Key Market Outlook(s) and Pick(s)
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Estee Lauder Update
Ho Hum. Another beat-and-raise quarter from the global leader in prestige beauty.
All of the key building blocks of the Estée Lauder turnaround were on full display in the second quarter.
Organic growth accelerated to +3.8%, putting EL firmly on track for its first year of positive organic growth in four years.
Mainland China further accelerated to +13% organic growth (from +9% last quarter), with EL gaining prestige share for the fourth straight quarter as the Chinese consumer recovery moves off the mat.
The shift into high-growth channels like Amazon and TikTok Shop continued to pay off, driving high single-digit online organic growth in the first half and putting online sales on track to exceed the prior record of 31% of revenue—a key driver behind EL’s return to volume-driven share gains in the U.S. after more than a decade of losses.
Most importantly, top-line acceleration is translating into margin recovery as PRGP benefits begin to flow through. Adjusted gross margin expanded 40 bps to 76.5%, while the #1 metric of the turnaround, adjusted operating margin, jumped 290 bps to 14.4%, reminding us what operating leverage looks like in real time.
Just like the organic sales recovery, this puts EL on track to expand operating margins for the first time in four years as the company works its way back toward its historical mid-teens margin profile over time.
If there were any question marks about where the turnaround stood heading into this report, these results answered them. Last year marked the clear inflection point for EL, with the worst now firmly in the rearview mirror.
Of course, expectations were already sky-high coming into the report after the 190%+ rally off the April lows, with a strong holiday season in both the US and China already baked in. Investors were looking for any excuse to book profits, and the post-earnings sell-off reflected that reality.
That’s fine by us because let’s be clear: this was an expectations problem, not a fundamentals problem. There was nothing in this report that undermines the long-term turnaround story. In fact, everything we care about—whether it’s China recovery, US stabilization, digital push, margin expansion, free cash flow—continued to accelerate and looked even better.
Selling here is a simple case of missing the forest for the trees.
The Estée Lauder turnaround is like a giant cruise ship (Disney, of course) doing a U-turn as opposed to a speedboat turning on a dime. It takes time to cut costs, clean up operations, and re-accelerate growth. But once it finishes the turn and the business gains momentum, there’s no stopping it. That’s exactly where we sit right now, and the same people that sold the stock last week will be chasing it again when it has a 2-handle in front of it.
Rather than getting cute and reacting to short-term price fluctuations, we are perfectly content to sit on our hands and wait. We continue to see this as still the very early innings of a turnaround at one of the highest-quality franchises across the globe. We captured the bargain when we bought it marked down and nobody wanted it. Now we let time, fundamentals, and execution do the heavy lifting as Estée Lauder reminds the market why it remains the best in the business.
Q2 Earnings Breakdown
10 Key Points
1) Estee Lauder posted revenue of $4.23B (+5.6% Y/Y), slightly ahead of consensus at $4.22B. Organic sales accelerated to +3.8%, an improvement from a -6% decline last year, driven by Skin Care (+6%), Fragrance (+6%), and Hair Care (+5%), partially offset by Makeup (-1%). YTD organic growth now stands at +3.3%, keeping EL on track for its first year of positive organic growth in four years (FY25 -8%, FY24 -1.7%, FY23 -6%). Adjusted EPS of $0.89 (+43% Y/Y) also beat consensus of $0.83.
2) Adjusted gross profit increased 6% Y/Y to $3.24B, with margins expanding 40 bps to 76.5%. Expansion was driven by continued PRGP benefits, including more competitive procurement, expense optimization, lower excess and obsolescence, and additional cost and efficiency initiatives. Management expects these actions to offset more than half of the ~$100M tariff-related headwind anticipated for the full year.
3) Adjusted operating income increased 32% Y/Y to $608M, with the all-important adjusted operating margin expanding 290 bps to 14.4%. Operating margins remain on track to expand for the first time in four years as EL works to restore solid double digit margins over the next few years. Expansion was driven by net benefits from the PRGP, which reduced non-consumer facing expenses by 3% Y/Y, helping fund a 7% increase in higher ROI, consumer facing investments to support growth.
4) The recovery in Mainland China continued, with organic growth accelerating to +13% from +9% in the prior quarter, once again outperforming the broader prestige beauty market. This marked the second consecutive quarter of double digit retail sales growth and the fourth straight quarter of share gains across all four core categories. Performance was supported by strong results during the 11.11 Global Shopping Festival, where the Estée Lauder brand ranked #1 in prestige beauty on Tmall, La Mer ranked #1 in luxury, and Jo Malone London ranked #1 in prestige fragrance. Management also noted that discounting levels across China continued to decline, supporting improved profitability alongside growth, with full year organic growth now expected to land in the mid single digit range.
5) Estée Lauder continues to lean into higher growth channels, with online organic sales growth reaching the high single digits in 1H and now on track to exceed last year’s prior record of 31% of reported sales. The company has launched 12 brands across 10 markets on Amazon and 12 brands across 7 markets on TikTok Shop. Management also announced expanded presence in specialty multi distribution, including a planned U.S. launch of MAC at Sephora, which is viewed as a game changer for the brand. Department store penetration in North America has now fallen below 30% of total sales, down from more than 60% historically.
6) Sales across the Americas increased 1% Y/Y to $1.22B, with organic sales flat for the quarter and expected to remain flat for the full year. Importantly, EL has now reversed 10 consecutive years of market share losses in the Americas, returning to volume-based share gains in total prestige beauty while also capturing value share in Skin Care and Hair Care. Overall trends across North America continue to improve, with expansion into higher growth channels and the upcoming MAC launch at Sephora serving as key catalysts for EL’s return to growth in its largest region.
7) Declines in the Travel Retail segment moderated during the quarter, with Estée Lauder outperforming peers across the broader channel and the all-important Hainan retail sales returning to high single digit growth. Traffic in Hainan has continued to improve, with January sales rebounding to high double digit growth alongside share gains across several brands. Trends across the rest of Northern Asia Travel Retail remain pressured, with conversion rates still low and certain markets continuing to face disruptions. However, Estée has expanded its Travel Retail presence across Western markets, supporting growth while helping diversify the business, and has shifted toward a demand-driven shipping strategy to avoid excess channel exposure.
8) Operating cash flow YTD increased to $785M, up from $387M last year. Free cash flow has improved materially, reaching $581M YTD versus $114M at the same point last year. The improved cash flow has been driven by reduced capex as management prioritizes higher ROI, consumer facing investments, with YTD capex down 25% Y/Y to $204M. Inventory levels are also in a much healthier position, now lower or in line with targeted goals across all global markets.
9) Management continues to make progress on the Profit Recovery Growth Plan (PRGP), with actions still expected to be substantially completed by FY27 and the majority of the full run rate benefits ($0.8B–$1B) anticipated to be realized during FY27. To date, EL has approved initiatives representing more than 80% of expected gross benefits, over 75% of expected charges ($1.2B–$1.6B total expected), and over 80% of the targeted net reduction in positions, with reductions reaching 6,000 versus a target range of 5,800–7,000.
10) Management raised full year guidance across all key metrics, narrowing the sales growth range to +3–5% from the prior +2–5%, raising organic growth to +1–3% from 0–3%, increasing the adjusted EPS midpoint to $2.15 (+43% Y/Y) from $2.00, and lifting the adjusted operating margin midpoint to 10% (+200 bps Y/Y) from 9.65%. At the midpoint of guidance, EL now expects growth across all regions except the Americas, which is expected to remain flat, with management making it clear their overall goal is to deliver the high end of the range.
Earnings Call Highlights
Morningstar Analyst Note
Canada Goose Update
Canada Goose is another one of our leveraged plays on the luxury cycle turning and the recovery in the Chinese consumer. Just like Estée Lauder, this recovery was front and center in Canada Goose’s most important holiday quarter.
Revenue accelerated +14.2% to fresh record highs of $694.5M, with its two largest markets, the U.S. and China, posting 23.3% and 13.1% growth, respectively.
DTC comp sales accelerated to +6.3%, marking the fourth straight quarter of positive comps, led by high single-digit gains in Mainland China and North America.
A major driver of this top-line recovery and a core pillar of the turnaround is repositioning Canada Goose as more than just a $1,000+ parka brand. The company is transforming from a winter-only, one-time purchase item into an all-season, 365-day relevant luxury lifestyle brand. Sweaters, t-shirts, sunglasses, shoes, you name it, the iconic North Pole patch is now on it.
In this all-important third quarter, revenue from these newer categories more than doubled Y/Y, with products outside traditional heavy down-filled outerwear now representing ~50% of total sales.
This deliberate mix shift away from ultra-high-margin parkas comes with some gross margin trade-off, contributing to a 40 bps contraction to 74%, even as the company continues leaning toward higher-margin DTC (which reached ~85% of sales in the quarter) and away from wholesale.
In our view, making this trade-off is a no-brainer.
Where GOOS did face pressure, and what the market clearly wasn’t a fan of, was EBIT margins and the failure to drive strong operating leverage in what should have been a blockbuster holiday period that otherwise beat expectations.
Adjusted EBIT margin stepped back to 29.3% from 33.8% last year. A large amount of the contraction traced to two one-time items: a $15M bad debt provision tied to a U.S. wholesale partner and a $9M FX gain from last year that didn’t repeat. Adjusting for those, there was still ~150 bps of underlying compression, driven by higher labor costs and stepped-up marketing spend.
The good news is that management has made it very clear that restoring strong EBIT margins is a top priority, with no structural reasons in the model preventing strong flow-through and a return to historical levels.
They expect material margin expansion starting in FY27, driven by several key building blocks: reducing marketing as a percentage of revenue, rolling out a new store labor system, optimizing the store footprint, targeted price increases, and continued broad-based revenue growth driving leverage.
The market is clearly taking the under, treating the stock as a show-me story with the jury still out on converting top-line momentum into bottom-line expansion.
We’re happy to take the other side of that trade. With top-line demand re-accelerating and all signs pointing to the early innings of a luxury cycle turning, GOOS is no longer fighting the current. At this stage, it largely comes down to execution.
What gives us real confidence in that execution is CEO Dani Reiss, the third-generation leader and grandson of the founder, who has been running the show for the past 25 years. When he took over in 2001, annual sales were around $3 million. In FY25, they hit ~$1.35 billion. With that track record and massive skin in the game (over 20% of shares outstanding), we wouldn’t bet against him delivering.
Just like Estée Lauder, and rather than paying attention to the market’s knee-jerk reaction to margin noise, we’re happy to sit on our hands and let time and execution do the work as Canada Goose builds out its full potential.
Q3 Earnings Breakdown
10 Key Points
1) Canada Goose reported Q3 revenue growth of +14.2% Y/Y (+13.2% in C$) to $694.5M, well ahead of consensus of $659.1M (+8.4% expected). Growth was driven by its two biggest markets, the U.S. and Greater China, which posted 23.3% (23.7% in C$) and 13.1% (13.2% in C$) growth, respectively. Adjusted net income was $142.3M, or $1.43/share, missing estimates of $1.63 and declining ~5% Y/Y from $1.51.
2) DTC revenue grew 14.1% (13.2% in C$) to $591M, with the high-margin channel representing ~85% of quarterly sales, up from ~29% of total revenue in FY17. DTC comp sales increased 6.3%, marking the fourth consecutive quarter of positive comps, driven by high single-digit growth in both North America and APAC, with mainland China serving as the largest contributor. Global store conversion improved for the fourth straight quarter, supported by digital enhancements that boosted customer engagement and reduced return rates Y/Y.
3) Wholesale revenue increased 16.6% (+13.9% in C$) to $88.3M, bringing YTD wholesale growth to +3%, ahead of original expectations. Strength during the quarter was driven by shipment timing and incremental in-season demand, with management highlighting cleaner channel inventories and healthy order books for SS26 and FW26, supported by strong demand for year-round assortments.
4) Gross profit increased 13.7% to $513.8M, with gross margin contracting 40 bps Y/Y to 74%. The margin contraction was driven by a deliberate strategy to expand year-round product relevance, with lighter-weight and non-winter categories now accounting for ~50% of sales, compared with ~95% of the mix coming from heavy down-filled items less than 15 years ago.
5) Consumer response to the expanded year-round assortment remained strong, with revenue from newness more than doubling Y/Y and all categories outperforming heavyweight down. The broader assortment is driving repeat purchases and stronger customer engagement, supporting higher store traffic and improved overall conversion levels.
6) Adjusted EBIT came in at $203.7M versus $205.2M last year, with margins taking a step back to 29.3% from 33.8%. The decline was driven by a 450 bps increase in SG&A to 45.2% of revenue ($313.6M), largely due to two discrete items: a $15M one-time bad debt provision tied to a U.S. wholesale partner and a $9M FX gain recorded last year that did not repeat. Excluding these items, margins still remained under pressure, with SG&A as a percentage of revenue rising 150 bps, driven by higher store labor costs and increased marketing investment. Management’s top priority remains rebuilding operating margins, with initiatives aimed at driving EBIT expansion beginning in FY27. These efforts include improving marketing efficiency with the goal of lowering marketing as a percentage of revenue, optimizing the store footprint while continuing selective store openings, implementing price increases, and sustaining broad-based growth to drive operating leverage.
7) Cash and cash equivalents increased to $346.9M from $285.2M last year, while net debt declined to $413M from $546.4M. The improvement was driven by disciplined working capital management, which reduced borrowings under credit facilities.
8) After seven consecutive quarters of inventory declines, inventory remained roughly flat Y/Y at $480.7M, while inventory turns increased 16% to 1.1x, reflecting stronger demand and a continued proactive approach to inventory management.
9) Canada Goose opened four new stores during the quarter, including a strategic relocation of its Milan location, a new store in Chicago, and two stores in China, bringing the total permanent store count to 81.
10) Canada Goose launched its Fall/Winter 2025 campaign and the new Snow Goose campaign during the quarter, helping drive brand momentum and repeat customer purchases. Brand desirability exceeded competitive benchmarks across key markets, particularly in Mainland China, while upper-funnel marketing delivered stronger overall returns on ad spend.
Earnings Call Highlights
General Market
The CNN “Fear and Greed Index” ticked up to 48 this week from 41 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) fell to 84.93% equity exposure this week from last week’s 88.46%.
Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week. Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.
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