A month has gone by since the last earnings report for Estee Lauder (EL). Shares have added about 9.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Estee Lauder due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

The Estee Lauder Companies Q2 Earnings Beat Amid China Weakness

The Estee Lauder Companies reported second-quarter fiscal 2025 results. The company's top and bottom lines declined year over year amid persistent challenges across China and travel retail. Due to challenges across its Asia travel retail business, weak consumer sentiment in China and Korea, and ongoing global geopolitical uncertainty, the company expects continued volatility and limited visibility in the near term. As a result, the company offered a disappointing third-quarter fiscal 2025 outlook.

Adjusted earnings of 62 cents per share surpassed the Zacks Consensus Estimate of 32 cents in the fiscal second quarter. The bottom line decreased 29% from earnings of 88 cents in the year-ago quarter.

The Estee Lauder Companies’ quarterly net sales of $4,004 million surpassed the Zacks Consensus Estimate of $3,975.4 million. However, the top line declined 6% year over year.

EL’s Product-Based Segmental Results

Skin Care’s sales were down 12% year over year to $1,921 million. The downside can be attributed to a challenging retail condition in the Asia/Pacific region and the company’s Asia travel retail sector. The decline was due to continued weak consumer sentiment in China, leading to reduced sales for Estee Lauder and La Mer. Makeup revenues fell 1% year over year to $1,150 million, thanks to a decline in TOM FORD sales, which were impacted by the difficult retail conditions in the Asia/Pacific region and the company's Asia travel retail business. In addition, net sales for M·A·C and Smashbox decreased. In the Fragrance category, revenues of $744 million inched up 1%, fueled by strong performance from the company’s Luxury Brands, particularly Le Labo. Hair Care sales totaled $159 million, down 8% year over year, mainly due to decreased performance from Aveda, reflecting ongoing challenges in the company’s salon channel and the timing of shipments.

Regional Revenue Results for EL's Q2

Sales in the Americas fell 2% year over year to $1,223 million. Revenues in the Europe, the Middle East & Africa (EMEA) region declined 6% to $1,494 million. In the Asia-Pacific region, sales tumbled 11% to $1,287 million.

EL’s Q2 Margin Breakdown: Key Insights

The Estee Lauder Companies’ adjusted gross margin increased by 310 basis points (bps) to 76.1%, despite the drop in net sales, mainly driven by net benefits from the Profit Recovery and Growth Plan (PRGP). The adjusted operating margin decreased by 200 bps to 11.5%, stemming from sales volume deleverage in the fiscal second quarter. This was somewhat mitigated by net benefits from the PRGP.

EL’s Financial Health Snapshot

The company exited the quarter with cash and cash equivalents of $2,586 million, long-term debt of $7,276 million and total equity of $4,169 million.

The net cash flow provided for operating activities for the six months ended Dec. 31, 2024, was $387 million. Capital expenditures during this time amounted to $273 million. The company said it paid a dividend totaling $366 million during this time.

The company announced a quarterly dividend of 35 cents per share on its Class A and Class B Common Stock, payable March 17, 2025, to shareholders of record as of Feb. 28, 2025.

What to Expect From EL in Q3?

For the third quarter of fiscal 2025, reported net sales are projected to decline 10-12% compared to the prior year’s level. The company’s adjusted organic net sales are anticipated to fall 8-10% in the quarter.

The adjusted EPS are likely to slump by 69-79%, ranging from 20 cents to 30 cents in the fiscal third quarter, reflecting challenges in the global travel retail business. 

The company’s fiscal third-quarter outlook reflects a significant double-digit decline in global travel retail net sales, driven by the challenging retail environment in Asia travel retail and added pressures from changes in selling policies at several Korean retailers. This decline is also influenced by a tough year-over-year comparison, due to the resumption of replenishment orders in the prior period.

The company expects moderate adjusted gross margin expansion, benefiting from a favorable year-over-year comparison, though this will be partially offset by sales volume deleverage. In addition, the effective tax rate is anticipated to be approximately 36%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -52.83% due to these changes.

VGM Scores

Currently, Estee Lauder has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Estee Lauder has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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This article originally published on Zacks Investment Research (zacks.com).

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