Estee Lauder Cos. Inc (EL) — Q1 2026 Earnings Call Transcript

Hello. On today's webcast are Stephane 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, all organic net sales growth also excludes the noncomparable impact 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 site 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 with the time scheduled for this webcast. And now I'll turn the webcast over to Stephane.

Thank you, Rainey, and hello to everyone. It is good to be with you to discuss our first quarter results and share the great work our teams are delivering across the action plan priorities for Beauty Reimagined. Let me begin with the first quarter. We delivered organic sales growth of 3%, a significant sequential acceleration from the 13% decline in the fourth quarter. We are pleased by the diversity of our performance. As Mainland China contributed nicely to return to growth, the rest of our markets in total improved sequentially, including high single-digit growth in our priority emerging markets, led by Mexico, Turkey and India's double-digit growth. And Travel Retail grew on a favorable comparable compared to last year's low base. We also got off to a strong start to the fiscal year with significant improvement in operating profitability. These results reinforce the confidence we have in our fiscal '26 outlook, a pivotal step towards restoring sustainable sales growth and rebuilding our operating margin to solid double-digit in the next few years. The first three action plan priorities of Beauty Reimagined: Accelerate best-in-class consumer coverage; create transformative innovation; and boost consumer-facing investment are increasingly amplifying each other to drive accelerating retail sales growth in key markets. In China, we significantly outperformed Prestige Beauty, as our retail sales increased double digits ahead of industry up high single digits. Seven of our brands grew double digits with Le Labo nearly triple digits. We gained share in every category as well as both brick-and-mortar and online. Impressively, we have gained Prestige Beauty share in five of the last six quarters, which is unparalleled among the biggest Prestige Beauty players. In U.S. Prestige Beauty, our retail sales growth accelerated sequentially. In the quarter, we grew 8% in skin care versus the category up 6%. The Ordinary drove our share gain in skin care, while we also gained share in Hair Care led by Aveda. All told, we maintained our Prestige Beauty share calendar year-to-date. The Estée Lauder brand achieved its third consecutive quarter of overall share gain in the U.S., thanks to excellent uptake in innovation. This quarter, it gained share in each of skin care, makeup and fragrance. Impressively, we delivered strong unit share gain in U.S. Prestige Beauty, demonstrating our strategic actions are driving new consumer acquisition. In several Western European markets, Prestige Beauty continues to see slow growth, in some cases, negative growth. In France, the biggest category in Prestige Beauty in Western Europe, we gained share in France and Spain. For the U.K., the largest market in the region and where Prestige Beauty is much more resilient, industry sales growth reaccelerated to nearly 10%, and we realized a strong sequential improvement in our retail sales trends. We still have much work to do in the U.K., but we are moving in the right direction. Our improving retail sales performance in many key markets around the world is a testament to our team's incredibly strong execution of Beauty Reimagined, starting with accelerating best-in-class coverage. We are advancing with speed to reach consumers where they are. Capitalizing on the learnings that we have had with Amazon in the U.S., Canada, and Japan, we opened Amazon storefront in Mexico with Clinique, The Ordinary and Estée Lauder and in the U.K. with The Ordinary. We announced our presence on TikTok Shop, launching Clinique, M·A·C and Dr. Jart in the U.S. as well as The Ordinary in Malaysia and Singapore. Impressively, M·A·C was awarded TikTok Shop Top Brand Campaign Award for 2025 in Personal Care and Life, recognized for the stellar grand opening and tremendous initial success. Our newest TikTok Shop has served to strengthen the performance across channels given how consumers discover, engage and transact. This collective action in our online consumer coverage complemented first quarter growth from our existing presence on fast-growing retailers like Tmall, JD, Douyin, and Notino. As a result, global online organic sales growth accelerated to double digits from mid-single-digit in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel. For our European Travel Retail business, we made great progress in expanding our consumer coverage in fragrance through new retail activation, new doors, and upgrading the existing fleet across our luxury portfolio. This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter. We also drove similarly strong retail sales growth in the Americas Travel Retail for fragrance, in part from our all-new distribution with Duty Free Americas. Looking at innovation, newness from TOM FORD, KILIAN PARIS, Jo Malone London and Aramis kicked off France's rich pipeline for fiscal '26. These launches, some of which created a halo benefit on existing products, combined with the Le Labo outstanding growth made France our best-performing category, rising 13%. We continue to expect France to be Prestige Beauty's fastest-growing category for fiscal '26, driven by luxury, the largest mix of our France business and where we are the leader as well as over the next few years, driven by both domestic markets and the Travel Retail channel. On that note, we are thrilled to have opened our new France atelier in Paris, where our team will blend state-of-the-art technology, data-driven intelligence, leveraging AI and olfactory expertise to craft the next generation of extraordinary scents, all while innovating much quicker than we have in the past. Skin care further drove our organic sales growth in the first quarter. We had an exciting slate of innovation in high-growth subcategories and across Prestige price tiers, including breakthrough launches in eye, acne and longevity targeting all age groups. This introduction, coupled with newness from earlier in the calendar year, contributed to skin care's growth. We continue to boost our consumer-facing investment to drive new consumer acquisition, focusing on high ROI opportunities like our brand building, freestanding stores and demand generation media activation. We opened 14 net new freestanding stores for our fragrance portfolio, including a row of new boutiques in New York City's SoHo District for Frédéric Malle, TOM FORD, Jo Malone London, and KILIAN PARIS. We introduced stunning new campaigns from TOM FORD debut of Black Orchid Reserve to I Only Wear M·A·C and La Mer Gives Skin Life. And we are reengaged in creating new consumer experiences across Travel Retail corridors. To fuel our first three action priorities, we made great strides delivering on the promise of PRGP, which Akhil will describe in more detail. Finally, we are especially encouraged by the momentum we are building as we reimagine the way we work, our fifth action plan priority. Our new executive team is fully in place. Our four newly reorganized regions are fully operational and throughout the organization, we are empowering faster decision-making. As you will recall, we committed in February to increasingly collaborate with partners in areas of business where they can support us to become the best consumer-centric Prestige Beauty company in the world. We are, therefore, thrilled to announce our new partnership with Shopify to modernize and scale our direct-to-consumer business in a phased approach, creating a best-in-class omnichannel consumer experience globally. Looking ahead, for the balance of the fiscal year, we continue executing on our action plan priorities, including investing in exciting holiday activation and expanding consumer coverage. As announced yesterday, this includes M·A·C entering U.S. Sephora spanning select stores as well as online and Sephora at Kohl's, which allows us to better connect with younger consumers and accelerate M·A·C turnaround in the U.S. Before I close, I want to share a few accomplishments from our just published fiscal 2025 Social Impact and Sustainability report. Since we announced our first set of public goals in 2019, we are proud to have achieved several of them across climate, water, waste, sourcing, ingredient transparency, and impactful social investment. In introducing additional 2030 goals, we are reemphasizing our focus on women and girl advancement guided in spirit by our founder, with a new commitment to contribute $50 million to support health, education, leadership, and entrepreneurship. In closing, the first quarter marked the beginning of our return to growth as anticipated for our fiscal 2026 outlook. While the macroeconomic environment globally continues to be dynamic with a variety of headwinds and tailwinds, we remain vigilant and focused on achieving our ambition for Beauty Reimagined. I am incredibly grateful to our employees around the world, who delivered a strong start to fiscal '26 onward and upward. I will now turn the call over to Akhil.

Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we are encouraged with our return to growth and the improvement in margins and cash flow results, thanks to the tremendous efforts of our teams globally. We are determined to continue driving value creation and executing with excellence and urgency across the pillars of Beauty Reimagined. Before I share an update on our reaffirmed full-year outlook, I'll start with a quick recap of our first quarter results. For more detail on our first-quarter performance, please refer to our press release issued this morning. Starting with organic net sales, we grew 3% compared to last year. This was driven by double-digit growth in fragrance and low single-digit growth in skin care. Together, these led to high single-digit growth in both Asia Pacific and Mainland China. Sales from our makeup and hair care categories declined, partially driving the low single-digit decrease in the Americas. Turning now to margins. Our gross margin expanded 60 basis points and was 73.3% in the quarter. This was driven by sales growth as well as strong net benefits from our PRGP, reflecting operational efficiencies, lower promotional activity, and ongoing reductions in excess and obsolescence. These results more than offset the headwinds from inflation and foreign exchange transactions. In terms of operating margin, we expanded 300 basis points to 7.3% compared to 4.3% last year. This expansion reflects net benefits from our PRGP. Specifically, they drove a 3% reduction in non-consumer-facing expenses, even with the normalization of employee incentive costs. As a result, we were able to fund consumer-facing investments, which increased by 4%. We are delivering on our strategic priority to improve operating margin for the full year as we strengthen overall cost efficiency and leverage under our PRGP. We are continuing to fuel consumer-facing investments that build brand desirability while maintaining discipline on non-consumer-facing expenses. Our effective tax rate for the quarter was 40.5%, up from 38.8% last year. The quarterly rate is based on our estimated full-year geographical mix of earnings and is expected to improve in the second half of the year as profitability builds throughout the year. In addition, the elevated rate includes the unfavorable impact associated with previously issued stock-based compensation. We are evaluating tax planning opportunities aligned with the strategic changes we have been making to our organizational structure and mix of business. Our return to sales growth, combined with strong cost efficiency and leverage, more than doubled diluted EPS to $0.32, up from $0.14 last year. In terms of our overall PRGP, building upon the work we did last year, we are continuing to execute with rigor, discipline and clear purpose to optimize key elements across our cost structure. We are driving momentum across the P&L, focusing on operational excellence to improve gross margin, streamline our organization to enhance agility, effectiveness, and efficiency through ongoing restructuring and leveraging our competitive approach to procurement to reduce costs and maximize ROI across all areas of spend. These efforts continue to advance our PRGP initiatives, creating fuel for growth, improving profitability, and positioning the company for sustainable long-term value creation. Proceeding now to the restructuring component of our PRGP. Through September 30, we recorded $697 million of total cumulative charges, primarily in employee-related costs. Turning now to cash flows. For the three months, we used $340 million in net cash flows from operating activities, a significant improvement as compared to the $670 million use of cash last year. The improvement primarily reflects higher earnings as well as a favorable change in operating assets and liabilities despite an increase in restructuring payments. We invested $96 million in CapEx, prioritizing consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the quarter, CapEx was down 32% versus the prior year, reflecting the phasing of projects. With a full-year outlook to invest roughly 4% of projected sales in CapEx, we are maintaining a more efficient and normalized level of investment to drive long-term sustainable growth. Also in the quarter, we paid $150 million in deferred consideration associated with the fiscal 2023 acquisition of the TOM FORD brand. Turning now to outlook. We are reaffirming our fiscal 2026 full-year outlook. While we don't expect a linear path, given macro volatility and prior year comparisons, our first-quarter results give us confidence as we remain focused on delivering our full-year outlook. In terms of organic net sales, we still expect flat to 3% growth for the full year. We anticipate stronger performance in the first half with favorable comparisons in Asia Pacific, driven by our global Travel Retail business as well as in Mainland China. We are seeing improvement in consumer sentiment in Mainland China, though it remains subdued and has yet to fully recover from historical lows. In our global Travel Retail business, we have good momentum in the West, fueled by consumer-facing investments and distribution expansion. That said, persistent challenges in the East continue to pressure retail sales. We expect these challenges to have a greater impact in the second half, particularly as we face tougher comparisons to last year when Mainland China returned to growth and our global Travel Retail business started shipping in line with retail. Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth. Before I close, let me reaffirm our assumptions regarding evolving trade policies and enacted tariffs. Based on information available and net of our planned mitigation actions through October 24, we continue to expect tariff-related headwinds to impact profitability by approximately $100 million. This does not include any subsequent or future changes. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. In closing, our focus remains on being the most consumer-centric beauty company and creating long-term value through sustainable growth, margin improvement, and cash productivity. To our teams around the world, thank you. Your dedication to executing across all pillars of Beauty Reimagined is reflected in our results and is driving a return to sustainable sales growth and rebuilding our operating margin to solid double digits over the next few years. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

I was hoping you could talk a little bit about volume trends versus price mix. I know it's not something you usually talk about regularly, but it is disclosed in your 10-Qs. And I think this quarter, given some of the comparisons and the distribution gains, there probably has been a nice move in volumes within your overall organic sales growth. But I'd love to just hear a little bit more about your perspective on the importance of driving volume over time as part of the algorithm.

Thank you, Lauren. I'll start and maybe Akhil can just add some flavors to it. I think let me start from the comment that I made on the U.S. because for us, we saw in the quarter significant share gain from a volume standpoint, which has been driven by several things. Some of the price adjustments that we've done with new launches in part of the Beauty Reimagined, all the new innovation that we've put forward, if you remember, have clearly committed to make sure that we are at the right price point, at the right price band for every single one of our four categories. And we've done that already with products like Studio Fix in M·A·C, but also we've done it in other geographies where we adjusted prices, namely Clinique in the U.K., where we have had great, great success with the repositioning of DDML. But in the U.S., the most significant part for us was actually the market share gain in units that is showing that we are bringing new consumers to the company and to our brand. And if you remember, that's part of Beauty Reimagined, it was really important for us that we are investing in the demand generation at the top of the funnel to just bring new consumers to our brands. So I think we're seeing the momentum from a unit standpoint going on. Obviously, it's driven by also macroeconomic trends. That's where we see a lot more demand at the entry of Prestige, and we've seen a strong acceleration with The Ordinary. We've seen a rebound also with M·A·C in the U.S. and starting to see some momentum in many markets. So I think it's a combination, Lauren, of categories, consumer demand also, but price points that we are driving throughout the organization. And we believe that allows us to just bring a lot of new consumers to the company overall and contributing to the market share gain in many markets and the rebound and the growth that we are seeing in the quarter.

Thank you, Stephane. Lauren, as we discussed, our main strategy is to attract more consumers. To support this, we've evaluated our pricing in key categories, making adjustments that have resulted in a positive response in overall unit sales. After years of raising prices due to inflation, we carefully reviewed our entire portfolio, and this year's pricing is lower than last year's, reflecting the easing of inflation and the overall pricing adjustments across the industry. Our business encompasses various categories, making it challenging to provide unit specifics, but with a 3% organic sales growth and pricing below 2%, we anticipate unit growth, excluding the mix impact. We are focused on understanding the drivers of unit mix and volume by business, as it varies significantly between fragrance and skincare. Our aim is to boost unit sales and attract more consumers, and we are beginning to see encouraging results. I hope that addresses your question.

One quick thing, Lauren, just to add like a very data point that is important. Where we see the biggest move in terms of unit is also in the perfume category for us. And we've had a significant influx of innovation, and that's also linked to what, Akhil, and I said about accelerating innovation, accelerating innovation at the right price point, and we are seeing a lot more also smaller sizing driving the growth over the world for perfume. And this is one of the things that we are seeing, and we are doubling down and accelerating going forward.

Yes. We returned to unit growth this quarter, which is a great positive.

So first, just short-term clarity. You referenced the strong start to the year with 3% organic sales growth in fiscal Q1, but kept the full-year top line guidance at the high end, that implies the balance of the year is more in line with Q1 or below if you use the lower end of the guidance. So just conceptually, is that conservatism or early in the year? Trying to understand if the Q1 result gives you more optimism, particularly given the comments about a stronger first half. And then also just longer term, obviously, solid share gains in Mainland China in the last few quarters, you've made a number of internal improvements. Just as you look out longer term over the next few years, do you think those share gains can continue, maybe give us a bit of a short-term report card on what's driving that and how sustainable those factors may be as you look out?

Thank you, Dara. A multiple-pronged question. Let me start maybe with Douyin because I think it's going to be important to really understand like the impact of China, also on the full year guidance. And I'll start and Akhil will give some flavor about the balancing of our year. So first of all, in China, we are really happy with our share gain. As mentioned in our prepared remarks, we are well ahead of the market, and we are in double-digit growth. We have seven brands in double digits, and we have actually many more in positive for the quarter. And that's been really encouraging because for us, it is no longer just growth on a few brands, but it's basically across the portfolio, across categories, and like I said, also in brick-and-mortar and online where we are gaining significant share. So when I see China, I see obviously a stabilization to a slight acceleration of the market that is mainly driven by us. We're seeing a peak of consumer confidence on the Chinese consumer starting to rebound, but don't get me wrong, it's still subdued compared to historical peaks. But we're seeing all of that moving in the right direction. But if you remember, our balance between the first half and the second half are very different because we are still lapsing in the first half of our fiscal year lower number, both in China and Travel Retail. And in the second half, this is where we're starting to anniversary the beginning of the recovery that we experienced last year in China, which obviously, we are early in the fiscal year. And while we are as a team extremely confident in our outlook for the year, we need to understand the balance between the two. And I would say a few macroenvironment things that are taking into consideration. One, there's still a lot of volatility out there. And I said like the environment is extremely dynamic. Trade policies are still there. Obviously, it's still very fluid as we saw even in the middle of the night, things are changing and one day is positive; some days, we have to just mitigate new news, but we are navigating a lot of volatility. And there's still many areas of the world where while we are seeing a recovery of consumer confidence, as I said, like in China, it is still very subdued in other areas, mainly in the West and in Europe. So all of that taking into consideration gives us that we still have to navigate early into the fiscal year, a great start, but a lot of volatility. And I think what I wanted is, Akhil, to just give a little bit more flavor also how do we see the balance of the first half and the second half.

Yes. Thank you, Stephane. Dara, I mean, when we gave you the full-year guidance, it was a very thoughtful guidance, which allowed us to run our long-term play to start investing in a business, start driving retail and really consistently doing the right thing to build retail. So that guidance was well done. We are pleased to see that we are progressing against that guidance. However, to your question on why we are not reaffirming guidance, first of all, the macro environment continues to overall be challenging. We are pleased to see the progress in China definitely, and not only pleased to see the overall market progress, our significant outperformance, as Stephane called out, in China. So we are happy to see that. But when you look at the broader beauty market around the world, there are pluses and minuses. So they are still there, and of course, we're also happy to hear the trade news this morning, but the environment continues to be overall macro with significant variability. Secondly, our industry outlook we gave you was 2% to 3%. We still believe that is the outlook. If we see positive to that, our intention, as Stephane has consistently said, is to grow share. So not only do we want to be in line with the market, we want to be ahead in key places, as we have said. And then last point is our cadence. Our cadence, as you can see last year, our Travel Retail business was significantly lower in shipments in the first half, and China also was having significant declines. That is in our first half. So when we see the positives this first quarter and what we expect in the first half of the year, that will be helped by that base period. The second half base period would be more challenging in Travel Retail and China. So all of that was incorporated in our full-year outlook. Of course, we are not giving you a specific quarter outlook, but we expect quarter 2 to see similar types of strengths, as we have seen. We have strong holiday plans. We are executing with excellence in all our markets. So there is definitely a front-half, back-half story. But overall, we are confident that we want to grow in line and ahead of retail, which we said, what, 2% to 3%. And that's why we kept the broader guidance because of the variability. So hopefully, this gives you a good perspective. And then we will continue to invest when we see the right opportunities because we want this turnaround that we are architecting to be sustainable for many, many years to come.

I wanted to ask on margins. Obviously, solid performance in Q1, both at the gross and operating margin line. Can you just discuss your outlook for the year? Is it broadly unchanged, both at the gross and operating margin? And just the solid start, does it give you more confidence in potentially being towards the higher end of those margin targets, just given the strength of the business and also like the news this morning on tariffs? And then maybe just lastly, what's embedded from a reinvestment standpoint, if you can talk about that as well?

Thank you, Filippo. Overall, when we provided guidance on margin at 9.4% to 9.9%, we expected the gross margin to be flat to positive. We plan to offset the tariff impact year-over-year and aim for a flat-to-positive gross margin. Much of our gross margin improvement will come from SG&A, as we demonstrated in Q1. This means, as we mentioned in our prepared remarks, we will invest in consumer-facing initiatives. While we see positive growth there, non-consumer facing areas decreased, creating leverage, which was observable in Q1. It's important to note that in Q1, there weren't significant tariff impacts, as these typically show a lag between when they occur and when they affect our P&L. Therefore, we expect these tariffs to impact gross margin in the remainder of the year, starting in Q2 and continuing through Q3 and Q4. Our guidance on gross margin remains largely unchanged. The announcements this morning are a welcome development, positively affecting not only tariffs but also consumer sentiment, which is crucial for all the businesses operating in both countries. We view this as a positive development. Although we haven't quantified the tariff amounts, we don't anticipate them being significant since our manufacturing is not heavily reliant on China, although we do source materials from there. We remain confident in our margin progression and aim to achieve this improvement quarter-on-quarter. As we mentioned, our goal is to deliver this on an annual basis. If we identify investment opportunities, we will reinvest. We have consistently reinvested since Stephane and I began providing guidance in February. We increased our consumer-facing investment last year, even when sales were down, and we have continued that trend this year. This is part of our strategy to establish a sustainable long-term turnaround.

Yes. And just to confirm, we're not altering our guidance for now; we are simply reaffirming it. It's important to note that our team is feeling very confident due to the solid start of the fiscal year, particularly with our Q1 results. Many initiatives from our Beauty Reimagined strategy, which includes enhancing consumer coverage and accelerating innovation, along with a 4% increase in consumer-facing investment in the first quarter, are significantly driving demand. As we mentioned earlier, growth is essential, and I want to highlight that Q2 is a major period for beauty, given events like 11/11, Cyber Monday, and the holidays, making it one of our busiest quarters. We're satisfied with how the quarter has started, and we have strong holiday programs prepared. Although it's early to comment on 11/11, we experienced a robust Golden Week in China, with growth ahead of the market in a very dynamic environment. Notably, air traffic in China increased by 14% in Hainan, contributing to strong demand, and we achieved double-digit growth during Golden Week. This all reassures us that we've had a promising start to the year. While we're not providing specific guidance for Q2, we're confident and reaffirming our yearly guidance. As we begin to see the advantages of our Beauty Reimagined strategy paying off for consumers, we will adjust our yearly outlook accordingly.

I had a question on Asia travel retail. Could you provide just, I guess, a little more color on inventory levels and movements in the quarter? And then overall, I guess, how would you characterize the demand backdrop and conversion trends that you're seeing within Travel Retail? I guess I'm trying to get a sense of if we're past the trough and when we should start to see better conversion trends, especially with some of the benefits of your activations?

Thank you, Bonnie. I'll begin. Travel Retail remains quite volatile, which is our starting point for the market. You inquired specifically about TR Asia, but TR West is actually performing well, showing a lot of positive signs. Focusing on TR East, it's a story of various cities as we've just begun to move past some of the steepest declines. I want to break down Asia into a few segments because we’re witnessing significant momentum, particularly in Travel Retail Japan, which enjoyed double-digit growth in the first quarter. Excluding China and Korea from the overall Travel Retail APAC performance, we also feel we are capturing more market share with momentum, especially in the emerging market of Oceania. Regarding the Chinese Travel Retail ecosystem, I want to reiterate that our inventory levels have adjusted back to appropriate levels and we're managing inventory based on demand. This is our ongoing approach for now and in the future. We have aligned with the industry's Travel Retail penetration targets that we aim to sustain as long as the demand remains steady. Interestingly, within the Chinese ecosystem, we are seeing, for the first time— as I mentioned in response to your last question— traffic levels beginning to show positive signs in September. I visited Hainan a few weeks ago and noticed high foot traffic. However, conversion rates remain slightly down; I don’t want to misrepresent that by saying conversion is improving. As The Estée Lauder Companies, we are implementing several strategies to enhance retail activation. We are investing in retail podiums for brands like Estée Lauder, Jo Malone, Le Labo, and TOM FORD. We’re effectively deploying our brand resources, which leads us to believe that the strong performance during Golden Week, which tends to attract more traffic, indicates we are gaining market share. Golden Week runs from October 1 to October 8, so I'm not making any conclusions for the quarter just yet. But we are beginning to see signs of recovery through robust retail activation on our part, alongside an uptick in traffic and improvements in conversion when the consumer experience is right.

Thank you, Stephane. To add to Bonnie's comment on inventory, both Stephane and I have consistently communicated that our Travel Retail inventory is now more appropriately aligned with the retail dynamics we are observing. We are focused on driving retail, which, as you inquired and Stephane noted, is returning, though not uniformly. There are signs of recovery in certain areas of Travel Retail. You can feel assured that our inventory is in the right range. We adjust it according to the working capital needs of retailers, but there is no reason for concern about our Travel Retail inventory being too high or too low. It is well-positioned and significantly lower compared to a year ago, both in actual figures and in relation to anticipated retail. We are confident about this, as it has enabled us to concentrate on building the business and managing it effectively in light of retail trends and the points that Stephane mentioned. In Travel Retail, we are intensifying our efforts in the West and Americas. We want to strengthen our position not only in the East but also on a global scale in Travel Retail.

Stephane, I think, you've mentioned in the past, several times that you felt coming into the role that Estée Lauder just hadn't moved fast enough into new channels to keep up with the consumer. Clearly, we've seen lots of action in recent quarters to close that gap, be it Amazon, Shopee in Southeast Asia, Amazon or even the move to M·A·C into Sephora. So I guess acknowledging that consumers will continue to move around and you'll have to adjust. I'm curious as to what degree you think you still have opportunities to catch up and how that plays into future planning? And I guess a little bit of how that varies across regions, if you could?

Thank you for recognizing our swift adaptation to consumer trends. I've communicated to everyone in the organization that we are following where consumers lead, provided that we can enhance our brand's equity and desirability. As you've noted, we are already in markets like the U.S., Canada, Japan, the U.K., and Mexico, and we’re actively seeking more opportunities. TikTok Shop presents an exciting avenue for us; I see it not just as a channel but as an ecosystem that helps us attract and retain new consumers across various platforms. We've also expanded our presence in Asia with Shopee and Kakao. Our collaboration with M·A·C and Sephora in the U.S. marks a significant advancement, along with our recent partnership with Shopify, which enhances our direct-to-consumer capabilities and streamlines our online and physical store connections. Our approach is clear and rapid. I've been traveling extensively over recent months, and our team is focused on exploring new channels while deepening our involvement in existing ones. In Europe and emerging markets, we are currently increasing distribution for brands like TOM FORD, Jo Malone, and KILIAN, and we've opened 40 new freestanding stores led by Le Labo and Jo Malone. This momentum is firmly integrated into our organization. The new geographical structure and brand assignments enable us to operate more efficiently, driving innovation tailored to retailers' needs and allowing for advanced media targeting to maximize ROI. You can expect to see our brand entering additional channels in the future, as long as we maintain and enhance our brand equity globally.

So I wanted to go back to Filippo's question just on margin, but more on the phasing. Akhil, I think back in August, you mentioned greater operating margin expansion in the back half and that it would build sequentially through the year. And I guess, if that were still the case? Based on what we saw in the first quarter, that would suggest maybe some decent upside relative to the full-year guidance. So recognize that you have greater confidence today, but just wanted to ask if there's a change in view on the phasing.

I believe that when you evaluate our margin range of 9.4% to 9.9%, our current 7% margin is still lower. Therefore, we will continue to build sequentially in absolute terms. In our business, we need to focus on sequential progress, even when considering quarter-on-quarter variations, excluding seasonality. We are not altering our approach based on just one quarter of data, as it's insufficient to adjust our strategy. We are committed to ensuring that we add to our plans daily, which will help us execute our objectives despite any challenges, and ideally exceed them. This is our ambition. At this moment, we lack enough information to modify our strategy. The positive performance this quarter reflects our effective management of SG&A and investment in consumer-facing initiatives. However, to achieve consistent sales, we need adequate resources to invest and keep driving the business. The progress on PRGP is comprehensive, and I want to emphasize that. While we focus on quarterly results, the crucial point is that the company has developed a cost structure stronger than ever, which enhances our growth initiatives. This improved cost structure enables us to examine the COGS and OpEx areas more closely through our enterprise business services, procurement efforts, and ongoing restructuring. We maintain our belief in the significant long-term potential for SG&A. While your inquiry pertains to quarterly phases, we see considerable opportunities, as both Stephane and I have mentioned, for expanding margins into solid double digits over the coming years. This remains our focus daily, while we also provide you with accurate guidance on quarterly results and phases. The overall potential remains, and we are dedicated to realizing it consistently.

And Peter, what I would add to just Akhil, I just want you to just see, obviously, what I said a few minutes ago. Very strong confidence of where we started the year. In case so we're starting, we're off to a very strong start with the 3% growth and the 300 basis point margin improvement. As Akhil said, obviously, we're not there yet to the full year profit, which we continue to build, and we have actually a path to get there. Absolutely, I reinforce the fact that we are confident in delivering the guidance that we gave, both on the top line and the bottom line, on the growth margin, investing in our brands and etc. What I'm actually really encouraged in what we're seeing is actually the fast reacceleration of our retail in geographies like China, the ability to maintain our market share in the U.S., which is the first time in many, many years, as I mentioned many times, but also our ability to just grow in unit, again, which means that we are bringing new consumers. Let alone, we haven't really talked much about innovation. We have a slew of innovation coming in Q1, but we have a lot coming in Q2 and Q3 that we can discuss, which is going to allow us to just connect with the consumer at different price points, different age groups, different categories. Every single one of our brands and regions are working on deploying new innovation. So I think you are going to see a continuous acceleration of ourselves and the continuous rebuilding of the operating margin towards the guidance that we are giving for the year and towards the solid double-digit operating margin for the future. And that's really what we are laser-focused as a team at delivering sequential improvement, and proving the organization and the world that we can do it sequentially, but in a very strong fashion as demonstrated in the first quarter.

I have a question that relates to your previous answer. As we look ahead to the next few years aiming for solid double-digit margins, there are several approaches to achieve this. Growing revenue is crucial, and there may also be opportunities to enhance gross margins or manage costs over time. I understand that you are committed to maintaining investments during this period to ensure sustainable and accelerating revenue growth. Could you discuss your ability to keep SG&A expenses stable in the coming years, even while making consumer-facing investments? It can be challenging to assess the net impact of cost-saving initiatives, but how will you maintain stable costs while pursuing investments? Additionally, there's a significant opportunity regarding the tax rate that many people inquire about, and I often lack satisfactory answers. Can you provide insight into how tax planning will evolve over the next three to five years and what opportunities might arise?

Thank you, Chris. I will address the first part of the question, and Akhil will discuss the tax aspects. Your question already hints at our direction. Regarding Beauty Reimagined, we are working on all fronts. We have improved our gross margin significantly in fiscal '25 and this year, we are maintaining it despite the tariffs' impact. As you mentioned, Chris, we are creating leverage in our gross margin for the future. The innovations we are introducing are priced right for consumers and designed to enhance the categories we are entering, including skin care, makeup, hair, and perfume. We are committed to building this foundation. We’ve also shown strong discipline in managing inventory, which significantly supports our cash flow management. I truly believe we are on a path to become best-in-class. Our value chain team is focused on creating efficiencies that will provide leverage as we see unit growth begin. The profit and loss statement we are developing is aimed at achieving that leverage. In Q1, we reduced SG&A by 3% through the PRGP, and it's worth noting that we haven't mentioned PRGP until now. PRGP is intended to create leverage by decreasing SG&A’s share of our overall P&L. We are disciplined in managing expenses, prioritizing consumer-facing investments to accelerate top-line growth because we understand that increasing the top line will lead to more units, greater leverage, improved gross margins, and lower SG&A percentages, all of which will enhance growth and operating margins. Although we haven't discussed PRGP today, it is progressing positively, providing the momentum to invest in consumer-facing initiatives and making our organization more agile and efficient. This will not only help us maintain our market share but also enable us to outperform the market and grow our share in the future while achieving leverage. That’s how I want you to view our P&L and the momentum we are building. We are early in this process, as we are not yet at the one-year anniversary of launching Beauty Reimagined, currently in the third quarter, and we have made considerable progress, giving you an idea of how the P&L will evolve. Of course, tax is a focus for us, as Akhil mentioned, and he will share a few more thoughts on it.

Before discussing tax, I want to highlight the margin aspect that Stephane mentioned. With a 3% sales growth this quarter, we've seen significant leverage. There are several routes to achieving a solid double-digit margin. First, our gross margin, which ended last year at 74%, still has considerable potential for improvement. Additionally, when we separate our SG&A into consumer-facing and non-consumer-facing, we are already showing notable cost reductions in non-consumer-facing. As our sales grow, we plan to maintain this trend. Even in our consumer-facing segment, we are implementing effective tools to enhance ROI. This means we plan to acquire marketing inputs at better prices and effectiveness, aiming to significantly improve ROI in consumer-facing investments as well. Thus, we have multiple strategies to move from our current margin to solid double-digit across all areas, as Stephane noted. Regarding our tax rate, we have acknowledged our high tax rate, providing guidance of 36% this year, which should be lower than last year, indicating progress. However, we are not satisfied with this rate as it results from our geographical earnings mix. Through our PRGP restructuring, we are exploring tax planning opportunities. A large portion of our business operates in international markets, and this, along with the negative impact of previous stock compensation, is a contributing factor. We aim to clarify this matter as we progress through the year and work towards improving the tax rate. Every reduction in the tax rate translates to significant benefits. As I mentioned in the last call, this is an ongoing effort that requires time and must be approached methodically. Nevertheless, addressing this issue remains one of our top priorities, so expect updates in the upcoming calls.