EL Q2 Deep Dive: Underlying Consumer and Channel Shifts Shape Outlook Amid Margin Pressures

Beauty products company Estée Lauder (NYSE:EL) met Wall Street’s revenue expectations in Q2 CY2025, but sales fell by 12% year on year to $3.41 billion. Its non-GAAP profit of $0.09 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Estée Lauder’s second quarter was marked by revenue and non-GAAP profit results that matched Wall Street expectations, but the market responded negatively due to a significant year-over-year sales decline and a sharp drop in adjusted EBITDA margin. Management attributed the performance to ongoing challenges in travel retail, which saw a 28% decline, and persistent softness in key Western markets. CEO Stéphane de la Faverie noted, “Nearly two-thirds of our organic sales decline came from travel retail,” emphasizing the impact of strategic changes and lower conversion rates. Management also acknowledged that inventory adjustments and increased consumer-facing investments weighed on profitability.

Looking ahead, Estée Lauder’s guidance reflects cautious optimism, with management targeting a return to low single-digit organic sales growth and gradual operating margin expansion. However, the company faces headwinds from incremental tariffs, subdued consumer sentiment in the U.S. and Europe, and persistent travel retail uncertainty. CFO Akhil Shrivastava stated, “While we expect margin progression, progress may take longer in some markets and is unlikely to be linear.” The company is prioritizing cost-saving initiatives, continued investment in consumer-facing activities, and a focus on emerging markets as potential growth drivers.

Key Insights from Management’s Remarks

Management pointed to channel realignment, portfolio innovation, and cost actions as central to both the quarter’s results and the strategic roadmap for recovery.

• Travel retail contraction: Travel retail continued to decline sharply, largely due to Estée Lauder’s strategic reduction in exposure and ongoing weak conversion rates. Management expects volatility in this channel to remain a risk, but noted that inventory levels are now healthier, reducing future vulnerability.
• Shift to online and specialty retail: The company accelerated its move into e-commerce and specialty retailers, with 11 brands now on Amazon in the U.S. and three in Canada. Online sales rose to 31% of reported sales, reaching an all-time high, while department stores now account for less than a third of North America sales.
• Product innovation pipeline: New launches—including La Mer’s Balancing Treatment Lotion and The Ordinary’s SPF 45 serum—drove share gains in China, Japan, and the U.S. Management highlighted that innovation is being tailored across prestige price tiers to reach a broader audience.
• Cost actions and restructuring: Estée Lauder made significant progress with its Profit Recovery and Growth Plan (PRGP), reducing non-consumer-facing costs and advancing a major restructuring, with over 3,000 positions already eliminated. The company continues to focus on SG&A efficiencies, outsourcing, and procurement improvements.
• Regional market dynamics: While the company gained market share in China and Japan and saw stabilization in North America, it reported ongoing weakness in Western Europe and Korea. Management is adjusting strategies and leadership in underperforming regions to drive improvement.

Drivers of Future Performance

Estée Lauder’s outlook is shaped by efforts to stabilize travel retail, expand in emerging markets, and manage cost discipline amid macroeconomic uncertainty.

• Travel retail and China recovery: Management expects modest growth in travel retail and mid-single-digit growth in China to support overall top-line improvement. Risks remain around travel retail conversion and geopolitical volatility in Asia, but healthier inventories and new distribution agreements are intended to mitigate some uncertainty.
• Margin improvement initiatives: The company is relying on its restructuring plan to drive operating margin recovery, primarily through further reductions in non-consumer-facing costs and targeted outsourcing. However, incremental tariffs and normalized bonus costs are expected to partially offset these gains, and progress may remain uneven across regions.
• Channel mix and innovation: Continued expansion of e-commerce and specialty retail is expected to reduce reliance on traditional department stores. Management is also focused on accelerating the launch of new products across prestige price tiers, aiming for innovation to account for over 25% of total sales, which could help drive consumer acquisition in both mature and emerging markets.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the pace of recovery in travel retail and China, (2) evidence that restructuring and cost actions are translating into sustained margin improvement, and (3) the ability of new product launches and channel diversification—especially online—to drive share gains in key markets. Continued progress in emerging markets and effective mitigation of tariff impacts will also be important indicators of execution.

Estée Lauder currently trades at $86.85, down from $90.01 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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