deliver the PRGP. As both Akhil and I have mentioned, we're pleased with the PRGP progress, having exceeded expectations for fiscal '25, with more goals for fiscal '26 and continued advantages into '27. We have the new leadership in place and this transformation extends beyond just the top level; it's felt throughout the organization. We previously announced the P&L responsibility shift from brand to region, which has been effective since July 1. The engagement across the organization among brands, regions, and functions is encouraging and positive. We're already witnessing collaboration and execution speed that yield significant benefits. Many of the advancements we've noted over the last six months since introducing Beauty Reimagined are evident in these changes, including share gains in China, the U.S., and Japan, as well as growth in emerging markets, though we strive for more improvement. Overall, I'm very happy with our progress and the speed at which we're moving. As you highlighted, the culture is evolving, and we are emphasizing ambition and accountability across all areas. This is just the beginning of the momentum we expect to see moving forward.

This is a question perhaps more for Akhil, although, Stéphane, I obviously welcome your perspective as well. I was hoping you could just maybe better decompose the gap between retail sales and shipments that you see entering fiscal '26. I'm curious as to how much of that is still the byproduct of elevated trade inventory in pockets versus the discounting you mentioned versus perhaps channel mix dynamics or otherwise? And then I guess, as you look forward, just how you anticipate that gap looking if it still exists as you exit the year versus the beginning?

Thank you, Steve. Looking at the overall picture from the end of fiscal '24 to the end of fiscal '25, we have decreased inventory across our largest markets: travel retail, China, and the U.S. In each market, we have aligned inventory levels to what is needed. In travel retail, we have essentially reached where we want to be. In China, we consistently maintain a lean inventory and are in a solid position. In North America, although we have cut down inventory, we need to be cautious in managing it due to the current retail environment. We anticipate that this gap will lessen in the future. Your main takeaway should be that our net shipments will begin to align more closely with retail trends than previously. You can feel optimistic about this. We will provide quarterly guidance, and for the first quarter in North America, we have already indicated that there are some challenges. However, your key message should be that we are focused on shipping to retail, as Stéphane and I have mentioned, with a strong emphasis on retail growth. There may be fluctuations by quarter, but we will correct this in the following quarter, and we will communicate transparently about it. In markets like North America, as part of our Beauty Reimagined initiative, we are shifting to purely specialty retailers which alters our channel mix, leading to changes in costs that can affect the gap between retail and net sales. Despite these challenges, these are profitable and valuable channels. Overall, we have made significant improvements, and we are monitoring this closely. We expect the gaps to narrow considerably compared to where we have been.

Yes. And I think, just one thing to add to what Akhil was saying. I think you're seeing even in the algorithm for the year, where we said we have modest growth for travel retail, mid-single-digit growth in China. For the rest of the business, we are in low single digits, but we are seeing gradual improvement from our net sales throughout the year because of what Akhil said, we are aligning retail and net throughout the year quarter-over-quarter. So still a bit of a gap in Q1, as Akhil mentioned. But frankly, you're going to see that in the exit of '26, we will be in a much better position, frankly, in all the geographies. But again, the big work was done in fiscal '25 on reducing dramatically the inventory in travel retail, and we exited fiscal '25 in the right place. So now it's fine-tuning to make sure that the total net sales and the retails are aligned going forward.

I want to focus on North America and discuss Akhil's comment about markets with a significant presence of department stores facing ongoing challenges. You've made impressive strides in North America with your presence on Amazon and gaining market share in different periods. How do you view the balance of sales channels in North America? Also, how long do you anticipate it will take for the region to achieve consistent sales growth, considering the challenges with department stores? More specifically, are you open to taking more decisive actions similar to what you did in travel retail to proactively reduce reliance on that channel?

Thank you, Lauren. I'll begin, and Akhil will add some insights. Looking at North America, I'd like to take a moment to highlight the strong market conditions. We've observed a steady improvement in fiscal '25, progressing month by month. Even in the early days of fiscal '26, July has shown strong results for us. In our prepared remarks, we mentioned gaining market share over the last six months of the previous fiscal year, which is significant for us. This transformation is noteworthy. Regarding your points, Lauren, much of this progress stems from our Beauty Reimagined initiative, particularly in expanding consumer reach. We’ve strategically increased our presence to 11 brands on Amazon, and our performance there has exceeded expectations. Clinique was our first brand to launch, followed closely by Aveda and Origins. Even as we reflect on the anniversary of Clinique's launch, it remains a strong performer, suggesting we've attracted new consumers and reengaged past ones over the last year. Amazon not only introduces new customers but also amplifies our entire business since it's a major platform for beauty searches. We're experiencing strong momentum with retailers like Ulta and our own online channel is also performing well. However, we still have work to do in traditional channels like department stores, which are decreasing as a percentage of our total business. We're collaborating closely with our long-standing partners to focus on key stores and recruit the right consumers. There's still considerable traffic and demand in these stores. July's early results are very promising, indicating we are gaining market share not only in brands like The Ordinary but also with Lauder, Clinique, and M·A·C, which boosts our confidence in making the necessary changes. Moving forward, you'll notice an increase in new retail partners like Amazon and specialty-multi, which aligns with our strategy.

Yes. I would add a few things to what Stéphane said. So I think overall, we are very pleased with where the channel mix is evolving in North America. As Stéphane said, we now have a much more balanced view of what e-channels bring. I mean department stores are probably less than one-third of our business, not probably, they are less than one-third of our business. We have built an Amazon business, which is significantly a larger part of our mix of business. We have a large DTC business between brand.com and freestanding stores. So we now have a much more diversified business than probably most people realize. And what we intend to do is to really serve the consumers and underlying e-channel as part of a very consumer-centric approach. There's a different consumer there. We are serving them according to that. And over time, we will continue to build. We do have opportunity to grow further in specialty multi, and we are looking at every opportunity to go. As Stéphane said, wherever the consumer is, we are going there, of course, in a value-creating way.

So one of the data points that you gave at Q3 was organic revenue growth excluding travel retail, which was minus 3% at the time. Are you able to share with us what Q4 excluding travel retail organic revenue growth was? And whilst I recognize the market is not linear, I think reporting from global beauty peers does show a more supportive beauty backdrop in the U.S. and China in Q4 versus Q3. So maybe if you didn't see an improvement in your organic revenue growth excluding travel retail, what do you attribute this to? Is this just a gap between your sell-in and sell-out or something else that's happening there considering we've seen the other players show improving trends there? And then I guess when you think about the '26 guide, can you help us understand when we should be expecting excluding travel retail organic revenue growth to turn positive? And I guess the reason I ask this is it does seem that this is the part of your business that you can influence more heavily through product innovation and distribution push, where the travel retail component feels still a little bit more out of your control and impacted by market dynamics.

Our overall business, excluding travel retail, experienced a low single-digit decline. Our aim is to enhance the business, as noted in our guidance. We anticipate returning to positive growth in fiscal '26, particularly in that low single-digit range. This is reflected in our guidance. Despite some positive retail activity, net sales in North America were negative, which we are actively working to address. Additionally, we observed a slowdown in Europe when comparing the first half of '25 to the second half, and we are focusing on accelerating growth in that region as part of our Beauty Reimagined strategy. In emerging markets, including our strong performance in Japan, we believe we can achieve greater growth outside of travel retail. Encouragingly, our business in China is beginning to recover, showing mid-single-digit growth in retail during the second half of fiscal '25 and gaining market share. We are adapting from travel retail to focus on building our retail presence and shipping accordingly. In other segments, particularly in China, the positive retail dynamics in the U.S., and opportunities in emerging markets indicate we are moving in the right direction towards driving this business, although, as Stéphane mentioned, it will take some time.

Yes. And Ashley, just to add to what Akhil said, I just want to go back to what we've guided for the year with modest growth for travel retail. And we still have ways to influence like we did with the reduction of the inventory last year. It is true that we are starting from a lower base, but we have a new team in place in travel retail, and we are really focused on accelerating retail. We'll be happy to just like show you many of the activities that we are doing in travel retail across Asia, the Americas, and Europe, where we are expanding distribution in the Americas and in Europe. So there's still a lot of untapped potential for us in many airports around the world. And actually, just one data point was interesting. In the month of May, we turned positive in Hainan, thanks to all the activities that we've put in retail with Estée Lauder, La Mer, Jo Malone, and you name it pretty much across the brand. Now the rest of our business is gradually and sequentially getting better with the intent and ambition that by the end of fiscal '26, we will be in positive in the rest of the business. We are foreseeing that China will be positive in the mid-single digits. China is stabilizing. We are gaining share. The other data point is we have early signals in July that we are also gaining share after a very strong Q4 led by 618, where we had top ranks and very top performance for Estée Lauder, La Mer, Jo Malone, and many other brands. So we are seeing gradual improvement from a net sales standpoint. From a retail, we're already there in North America. We are accelerating in the emerging market, and we intend to be in double-digit growth for the fiscal year in emerging markets. As Akhil said, the challenge that we have to work on is The Estée Lauder Companies, but also because of the trend in the market is the big Europe, where we are seeing a decrease in consumer sentiment and obviously, a little bit of a softening of the trend, especially in the key markets like France, Germany, and to a lesser extent, in Italy and Spain. But so we are very conscious of that, and we are working with the team, the new team in the U.K. to make sure that we are deploying more innovation in this market and having the right consumer coverage with the right media investment to recruit new consumers to our brands.

So just going back to the operating margin guidance for the full year. I was just hoping to get more color on the interplay between gross margins and SG&A. And then as you guys make that progress towards the double-digit operating margin target, where you see more improvement on the gross margin or SG&A line?

I'll begin, and Stéphane can add. Overall, in the guidance of 9.4% to 9.9% that we provided, we expect gross margin to remain flat or increase, despite the significant impact of tariffs we encountered. Without this impact, we would have seen an expansion in gross margin beyond the 230 basis points we achieved. As Stéphane mentioned earlier, we are exploring additional opportunities to offset these challenges through various pricing strategies and PRGP initiatives that are not yet in place. Looking ahead, we believe there are more opportunities to enhance gross margin over the long term. In 2026, we expect most of our margin growth to stem from SG&A, particularly from areas that do not directly face consumers. We will focus on ensuring we have the necessary resources to support our brands and the Beauty Reimagined strategy. Regarding other expenses not visible to consumers, including G&A, shared services, and employee costs, we previously announced a significant restructuring effort to better align our business. Within SG&A, as Stéphane noted, we are considering a comprehensive overhaul of our business model, emphasizing outsourcing and procurement opportunities. We are committed to evaluating every operational expense to identify ways to consolidate, improve efficiency, and optimize spending. Our growth will primarily arise from SG&A, but we also see potential in gross margin. We believe there are opportunities in both areas, with a greater emphasis on SG&A.

Yes. Just one quick addition, Rupesh, on this point. We are laser-focused on growth. The PRGP, if you remember, the G is growth. So a lot of the savings that are coming from the PRGP, which we are already in completion of the first year, and we still have one more year to go. And as I said in my prepared remarks, we're very pleased with the progress that we've made. We are reinvesting a large part of this cost saving into consumer-facing. And I said it in multiple calls before, we could have taken a very different position to just drop many more of these savings to just improve quickly or faster the operating margin. But we strongly believe that with the strength of our brands, with the innovations that are coming and the new media model that we are putting in place, we need to fuel the growth going forward and the consumer acquisition that we just need to go back to historical growth algorithms and beat market share. When we get there with the new operating model that we are putting in place with lower SG&A, a better gross margin than what we have had over the last few years, we know that there will be a lot of leverage going forward. But we need to be laser-focused on activating retail. And obviously, as we made in the other question, that we tighten the retail to net, and this is just going to create a lot of leverage going forward.

I have a two-part question regarding the developments so far this quarter, particularly in Asia as highlighted in your press release. I would appreciate some additional context on what you are observing in that category and your performance there. Additionally, regarding Europe, you mentioned experiencing some slowing in the category. With new leadership in place aiming to enhance penetration, what is your outlook for Europe over the next 12 months in terms of both the category and your company's performance? What benchmarks for success and indicators of progress should we consider in the market?

Thank you, Chris. I want to clarify the situation in Asia, differentiating between China and the rest of the region. We are seeing encouraging signs of stabilization in China, which is very important. Consumer sentiment is improving, although it remains lower than a few years ago. However, we've had strong performance across all categories and channels in Q4, which is exceptional for us. Ten of our brands, including our major brand, experienced retail growth in a diversified manner. Lauder and La Mer continue to perform well, and we've seen significant retail acceleration in brands like Jo Malone and TOM FORD, including TOM FORD makeup. We also had a successful launch of The Ordinary in China with Sephora, and we are expanding on Tmall. There's good momentum in China, although we acknowledge that there's still work to do. While the market is soft, we are gaining market share. In the rest of Asia, we've observed some slowdown. Japan remains strong for us, with market share growth, but we've noticed a sequential decline in performance due to factors like FX and fewer tourists. Korea is soft, and we are collaborating with our new general manager to accelerate the market. Southeast Asia is still relatively strong, and we see potential with 10% of our sales coming from emerging markets, with expectations for double-digit growth this year and beyond. In Europe, the consumer trend is concerning as we see a decline in performance and a slowdown in prestige beauty in major markets, particularly France and Germany, while Spain and Italy remain somewhat positive. We are expanding our consumer coverage and increasing activities, especially in fragrances, which have been a significant driver in Europe. Brands like Jo Malone, TOM FORD, and Le Labo are performing well, and we are strategically investing to drive growth and attract more consumers. Our focus on innovation is paying off, with more than 25% of our innovations hitting the market within 12 months, catering to consumer demand for new products in Europe. Overall, we see stabilization in China, strength in North America, and some weaknesses in the rest of APAC and Europe, but we are committed to expanding distribution, introducing new innovations, and attracting new consumers, which gives us confidence that by the end of fiscal '26, all new geographical regions will be in positive territory.

So thank you for all the details on fiscal '26, but just listening to you both and reading through the release, there's just a lot going on, a lot of moving pieces. So when we just think about the fiscal '26 guidance, can you just talk about the level of visibility or confidence you have in the outlook at this point in time? And I guess, specifically, have you embedded some cushion if some of these assumptions were to move against you?

Overall, when we provide this outlook, we take the best possible perspective and conduct a risk assessment. What we find encouraging is definitely the situation in China, where the market has expanded, and we have achieved mid-single-digit growth in retail. This is significant because China is one of the largest beauty markets globally, and it wasn't the same in the first half of the year. With two consecutive quarters of mid-single-digit growth and gaining market share, we feel more confident, considering external geopolitical issues that are beyond our control. What we can control is working effectively, and we are succeeding in that market again, which is positive. Secondly, regarding travel retail, the actions we've taken regarding inventory and the tough decisions made in 2025 provide a solid foundation for our growth. Although retail in travel is still facing challenges, our shipment base has worked hard in 2025 to navigate these choices. Thus, both travel retail and China provide us with a clearer outlook as long as external factors remain stable. In North America, we are starting to see positive retail growth, and we gained market share in the latter half of the year. This increases our confidence that we are becoming more competitive in North America amidst all the channel changes we've implemented. In addition to these three main markets, we have a strong presence in emerging markets worldwide, and we are focused on accelerating our efforts there, which is a priority stated early on by Stéphane. While emerging markets can be volatile, they still represent a growth opportunity where we are well positioned. When we evaluate our major businesses from a sales perspective, we have solid data to support our outlook. From a profit perspective, we have diligently analyzed our cost structure through our PRGP initiative, allowing us to understand our costs, COGS, tariffs, and potential mitigations. This thorough analysis supports the margin outlook we've provided. Thus, based on the information we have today, we believe our outlook regarding revenue, gross margin, and cash is reasonable, of course with the caution that you would expect from us.

And I would say, Peter, just one quick thing. Obviously, we've said it, and you see it yourself, there's an enormous amount of volatility out there in any geographies around the world. So we have ranges to give us room basically to deliver, like Akhil said, the outlook. And I think you should see that from this team that we've over-delivered PRGP to our expectations. We will continue. We have 11 months to go into this fiscal year, and there's not a day in the week that we are not looking for new opportunities to cut costs where we need to do it, to refuel basically our brands everywhere around the world to activate retail. So we have ranges. Obviously, you would expect from any good managed business to have ranges not only to deliver the outlook, but also for us to continue to do meaningful work. You saw the work that we're doing in gross margin throughout fiscal '25. With the enormous amount of volume deleverage, we've been able to just improve gross margin by 230 basis points and even beat the guide that we gave for Q4 in fiscal '25. So expect us to continue to act with the same determination to cut costs where we need to cut costs to invest to accelerate retail and to deliver on our guide for the year.

What are your total PRGP gross savings? Stéphane, as you mentioned, the entire team has exceeded expectations on this plan. What amount are you factoring into your guidance for the margin expansion you outlined at the midpoint of the program? Additionally, how much are you planning to reinvest in client-facing initiatives this year? I'm trying to understand how this translates to the bottom line. Regarding your comments, I have a clarification question. Of the 500 basis points gap in retail compared to shipments, it seems to have grown about 2% in the Americas according to my calculations. I believe the 500 basis points comment specifically pertains to the U.S. Can you share what the exit rate was in the Americas? Also, how much retail growth do you anticipate in the U.S. for the upcoming fiscal quarter? You mentioned it would surpass the 500 basis point gap, but I'm considering the entire fiscal year. Lastly, can you clarify the potential for a price increase as a positive factor for the gross margin outlook? Are there expected price increases in the low single digits for local currency growth, or is that a potential upside?

I'll start with the PRGP. When we first announced PRGP, we indicated a range of $1.1 billion to $1.4 billion, and later Stéphane and I expanded on that. In our expansion, we requested that you hold us accountable to margin rather than tracking dollars since the business was significantly deleveraging. Since then, our focus has been on growing margin, which we have done in gross margin, and we anticipate continued growth in overall margin for '26. We are committed to achieving strong double-digit margins. Initially, we said we would achieve more than 50% of the $1.1 billion to $1.4 billion target in '25, and Stéphane pointed out that we exceeded that figure in '25. Regarding the embedding in '26, both '25 and '26 are fiscal years with substantial PRGP savings embedded. This fundamentally stems from our restructuring efforts. We have incurred around $700 million in restructuring costs out of our total announced range of $1.2 billion to $1.6 billion. Therefore, we still have room for the outsourcing project we've discussed and other cost structure streamlining opportunities mentioned by Stéphane. Our forecast incorporates a significant amount of PRGP savings, although we are not including the outsourcing work for '26, as that will extend into future years, along with procurement efforts, which we are currently addressing and should provide another significant lever. Overall, our goal is to manage headcount between 5,800 to 7,000 employees. We have already made progress with over 3,000 reductions. We will maintain a balance and are not strictly targeting a specific number, but we are focused on achieving profitable margins that allow us to operate effectively, support our brands, and ultimately deliver the desired margins. That summarizes our approach to PRGP.

On pricing, I want to emphasize that we have pricing power and are implementing a low single-digit increase in prices. It’s important to clarify our pricing strategy for this year and moving forward. We are focused on enhancing our pricing power by investing in our strong brand while also introducing new innovations at appropriate price points. I've mentioned that we are exploring a range of prestige price tiers from entry-level options like The Ordinary and Clinique to higher-end products like Re-Nutriv and Estée Lauder, as well as La Mer and Jo Malone. We maintain significant pricing power across our brands, but we are also attentive to the growth trends within different price bands. We analyze where the growth is occurring, whether it's within the $10 to $15 range, the $20 to $25 range, or beyond, and tailor our innovations accordingly. Additionally, we have strategically reduced prices on some products to stimulate growth for certain legacy items. We have not only lowered discounts but have also made price adjustments. Overall, we still hold pricing power and are raising prices, which is reflected in our guidance for fiscal '26.

Regarding your question about North America and the 5-point gap, we anticipate this gap to be significant in the first quarter. However, we expect it to narrow over the full year from the 5 points observed in the complete fiscal year of '25. We will continue to provide you with updates on this each quarter.