The Estée Lauder Companies Reports Fiscal 2025 First Quarter Results

Net Sales Decreased 4% and Diluted Net EPS Decreased to Net Loss Per Share of $.43

Organic Net Sales¹ Decreased 5% and Adjusted Diluted EPS Increased to $.14

Withdrawing Fiscal 2025 Outlook Amid Incremental Uncertainty on Timing of Stabilization in

Mainland China Market and Asia Travel Retail as well as in the Context of Leadership Changes

Reducing Dividend to a More Appropriate Payout Ratio

The Estée Lauder Companies Inc. (NYSE:EL) today reported net sales of $3.36 billion for its first quarter ended September 30, 2024, a decrease of 4% from $3.52 billion in the prior year. Organic net sales decreased 5% primarily due to worsened consumer sentiment in China that drove further softening in overall prestige beauty in mainland China and low conversion rates in Asia travel retail and Hong Kong SAR. In addition, lower replenishment orders in Asia travel retail, including inventory pressure given the further retail market deceleration, impacted organic net sales. Partially offsetting these declines was growth in several markets, including Japan and the Company's Priority Emerging Markets².

The Company reported a net loss of $156 million, compared with net earnings of $31 million in the prior year, primarily due to charges associated with talcum litigation settlement agreements of $159 million in the aggregate, which includes charges for current and potential future claims with certain plaintiff law firms. These agreements relate to the settlement of approximately 70% of talcum litigation cases that were outstanding during the fiscal 2025 first quarter, and also provide for settling potential future cases with these firms, at annual capped amounts, starting on January 1, 2025 for five years. The change also reflects charges associated with the Restructuring Program component of the Company's Profit Recovery and Growth Plan ("PRGP"). Diluted net loss per common share was $.43, compared with net earnings per common share of $.09 reported in the prior year. Excluding restructuring and other charges and adjustments as detailed on page 3, net income was $52 million and adjusted diluted net earnings per common share increased to $.14 and rose 7% in constant currency.

Fabrizio Freda, President and Chief Executive Officer said, "Our first quarter results are largely aligned with our outlook on an adjusted basis, despite the fact that the expected headwinds in China and Asia travel retail were greater than anticipated. Our Profit Recovery and Growth Plan drove gross margin expansion, which was partially offset by operating deleverage. Other pillars of our strategic reset also delivered promising initial results.

"As we reignite Skin Care, our night-time innovations proved highly sought after, driving strong organic sales growth for the category in the markets of EMEA as well as strong share gains for the second consecutive quarter in prestige Skin Care in China, led by La Mer. We advanced our ambitions to capitalize on the multiple growth drivers of Fragrance. We expanded consumer reach of our luxury and artisanal portfolio and launched BALMAIN Beauty, as we aim to strengthen our strategic leadership in luxury Fragrance, demonstrated in the quarter by having become the top-ranked company in Japan in the category driven by Le Labo and Jo Malone London. Moreover, we set the stage to reaccelerate our growth in the prestige tier of Fragrance. We also made great strides in our pursuit of moving faster to leverage winning channels, most notably in the U.S. having delivered a sequential acceleration of retail sales growth in the first quarter. And, just last week we further demonstrated our execution of this pillar, as our Estée Lauder flagship brand debuted in the U.S. Amazon Premium Beauty store.

"While we believe the new economic stimulus measures in China present medium- to long-term potential for stabilization and ultimately growth in prestige beauty, we anticipate still-strong declines near-term for the industry in China and Asia travel retail. In the rest of our business, we continue to expect the ongoing normalization of growth in prestige beauty, most notably in North America. With this complex industry landscape, including the particular difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail, and in the context of leadership changes, we are solely issuing an outlook for the second quarter and withdrawing our fiscal 2025 outlook. Additionally, we are reducing our dividend to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team to reaccelerate our profitable growth trajectory."

With regard to the Company's recent CEO succession plan announcement, Freda emphasized, "Having worked alongside Stéphane for many years, I am thrilled to welcome him as our next President and CEO effective January 1, 2025, and look forward to supporting a seamless transition for the next several months. In an industry as dynamic as prestige beauty, Stéphane's deep knowledge, exceptional strength as a leader, and unique ability to combine inspiration, authenticity, and strategic insights to drive profitable growth will enable him to move us forward with speed and agility."

Fiscal 2025 First Quarter Results

Reported net sales decreased 4%, including the impact from foreign currency translation.

Adjusted diluted net earnings per common share excludes restructuring and other charges and adjustments as detailed in the following table.

The Company announced its PRGP in November 2023, and initiatives under the plan are currently underway, delivering net benefits in the fiscal 2025 first quarter that primarily improved cost of sales and resulted in gross margin expansion compared to the prior year. Partially offsetting these benefits was operating deleverage due to the decline in net sales.

Total reported operating loss was $121 million, a decrease from operating income of $98 million in the prior year. In constant currency, adjusted operating income increased 23% to $133 million, excluding the following items and primarily reflecting lower cost of sales and operating expenses, partially offset by lower net sales:

• Fiscal 2025 first quarter:
  • $159 million of aggregate charges associated with the talcum litigation settlement agreements.
  • $106 million of restructuring and other charges associated with the Restructuring Program component of the PRGP.
• Fiscal 2024 first quarter: $10 million of restructuring and other charges and adjustments.
• The favorable impact of foreign currency translation of $11 million.

During the fiscal 2024 second quarter, the Company identified and corrected prior-period misclassifications of net sales and operating income between certain of its product categories. As a result, product category net sales and operating income have been adjusted from the amounts previously reported for the three months ended September 30, 2023 for comparability purposes. The misclassifications had no impact on the prior-period consolidated statements of earnings, consolidated statements of comprehensive income, consolidated balance sheets, or the consolidated statements of cash flows, and the Company determined that the impact on its previously issued financial statements for the respective period was not material. See the Q2 2024 Quarterly Earnings section of the Company's website for supplemental information relating to the impacts of these misclassifications.

The product category net sales commentary below reflects organic performance, excluding the (positive) impacts which are reflected in the preceding table.

Skin Care

• Skin Care net sales decreased 8%, primarily due to worsened consumer sentiment in China that drove further softening in overall prestige beauty in mainland China and low conversion rates in Asia travel retail and Hong Kong SAR. In addition, lower replenishment orders in Asia travel retail, including inventory pressure given the further retail market deceleration, impacted organic net sales. The category's performance was driven by double-digit declines from La Mer and Estée Lauder, primarily due to the aforementioned challenges.
• Partially offsetting the declines in Estée Lauder in mainland China and Hong Kong SAR were:
  • Net sales growth in Europe, the Middle East & Africa ("EMEA") and, to a lesser extent, The Americas, benefiting from new product innovation within the Advanced Night Repair and Revitalizing Supreme+ product franchises, which are strategically focused on nighttime skin care.
  • The net sales growth in The Americas reflected shipments for the brand's October 2024 launch in Amazon's U.S. Premium Beauty store.
• Skin Care operating income increased, primarily due to lower cost of sales and disciplined expense management, partially offset by the decline in net sales.

Makeup

• Makeup net sales decreased 2%, led by M·A·C and Too Faced, partially offset by Clinique.
• Net sales from M·A·C declined high-single-digits, reflecting softness in the brand's retail sales in North America, resulting in lower replenishment orders. The ongoing business disruptions in the Middle East also contributed to the brand's decline in net sales.
• Too Faced net sales decreased, primarily in North America.
• Net sales from Clinique increased double digits globally, with growth across all geographic regions, benefiting from continued strength in the lip subcategory, led by the Clinique Pop and Almost Lipstick product franchises and fueled by new product innovation, along with the fiscal 2024 third quarter launch in Amazon's U.S. Premium Beauty store.
• Makeup operating loss increased, due to $159 million in aggregate charges relating to the talcum litigation settlement agreements.

Fragrance

• Fragrance net sales decreased 1%, driven by the challenges in the Company's global travel retail business, partially offset by growth in both Asia/Pacific and collectively in the markets of EMEA. Reported and organic net sales from the Company's Luxury Brands³, excluding its global travel retail business, grew mid-single-digits in total compared to the prior year, reflecting strategic investments to support direct-to-consumer expansion, particularly freestanding stores.
• Net sales from TOM FORD declined high-single-digits, reflecting the brand's retail softness in North America that led to lower replenishment orders as well as the challenges in the Company's global travel retail business.
• Net sales from the Company's Prestige Brands⁴ declined double digits, primarily driven by challenges in the Company's global travel retail business.
• Jo Malone London net sales were flat, driven by the challenges in the Company's global travel retail business, offset by growth in the rest of the business owing to new product innovation, including Orange Marmalade and Hinoki & Cedarwood, as well as existing products, such as Cypress & Grapevine primarily owing to the franchise's strategic focus on men.
• Net sales from Le Labo increased double digits, primarily driven by continued success of the Classic Collection as well as the annual City Exclusive event, including new product innovation, and benefited from targeted expanded consumer reach, including direct-to-consumer, globally.
• Fragrance operating income declined, primarily driven by strategic investments to support targeted expanded consumer reach globally and the growth of the Company's Luxury Brands through advertising and promotional activities, including the fiscal 2025 launch of BALMAIN Beauty.

Hair Care

• Hair Care net sales decreased 6%, primarily driven by Aveda, reflecting the timing of shipments and continued softness in the Company's North America salon channel.
• Hair Care operating loss decreased, reflecting lower cost of sales and disciplined expense management, partially offset by the decline in net sales.

The geographic region net sales commentary below reflects organic performance, excluding the negative/(positive) impacts which are reflected in the preceding table.

The Americas

• Net sales decreased 1%, reflecting challenges in North America, partially offset by growth in Latin America.
• In North America, net sales decreased 1%, primarily reflecting declines from M·A·C, Aveda, TOM FORD and Too Faced, as previously mentioned. These pressures were partially offset by the launch of seven brands to date in Amazon's U.S. Premium Beauty store, including shipments for Estée Lauder's launch in October 2024, contributing to the Company's double-digit online growth in the United States. The Company's retail sales growth in the United States accelerated sequentially in the fiscal 2025 first quarter, to low single-digit growth.
• Latin America net sales growth was fueled by high-single-digit growth in Brazil, with particular strength in Makeup.
• Operating loss in The Americas decreased, primarily reflecting lower cost of sales and the favorable year-over-year impact of net intercompany activity, largely offset by $159 million of aggregate charges associated with the talcum litigation settlement agreements.

Europe, the Middle East & Africa

• Net sales decreased 4%, driven by a double-digit decline in the Company's global travel retail business due to lower replenishment orders in Asia travel retail reflecting i) the challenging retail environment, including worsened consumer sentiment in China, ii) travelers diverting spending toward experiences, which continued to dampen conversion for beauty products, and iii) inventory pressure given the further retail market deceleration.
• Net sales grew low-single-digits collectively in the markets of EMEA, primarily driven by the success of both hero products and new innovation in Skin Care, which fueled double-digit online growth.
• Operating income decreased, reflecting the unfavorable year-over-year impact of net intercompany activity and the decline in net sales as well as strategic investments aimed at driving growth, including targeted expanded consumer reach and new product innovation.

Asia/Pacific

• Net sales decreased 11%, led by mainland China and Hong Kong SAR, partially offset by double-digit growth in Japan.
• Mainland China net sales decreased double digits, reflecting the impacts from further softening in overall prestige beauty due in large part to worsened consumer sentiment. The Company gained prestige beauty share in mainland China, led by Skin Care, for the second consecutive quarter.
• In Hong Kong SAR, net sales declined double digits primarily due to lower replenishment orders resulting from low conversion rates among traveling consumers, given worsened consumer sentiment.
• Net sales in Japan increased across all major product categories, led by Fragrance, driven by both domestic and traveling consumers, fueling continued growth in nearly all channels of distribution. The Company's retail sales grew double digits in the fiscal 2025 first quarter, driving prestige beauty share gains compared to the prior year.
• Operating income decreased, primarily driven by the decline in net sales, partially offset by disciplined expense management.

Cash Flows

• For the three months ended September 30, 2024, net cash flows used for operating activities were $670 million, compared with $408 million in the prior year primarily reflecting the decline in net earnings compared to the prior year and an increase in cash paid for income taxes.
• Capital Expenditures decreased to $141 million from $295 million in the prior year due to the prior-year payments relating to the manufacturing facility in Japan.
• The Company ended the quarter with $2.35 billion in cash and cash equivalents and paid dividends of $0.24 billion.

Dividend Update

With the complex prestige beauty landscape, including the particular difficulty in forecasting the timing of market stabilization and recovery in mainland China and Asia travel retail, the Company is reducing its dividend to a more appropriate payout ratio. The dividend reduction also affords more financial flexibility for the incoming leadership team to reaccelerate the Company's profitable growth trajectory. The Company continues to view dividends as an important piece of its capital allocation strategy at an appropriate payout ratio. Today, the Company declared a quarterly dividend of $.35 per share on its Class A and Class B Common Stock, payable in cash on December 16, 2024 to stockholders of record at the close of business on November 29, 2024.

Outlook for Fiscal 2025 Second Quarter

The Company began the fiscal year anticipating tempered performance in mainland China and Asia travel retail. While overall results for the fiscal 2025 first quarter were generally aligned with its outlook on an adjusted basis provided in August 2024, the impacts from worsened consumer sentiment in these areas of its business were greater than expected. Looking ahead, the Company is cautiously optimistic about the potential medium- to long-term growth opportunities presented by the new economic stimulus measures in China, but volatility and uncertainty remain elevated in the near-term and, therefore, the Company does not expect the stimulus measures to benefit its second quarter performance. In the rest of its business, the Company continues to expect the ongoing normalization of growth in the prestige beauty industry, most notably in North America.

With this complex industry landscape, including the particular difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail, and in the context of changes in leadership, the Company is solely providing a fiscal 2025 second quarter outlook and withdrawing its full-year fiscal 2025 outlook.

The Company has reflected the following assumptions in its second quarter outlook:

• Additional risks associated with the ongoing slowdown in overall prestige beauty in mainland China and the challenging retail environment in Asia travel retail. The Company does not expect the recently-announced economic stimulus measures in China to benefit its second quarter performance.
• Continued net sales decline in Hong Kong SAR primarily driven by ongoing low conversion rates among traveling consumers due to worsened consumer sentiment.
• Sustained investments in the second quarter to support growth in key areas of the business, particularly for innovation, holiday and key shopping moments.
• An effective tax rate for the second quarter of approximately 43%, primarily reflecting the unfavorable impact of previously-issued stock-based compensation, which impacts the second quarter due to the timing of vesting.

The Company continues to monitor the effects of the global macro environment, including the risk of recession; currency volatility; inflationary pressures; supply chain challenges; social and political issues; competitive pressures; legal and regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. The Company is also mindful of inflationary pressures on its cost base and is monitoring the impact on consumer preferences and the impact of changes being made in the organization, including those related to the PRGP.

Second Quarter Fiscal 2025

Currency exchange rates are volatile and difficult to predict. Using October 24, 2024 spot rates for fiscal 2025, foreign currency translation is not expected to have a material impact to the Company's sales or earnings per share outlook for the second quarter.

Sales Outlook

• Reported and organic net sales are forecasted to decrease between 8% and 6% versus the prior-year period.

Earnings per Share Outlook

• Reported diluted net earnings per common share are projected to be between $.02 and $.19.
  • The combined impact from the increases in the Company's effective tax rate and net interest expense is expected to dilute net earnings per common share by $.05.
  • The Company expects to take charges associated with previously approved restructuring and other activities. For the Restructuring Program component of the Profit Recovery and Growth Plan, the charges are estimated to be between approximately $72 million to $82 million, equal to $.15 to $.18 per diluted common share. Additional restructuring charges are anticipated as initiatives are approved throughout fiscal year 2025.
• Adjusted diluted net earnings per common share are expected to decrease between 77% and 60% and range between $.20 and $.35.

Conference Call The Estée Lauder Companies will host a conference call at 9:30 a.m. (ET) today, October 31, 2024 to discuss its results. The dial-in number for the call is 877-883-0383 in the U.S. or 412-902-6506 internationally (conference ID number: 6363279). The call will also be webcast live at http://www.elcompanies.com/investors/events-and-presentations.

Cautionary Note Regarding Forward-Looking Statements

Statements in this press release, in particular those in "Outlook," as well as remarks by the CEO and other members of management, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address the Company's expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, the Company's long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like "expect," "will," "will likely result," "would," "believe," "estimate," "planned," "plans," "intends," "may," "should," "could," "anticipate," "estimate," "project," "projected," "forecast," and "forecasted" or similar expressions. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, actual results may differ materially from the Company's expectations.

Factors that could cause actual results to differ from expectations include, without limitation:

The Estée Lauder Companies Inc. is one of the world's leading manufacturers, marketers and sellers of quality skin care, makeup, fragrance and hair care products, and is a steward of luxury and prestige brands globally. The Company's products are sold in approximately 150 countries and territories under brand names including: Estée Lauder, Aramis, Clinique, Lab Series, Origins, M·A·C, La Mer, Bobbi Brown Cosmetics, Aveda, Jo Malone London, Bumble and bumble, Darphin Paris, TOM FORD, Smashbox, AERIN Beauty, Le Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, KILIAN PARIS, Too Faced, Dr.Jart+, the DECIEM family of brands, including The Ordinary and NIOD, and BALMAIN Beauty.

ELC-F

ELC-E

This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring and other activities and adjustments, as well as organic net sales. Included herein are reconciliations between the non-GAAP financial measures and the most directly comparable GAAP measures for certain consolidated statements of earnings accounts before and after these items. The Company uses certain non-GAAP financial measures, among other financial measures, to evaluate its operating performance, which represent the manner in which the Company conducts and views its business. Management believes that excluding certain items that are not comparable from period-to-period, or do not reflect the Company's underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze operating performance from period-to-period. In the future, the Company expects to incur charges or adjustments similar in nature to those presented herein; however, the impact to the Company's results in a given period may be highly variable and difficult to predict. The Company's non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While the Company considers the non-GAAP measures useful in analyzing its results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP.

The Company operates on a global basis, with the majority of its net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect the Company's results of operations. Therefore, the Company presents certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of its underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency information by translating current-period results using prior-year period monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.

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