Estée Lauder (EL)

Beauty products company Estée Lauder (NYSE:EL) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 3.6% year on year to $3.48 billion. Its non-GAAP profit of $0.32 per share was 81.9% above analysts’ consensus estimates.

Company Overview

Named after its founder, who was an entrepreneurial woman from New York with a passion for skincare, Estée Lauder (NYSE:EL) is a one-stop beauty shop with products in skincare, fragrance, makeup, sun protection, and men’s grooming.

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Competitors that offer a wide range of beauty and cosmetics products include L’Oreal (ENXTPA:OR), Coty (NYSE:COTY), Proctor & Gamble (NYSE:PG), and private company Revlon.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $14.45 billion in revenue over the past 12 months, Estée Lauder is one of the larger consumer staples companies and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because there are only so many big store chains to sell into, making it harder to find incremental growth. To accelerate sales, Estée Lauder likely needs to optimize its pricing or lean into new products and international expansion.

As you can see below, Estée Lauder struggled to generate demand over the last three years. Its sales dropped by 5.8% annually, a tough starting point for our analysis.

This quarter, Estée Lauder reported modest year-on-year revenue growth of 3.6% but beat Wall Street’s estimates by 2.9%.

Looking ahead, sell-side analysts expect revenue to grow 3.5% over the next 12 months. Although this projection implies its newer products will fuel better top-line performance, it is still below average for the sector.

When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.

Estée Lauder’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 3% year on year.

In the latest quarter, Estée Lauder’s organic sales rose by 3% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

Estée Lauder has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 73.2% gross margin over the last two years. That means for every $100 in revenue, only $26.79 went towards paying for raw materials, production of goods, transportation, and distribution.

Estée Lauder’s gross profit margin came in at 73.4% this quarter, in line with the same quarter last year. Zooming out, Estée Lauder’s full-year margin has been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Estée Lauder was roughly breakeven when averaging the last two years of quarterly operating profits, lousy for a consumer staples business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Estée Lauder’s operating margin decreased by 8.3 percentage points over the last year. Estée Lauder’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, Estée Lauder generated an operating margin profit margin of 4.9%, up 8.5 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

In Q3, Estée Lauder reported adjusted EPS of $0.32, up from $0.14 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Estée Lauder’s full-year EPS of $1.68 to grow 37.3%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Estée Lauder has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 8% over the last two years, better than the broader consumer staples sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Estée Lauder’s margin dropped by 1.4 percentage points over the last year. This decrease warrants extra caution because Estée Lauder failed to grow its revenue organically. Its cash profitability could decay further if it tries to reignite growth through investments.

Estée Lauder burned through $436 million of cash in Q3, equivalent to a negative 12.5% margin. The company’s cash burn slowed from $811 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Estée Lauder historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.8%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Estée Lauder reported $2.22 billion of cash and $9.42 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.99 billion of EBITDA over the last 12 months, we view Estée Lauder’s 3.6× net-debt-to-EBITDA ratio as safe. We also see its $130 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Estée Lauder beat analysts’ organic revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its full-year EPS guidance missed. Overall, we still think this was a decent quarter with some key metrics above expectations. The stock traded up 5.2% to $102.50 immediately after reporting.

Updated: December 3, 2025 at 9:58 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Estée Lauder’s business quality ultimately falls short of our standards. To begin with, its revenue has declined over the last three years. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining operating margin shows the business has become less efficient. On top of that, its declining EPS over the last three years makes it a less attractive asset to the public markets.

Estée Lauder’s P/E ratio based on the next 12 months is 42.8x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $102.17 on the company (compared to the current share price of $102.10).