Estée Lauder Ends FY26 Strongly; Goldman Sachs Expects Faster Revenue Growth and Continued Margin Recovery in FY27

Overview

The report argues that Estée Lauder's FQ4 sales and margin performance meaningfully exceeded even elevated market expectations, indicating that the “Beauty Reimagined” strategy and “One ELC” operating model are improving the business. Goldman Sachs expects innovation, growth in China and North America, normalization in travel retail, and PRGP savings to support revenue and margin momentum in FY27 and beyond, and therefore reiterates Buy CL while raising its price target.

Core views

First, the report views the composition of FQ4 results as direct evidence that the transformation is progressing. Organic sales grew 5% year over year, above Goldman Sachs' 3.2% forecast and the Visible Alpha consensus of 3.0%. Regionally, Asia-Pacific grew 9%, above Goldman Sachs' 4.5% forecast and the 3.8% consensus; mainland China grew 7%, versus Goldman Sachs' 4.0% forecast and the 6.1% consensus; and the Americas grew 5%, versus Goldman Sachs' 3.0% forecast and the 1.1% consensus, although this included an $18 million, or 190 bps, one-time contribution from the reversal of unused gift-card liabilities. EUKEM grew 1%, broadly in line with expectations, and was negatively affected by approximately 200 bps of disruption from the situation in the Middle East. Category performance indicates that the sources of growth are broadening. Fragrance organic sales grew 10%, driven by double-digit growth in luxury fragrance brands; skin care grew 7%, mainly due to La Mer, The Ordinary, and Estée Lauder; makeup grew 2%, as growth in MAC lip products and Tom Ford eye and face products partially offset declines at Bobbi Brown and Too Faced. Hair care declined 1% due to factors including Aveda's promotional adjustments, exits from underperforming stores, and weakness in the salon channel, with growth at The Ordinary only partially offsetting the pressure. The sales outperformance translated further into margin improvement. FQ4 gross margin was 75.5%, up 360 bps year over year and well above Goldman Sachs' 72.9% forecast and the 73.0% consensus; PRGP savings and a $38 million tariff refund offset some of the disruption in the Middle East. The company also increased consumer-facing investment by 7%, while SG&A grew 7.3% year over year, yet EBIT margin still reached 7.3%, up 330 bps year over year and above Goldman Sachs' 6.6% forecast and the 6.5% consensus. Quarterly EPS was $0.39, above Goldman Sachs' and FactSet's consensus estimate of $0.32, including a $0.07 contribution from the tariff refund and a $0.05 drag from disruptions related to the Middle East conflict. Management also increased expected annualized gross savings from the PRGP restructuring from the previous range of $1.0 billion to $1.2 billion to $1.2 billion and raised its net workforce reduction target from 9,000-10,000 employees to 10,000; the full savings run rate is expected to be achieved in FY28. Looking ahead to FY27, management maintained its organic sales growth guidance of 3% to 5%, versus Goldman Sachs' 4.5% forecast and the 3.7% consensus. Growth is expected to be weighted toward the first half, reflecting earlier product launches, improved travel retail shipments entering FY27, and easier first-half travel retail comparisons. Innovation's share of sales is expected to increase by 200 to 250 bps, after innovation accounted for 23% of FY26 sales, with skin care expected to be the principal driver. By category, fragrance and skin care are expected to continue growing, while makeup is expected to return to growth. Regionally, the company seeks more diversified growth, with North America becoming a focus after returning to organic growth in FQ4; mainland China is expected to benefit from high-single-digit growth in the prestige beauty market, faster innovation, and channel diversification; and EUKEM growth is expected to be more weighted toward the second half as it laps the low base created by the Middle East conflict. Travel retail is an important component of reducing growth volatility and restoring growth. The channel represented 15% of FY26 sales, well below its FY21 peak of 29%, and Goldman Sachs believes the resized business will reduce the volatility that previously affected results. Management stated that global travel retail sales returned to positive growth in June and July, with Hainan delivering double-digit growth. Regarding the situation in the Middle East, the company's base case assumes no material impact in FY27, but this view is conditional on the situation not deteriorating further. Visibility into FY27 profitability also improved. Management raised adjusted EBIT margin guidance from 12.5%-13.0% to 12.7%-13.5%, versus prior Goldman Sachs and consensus estimates of approximately 12.9%. Margin expansion is expected to come primarily from reducing non-consumer-facing spending while continuing to increase consumer-facing investment, alongside modest gross margin improvement. The company continues to target a return to a solid double-digit operating margin over the next several years. FY27 adjusted EPS guidance is $3.10-$3.35, with a midpoint of $3.23, above the previous consensus of $3.19 but below Goldman Sachs' prior forecast of $3.40. Goldman Sachs therefore raised its FY27-FY29 EBIT forecasts by approximately 4%, but lowered its EPS forecasts for the same period by 1% to 2% because the tax rate and share count were higher than previously assumed. Its latest FY27-FY29 revenue forecasts are $15.8514 billion, $16.6676 billion, and $17.5432 billion, respectively, versus prior forecasts of $15.6421 billion, $16.4475 billion, and $17.3112 billion; its new EPS forecasts for the same period are $3.32, $4.09, and $4.91, versus $3.40, $4.18, and $4.95 previously. Goldman Sachs identifies six reasons why it believes the growth momentum is sustainable: the prestige beauty industry has long-term mid-single-digit growth potential; innovation that is more aligned with trends and accretive to gross margin is accelerating; the China business is shifting from relying primarily on two brands to multibrand growth, supporting market-share improvement; travel retail has been resized to a more appropriate scale; the US channel mix is shifting from department stores toward specialty multibrand retailers and online channels, with improving market-share trends; and the expanded PRGP and productivity savings can both support margin expansion and fund growth investments. Management does not currently plan to pursue large transformational M&A and will instead remain focused on turning around the fundamentals, which Goldman Sachs believes investors will view positively. Consumer surveys provide a more mixed supplementary signal on brand health. HundredX data cover more than 80 industries and over 3,000 brands, with 13.6 million pieces of feedback collected from 444,000 people since August 2021. Net purchase intent over the past three months shows that both the Estée Lauder brand and MAC are below the peer average comprising more than 50 makeup and skin care brands, indicating a lower propensity to increase spending over the next 12 months. In terms of net promoter score, Estée Lauder is above peers, Clinique is in line with peers, and MAC is below peers. Among brand drivers, Estée Lauder's premium positioning results in a lower price score, but metrics such as quality and product availability are stronger. On valuation, Goldman Sachs raised its 12-month price target from $100 to $112 using an equally weighted EV/EBITDA and P/E valuation based on Q5-Q8 forecasts, increasing the respective target multiples from 12.5x and 25.0x to 13.5x and 27.5x to reflect greater visibility into the fundamental transformation. Elsewhere in the valuation comparison, the report states that the price target corresponds to Q5-Q8 EV/EBITDA of 13.5x and P/E of 25.0x. Current CY27E EV/EBITDA is 13.3x, representing discounts of 5% to the company's one-year and three-year historical averages of 14.0x and 14.1x, respectively, and a 24% discount to beauty peers. Current CY27E P/E is 24.1x, representing discounts of 13% and 8% to the one-year and three-year historical averages of 27.6x and 26.2x, respectively, and a 2% discount to beauty peers. The price target implies 32.9% potential upside from the current price of $84.27.

Analysis framework

Goldman Sachs first compares actual FQ4 organic sales and regional and category performance item by item with its own forecasts and market consensus, then tracks how sales growth flows through to gross margin, consumer investment, EBIT margin, and EPS. The report subsequently incorporates management's FY27 guidance, the cadence of innovation launches, regional and channel recovery, PRGP savings, and adjustments to tax rate and share count assumptions into its medium-term forecasts, while using HundredX consumer feedback to assess brand purchase intent and advocacy. Finally, the report applies an equally weighted EV/EBITDA and P/E relative valuation, raising its target multiples and price target to reflect greater visibility into the transformation.

Methodology notes

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of actual results with Goldman Sachs forecasts and market consensus

  The report compares FQ4 sales, margins, and EPS item by item against Goldman Sachs, Visible Alpha, or FactSet consensus estimates to determine the extent to which the company exceeded expectations despite elevated market expectations.

• Valuation MethodologyEV/EBITDA valuation

  EV/EBITDA relative valuation based on Q5-Q8 forecasts

  The report assesses valuation using the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization, and compares the 13.5x target multiple with the current trading multiple, the company's historical averages, and beauty peers.

• Valuation MethodologyPE/PEG valuation

  P/E relative valuation based on Q5-Q8 forecasts

  The report uses forward P/E for the other half of the price target weighting and compares the current and target multiples' premiums or discounts with the company's historical levels and beauty peers.

• (Out-of-Vocabulary Method)

  HundredX survey of net purchase intent, net promoter score, and brand drivers

  Net purchase intent measures the percentage of customers planning to increase spending over the next 12 months, while net promoter score measures consumers' likelihood of recommending a brand. The report uses these metrics to compare Estée Lauder, MAC, and Clinique with the average performance of more than 50 makeup and skin care brands.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Estée Lauder Companies Inc.（EL.US）

  The report believes the company is recovering from several years of execution challenges and weak performance, with a strong finish to FY26 establishing a foundation for revenue growth and margin recovery in FY27.

  Strengths

  Long-term growth potential in prestige beauty, accelerating innovation, multibrand growth in China, adjustments to the US channel mix, normalization of travel retail scale, and PRGP savings.

  Weaknesses

  HundredX data show that the Estée Lauder brand's net purchase intent is below peers, while MAC's net purchase intent and net promoter score are both below peers; its premium positioning also results in a lower price score.

  Comparison

  Current CY27E EV/EBITDA trades at a 24% discount to beauty peers, while current CY27E P/E trades at a 2% discount; the Estée Lauder brand's net promoter score is above peers, while Clinique is in line with peers.

  Risks

  Weaker-than-expected market-share improvement, slower-than-expected revenue recovery, slower-than-expected operating margin expansion, and further deterioration in the situation in the Middle East.

Key data

• FQ4 Organic Sales Growth+5%Above Goldman Sachs' +3.2% forecast and the Visible Alpha consensus of +3.0%.
• FQ4 Regional Organic Sales GrowthAsia-Pacific +9%; mainland China +7%; Americas +5%; EUKEM +1%The Americas included a one-time contribution of $18 million, or approximately 190 bps, from the reversal of gift-card liabilities; EUKEM was negatively affected by approximately 200 bps of disruption in the Middle East.
• FQ4 Category Organic Sales GrowthFragrance +10%; skin care +7%; makeup +2%; hair care -1%Fragrance and skin care performed the strongest, while hair care was affected by Aveda's adjustments and weakness in the salon channel.
• FQ4 Gross Margin75.5%Up 360 bps year over year, above Goldman Sachs' 72.9% forecast and the 73.0% consensus.
• FQ4 EBIT Margin7.3%Up 330 bps year over year, above Goldman Sachs' 6.6% forecast and the 6.5% consensus.
• FQ4 EPS$0.39Above Goldman Sachs' and FactSet's consensus estimate of $0.32; the tariff refund contributed $0.07, while disruption in the Middle East reduced EPS by $0.05.
• PRGP Annualized Gross Savings$1.2bnPreviously expected to be $1.0 billion to $1.2 billion; the full run rate is expected to be achieved in FY28.
• PRGP Net Workforce Reduction Target10,000 employeesPreviously expected to be 9,000 to 10,000 employees.
• FY27 Organic Sales Growth Guidance+3% to +5%Versus Goldman Sachs' +4.5% forecast and the +3.7% consensus, with growth expected to be weighted toward the first half.
• FY27 Innovation Contribution200 to 250 bps increase in share of salesInnovation products represented 23% of FY26 sales, with FY27 expected to be driven primarily by skin care innovation.
• Travel Retail Share of Sales15% in FY26Below the FY21 peak of 29%; global travel retail returned to positive growth in June and July, while Hainan delivered double-digit growth.
• FY27 Adjusted EBIT Margin Guidance12.7% to 13.5%Previously 12.5% to 13.0%, versus prior Goldman Sachs and consensus estimates of approximately 12.9%.
• FY27 Adjusted EPS Guidance$3.10 to $3.35Midpoint of $3.23, versus Goldman Sachs' prior forecast of $3.40 and the consensus estimate of $3.19.
• FY27-FY29 Forecast RevisionsEBIT raised by approximately 4%; EPS lowered by 1% to 2%The EPS reductions reflect a higher tax rate and share count than Goldman Sachs previously expected.
• 12-Month Price Target$112Raised from $100; versus the current price of $84.27, implying 32.9% potential upside.
• Current CY27E ValuationEV/EBITDA 13.3x; P/E 24.1xEV/EBITDA trades at a 24% discount to beauty peers, while P/E trades at a 2% discount to beauty peers.

Impact & implications

The report believes that the simultaneous outperformance in FQ4 sales and margins increased visibility into Estée Lauder's fundamental transformation. Accelerating innovation, improvement in China and North America, normalization of travel retail scale, and PRGP savings are expected to diversify the sources of FY27 growth and support continued operating margin expansion beyond FY27. However, the higher tax rate and share count mean that EBIT improvement will not translate fully into EPS upgrades over the same period.

Risks

• The trajectory of market-share improvement may be weaker than expected.
• Revenue recovery may be slower than expected.
• Operating margin expansion may be slower than expected.
• The assumption of no material impact from the Middle East in FY27 is conditional on the situation not deteriorating further.

What to watch

• Whether FY27 organic sales can achieve 3% to 5% growth and whether growth is weighted toward the first half as expected.
• Whether innovation's share of sales can increase by 200 to 250 bps in FY27, particularly the contribution from skin care innovation.
• Whether the North American recovery, multibrand growth in China, and second-half improvement in EUKEM can deliver more diversified regional growth.
• Whether positive global travel retail growth and double-digit growth in Hainan can continue.
• Whether adjusted EBIT margin can reach 12.7% to 13.5% and whether PRGP savings can achieve the full run rate in FY28.
• The impact of the higher tax rate and share count on FY27-FY29 EPS.