Estée Lauder Swings to Profit, But Tax Rate Soars

Ticker: EL · Form: 10-Q · Filed: 2025-10-30T00:00:00.000Z

Sentiment: mixed

Topics: Earnings, Taxation, Cash Flow, Beauty Industry, Financial Performance, Regulatory Impact, Operating Income

Related Tickers: EL, LVMH, COTY, UL

TL;DR

**EL's profit rebound is a mirage; soaring tax rates and cash burn make this a short-term win, not a long-term buy.**

AI Summary

The Estée Lauder Companies Inc. (EL) reported a significant turnaround in the first quarter of fiscal 2026 (ended September 30, 2025), achieving net earnings of $47 million, a substantial improvement from a net loss of $156 million in the prior-year period. Diluted earnings per share also improved to $0.13 from a loss of $0.43. Net sales increased by 3.5% to $3,481 million from $3,361 million, driven by higher gross profit of $2,554 million compared to $2,433 million. Operating income rebounded to $169 million from an operating loss of $121 million, largely due to the absence of a $159 million talcum litigation settlement agreement charge present in the prior year. However, the effective income tax rate surged to 56.9% from 13.3%, impacted by a loss before income taxes, new U.S. tax legislation (One Big Beautiful Bill Act) with an $8 million unfavorable impact, and a valuation allowance against foreign tax credits. Cash and cash equivalents decreased by $702 million to $2,219 million from $2,921 million at June 30, 2025, primarily due to $340 million in net cash used for operating activities and $239 million for financing activities, including $127 million in dividends paid.

Why It Matters

Estée Lauder's return to profitability is a critical signal for investors, indicating a potential stabilization after a challenging period, especially with the absence of significant litigation costs. However, the dramatic increase in the effective tax rate to 56.9% due to new U.S. tax legislation and valuation allowances could significantly compress future earnings, impacting investor returns. For employees and customers, a healthier financial position could mean continued investment in product development and market expansion, but the high tax burden might limit capital available for growth initiatives. In the competitive beauty market, this tax headwind could put Estée Lauder at a disadvantage against rivals with more favorable tax structures, potentially affecting its ability to invest in innovation and marketing.

Risk Assessment

Risk Level: medium — The risk level is medium due to the significant increase in the effective income tax rate to 56.9% from 13.3% in the prior year, driven by new U.S. tax legislation and valuation allowances. This high tax burden could materially impact future profitability. Additionally, the company reported net cash flows used for operating activities of $340 million, indicating a negative operational cash flow trend for the quarter.

Analyst Insight

Investors should closely monitor Estée Lauder's future tax rate and cash flow statements. While the return to net earnings is positive, the underlying tax and cash flow dynamics suggest potential headwinds. Consider holding or reducing exposure until there's clearer guidance on tax rate normalization and improved operational cash generation.

Financial Highlights

revenue
$3,481M
operating Margin
4.86%
total Assets
$19,329M
total Debt
$7,323M
net Income
$47M
eps
$0.13
gross Margin
73.37%
cash Position
$2,219M
revenue Growth
+3.5%

Key Numbers

Key Players & Entities

FAQ

What were Estée Lauder's net earnings for the quarter ended September 30, 2025?

Estée Lauder reported net earnings of $47 million for the three months ended September 30, 2025, a significant improvement from a net loss of $156 million in the same period last year.

How did Estée Lauder's net sales perform in the first quarter of fiscal 2026?

Net sales for Estée Lauder increased to $3,481 million for the three months ended September 30, 2025, up from $3,361 million in the prior-year period, representing a 3.5% increase.

What was the effective income tax rate for Estée Lauder in Q1 2026?

The effective income tax rate for Estée Lauder was 56.9% for the three months ended September 30, 2025, a substantial increase from 13.3% in the prior-year period.

What factors contributed to the higher effective tax rate for Estée Lauder?

The increase in the effective tax rate was attributed to the loss before income taxes, the estimated unfavorable impact of the newly enacted U.S. tax legislation (One Big Beautiful Bill Act) of $8 million, a higher effective tax rate on foreign operations, and a valuation allowance against foreign tax credit and R&D tax credit U.S. deferred tax assets.

How did the 'One Big Beautiful Bill Act' impact Estée Lauder's financials?

The 'One Big Beautiful Bill Act' had an estimated unfavorable fiscal 2026 impact of $8 million on Estée Lauder's provision for income taxes for the three months ended September 30, 2025, primarily due to the expansion of the business interest expense deduction limitation.

What was Estée Lauder's operating income for the quarter?

Estée Lauder reported an operating income of $169 million for the three months ended September 30, 2025, a significant turnaround from an operating loss of $121 million in the same period of the prior year.

Did Estée Lauder have any significant litigation charges in the current quarter?

No, Estée Lauder did not report any talcum litigation settlement agreements charges in the three months ended September 30, 2025, which contrasts with a $159 million charge in the prior-year period.

What was the change in Estée Lauder's cash and cash equivalents?

Estée Lauder's cash and cash equivalents decreased by $702 million, from $2,921 million at June 30, 2025, to $2,219 million at September 30, 2025.

What were the main drivers of cash outflow for Estée Lauder in Q1 2026?

The main drivers of cash outflow for Estée Lauder were $340 million used for operating activities, $116 million used for investing activities, and $239 million used for financing activities, which included $127 million in dividends paid to stockholders.

What new accounting standards is Estée Lauder evaluating?

Estée Lauder is evaluating FASB ASU No. 2025-06 on 'Targeted Improvements to the Accounting for Internal-Use Software' (effective fiscal 2029) and FASB ASU No. 2025-05 on 'Measurement of Credit Losses for Accounts Receivable and Contract Assets' (effective fiscal 2027).

Risk Factors

Industry Context

The beauty industry, particularly in the prestige segment where Estée Lauder operates, is characterized by strong brand loyalty, innovation in product development, and evolving consumer preferences towards digital channels and sustainability. Competition is intense, with established global players and emerging direct-to-consumer brands vying for market share. Economic conditions and discretionary spending significantly influence demand for premium beauty products.

Regulatory Implications

The company faces ongoing scrutiny regarding product safety and ingredient disclosure. The recent enactment of the 'One Big Beautiful Bill Act' in the U.S. introduces new complexities in international tax frameworks and interest expense deductibility, requiring careful compliance and potential adjustments to tax strategies. Global tax regulations, such as Pillar Two, also necessitate ongoing monitoring and adaptation.

What Investors Should Do

  1. [object Object]
  2. [object Object]
  3. [object Object]
  4. [object Object]

Glossary

Valuation Allowance
A contra-asset account used to reduce the carrying value of deferred tax assets when it is more likely than not that some portion or all of a deferred tax asset will not be realized. (The establishment of a valuation allowance against foreign tax credits and R&D tax credits contributed to the significantly higher effective tax rate in the current period.)
One Big Beautiful Bill Act
New U.S. tax legislation enacted on July 4, 2025, with provisions effective in fiscal 2026, including modifications to the international tax framework and expansion of the business interest expense deduction limitation. (This act had an estimated unfavorable impact of $8 million on the company's provision for income taxes for the quarter.)
Pillar Two
Global Anti-Base Erosion rules issued by the OECD, establishing a 15% global minimum tax for multinational companies, enacted into domestic law by various countries. (While enacted in certain countries, the estimated tax impact for Estée Lauder for the quarter was not material.)
Operating lease right-of-use assets
Assets recognized under ASC 842 for the right to use a leased asset for the lease term. (These assets, along with corresponding liabilities, represent a significant portion of the company's balance sheet, totaling $1,889 million as of September 30, 2025.)
Deferred tax assets
Tax assets that result from deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards. (The company holds $1,366 million in deferred tax assets as of September 30, 2025, a portion of which is subject to a valuation allowance.)

Year-Over-Year Comparison

Compared to the prior year's three-month period, Estée Lauder Companies Inc. has shown a significant turnaround, moving from a net loss of $156 million to a net earning of $47 million. Net sales increased by 3.5% to $3,481 million, and operating income rebounded from a loss of $121 million to a gain of $169 million, largely due to the absence of a $159 million talcum litigation charge. However, the effective income tax rate dramatically increased to 56.9% from 13.3%, driven by new tax legislation and a valuation allowance on tax credits. Cash and cash equivalents saw a substantial decrease of $702 million, primarily due to negative operating cash flows.

Filing Stats: 4,558 words · 18 min read · ~15 pages · Grade level 15.7 · Accepted 2025-10-30 13:43:17

Filing Documents

Financial Information

Part I. Financial Information

Financial Statements (Unaudited)

Item 1. Financial Statements (Unaudited) Consolidated Statements of Earnings (Loss) — Three Months Ended September 30, 2025 and 2024 2 Consolidated Statements of Comprehensive Incom e (Loss) — Three Months Ended September 30, 2025 and 2024 3 Consolidated Balance Sheets — September 30, 2025 and June 30, 2025 4 Consolidated Statements of Cash Flows — Three Months Ended September 30, 2025 and 2024 5

Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements 6

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 33

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk 54

Controls and Procedures

Item 4. Controls and Procedures 55

Other Information

Part II. Other Information

Legal Proceedings

Item 1. Legal Proceedings 55

Unregistered Sales of Equity Securities and Use of Proceeds

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55

Other Information

Item 5. Other Information 56

Exhibits

Item 6. Exhibits 56

Signatures

Signatures 57 Table of Contents

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements. THE ESTE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (Unaudited) Three Months Ended September 30, (In millions, except per share data) 2025 2024 Net sales $ 3,481 $ 3,361 Cost of sales 927 928 Gross profit 2,554 2,433 Operating expenses Selling, general and administrative 2,296 2,298 Restructuring and other charges 89 97 Talcum litigation settlement agreements — 159 Total operating expenses 2,385 2,554 Operating income (loss) 169 ( 121 ) Interest expense 86 92 Interest income and investment income, net 30 35 Other components of net periodic benefit cost 4 2 Earnings (loss) before income taxes 109 ( 180 ) Provision (benefit) for income taxes 62 ( 24 ) Net earnings (loss) $ 47 $ ( 156 ) Net earnings (loss) per common share Basic $ .13 $ ( .43 ) Diluted $ .13 $ ( .43 ) Weighted average common shares outstanding Basic 361.2 359.6 Diluted 363.3 359.6 See notes to consolidated financial statements. 2 Table of Contents THE ESTE LAUDER COMPANIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended September 30, (In millions) 2025 2024 Net earnings (loss) $ 47 $ ( 156 ) Other comprehensive (loss) income: Net cash flow hedge gain (loss) 16 ( 57 ) Cross-currency swap contract - fair value hedge gain 3 12 Retirement plan and other retiree benefit adjustments 4 2 Translation adjustments ( 27 ) 108 (Provision) benefit for income taxes on components of other comprehensive (loss) income ( 10 ) 18 Total other comprehensive (loss) income, net of tax ( 14 ) 83 Comprehensive income (loss) $ 33 $ ( 73 ) See notes to consolidated financial statements. 3 Table of Contents THE ESTE LAUDER COMPANIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except share and per share data) September 30, 2025 June 30, 2025 ASSETS Current assets Cash and cash equivalents $ 2,219 $ 2,921 Accounts receivabl

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of The Este Lauder Companies Inc. and its subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP in annual financial statements. The unaudited interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2025. Certain prior-year amounts in the notes to the consolidated financial statements have been reclassified to conform to current-year presentation. Management Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses reported in those financial statements. Descriptions of the Company's significant accounting policies are discussed in the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration of Credit Risk The Company is a worldwide manufacturer, marketer and seller of skin care, makeup, fragrance and hair care products. The Company's sales subject to credit risk are made primarily to department stores, duty-free retailers, specialty multi retailers, online pure players, perfumeries and pharmacies, and salons and spas. The Company grants credit to qualified customers. While the Company does not believe it is exposed significantly to any undue concentration of credit risk at this time, it continues to monitor its customers' abilities, individually and collectively, to make timely payments. Inventory and Promotional Merchandise Inventory and promotional merchandise consists of the following: (In millions) September 30, 2025 June 30, 2025 Raw materials $ 593 $ 631 Work in process 250 283 Finished goods 1,062 996 Promotional merchandise 157 164 Total inventory and promotional merchandise $ 2,062 $ 2,074 Property, Plant and Equipment Property, plant and equipment consists of the following: ($ in millions) September 30, 2025 June 30, 2025 Assets (Useful Life) Land and improvements (1) $ 74 $ 75 Buildings and improvements ( 10 to 40 years) 1,051 1,057 Machinery and equipment ( 3 to 20 years) 1,431 1,429 Computer hardware and software ( 4 to 10 years) 2,077 1,926 Furniture and fixtures ( 5 to 10 years) 143 145 Leasehold improvements 2,646 2,631 Construction in progress 319 462 Total property, plant and equipment, gross 7,741 7,725 Less accumulated depreciation and amortization ( 4,676 ) ( 4,553 ) Total property, plant and equipment, net $ 3,065 $ 3,172 (1) Land improvements are depreciated over a 10 year useful life. Depreciation and amortization of property, plant and equipment was $ 170 million and $ 168 million during the three months ended September 30, 2025 and 2024, respectively. Depreciation and amortization related to the Company's manufacturing pro

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On July 4, 2025, new U.S tax legislation was enacted known as the One Big Beautiful Bill Act. This legislation includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of certain business tax provisions. The legislation has multiple effective dates, with certain provisions becoming effective in fiscal 2026. The most impactful provision effective beginning in fiscal 2026 relates to the expansion of the business interest expense deduction limitation. The resulting increase in tax deductible interest expense reduced U.S. taxable income and increased the excess foreign tax credits generated which require a valuation allowance. The estimated unfavorable fiscal 2026 impact of the One Big Beautiful Bill Act has been included in the provision for income taxes, and the impact for the three months ended September 30, 2025 was $ 8 million. In December 2021, the Organization for Economic Cooperation and Development issued "Pillar Two" Global Anti-Base Erosion model rules for countries to enact into domestic law that would establish a 15% global minimum tax applied on a country-by-country basis for multinational companies. In certain countries that have enacted legislation incorporating the global minimum tax, it became effective for the Company at the beginning of fiscal 2025. The estimated tax impact of such legislation has been included in the provision for income taxes for the three months ended September 30, 2025 and was not material. As of September 30, 2025 and June 30, 2025, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, totaled $ 141 million and $ 140 million, respectively. The total amount of unrecognized tax benefits at September 30, 2025 that, if recognized, would affect the effective tax rate was $ 134 million. The total gross interest and penalt

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Issued Accounting Standards FASB ASU No. 2025-06 – Targeted Improvements to the Accounting for Internal-Use Software (Subtopic 350-40) In September 2025, the FASB issued authoritative guidance to modernize the accounting for the costs to develop software for internal use to align better with current software development methods, such as agile programming. Capitalization of eligible costs will begin when (1) management has authorized and committed to funding the software project, and (2) it is probable that the project will be completed and the software will be used to perform the function intended. In evaluating whether it is probable the project will be completed, entities are required to consider whether there is significant uncertainty associated with the development activities of the software. The new standard does not change the types of costs that are capitalizable once the threshold for capitalization is met. Capitalization ceases when the software project is substantially complete and ready for its intended use, which typically occurs after all substantial testing is completed. Furthermore, the guidance supersedes website development costs guidance and incorporates the recognition requirements for website-specific development costs into Subtopic 350-40. The guidance clarifies that existing disclosure requirements under ASC 360 for property, plant and equipment apply to capitalized costs under the new standard, regardless of how the internal-use software is classified on the balance sheet or how it was acquired. Effective for the Company : The guidance becomes effective for the Company's first quarter of fiscal 2029. The guidance can be applied prospectively, retrospectively or through a modified transition approach. Early adoption is permitted. Impact on consolidated financial statements : The Company is currently evaluating the impact that this guidance will have on its consolidated financial stat

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Companies are required to use specific categories to prepare and disclose a tabular rate reconciliation (using both percentages and reporting currency amounts) of: the reported income tax expense (or benefit) from continuing operations and the product of the income (or loss) from continuing operations before income taxes and the applicable statutory federal income tax rate of the jurisdiction of domicile; and reconciling items within certain categories that are equal to or greater than a specified quantitative threshold, including the nature, effect, and underlying causes of the reconciling items and the judgment used in categorizing the reconciling items. The guidance also requires companies to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign jurisdictions including individual jurisdictions with amounts paid equal to or greater than a specified quantitative threshold. The guidance also codifies existing SEC rules that require companies to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign as well as income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign jurisdictions. Effective for the Company – The guidance is effective for the Company's fiscal year ending June 30, 2026 Form 10-K. Early adoption is permitted. The guidance should be applied on a prospective basis with the option to apply the standard retrospectively. Impact on consolidated financial statement s – The Company is currently evaluating the impact that this guidance will have on its consolidated financial statement disclosures. NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill The Company assigns goodwill at the time of acquisition to a reporting unit, which is one level below the Company's operating segments. The skin care, makeup, fragrance and

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Intangible Assets Other intangible assets consist of the following: September 30, 2025 June 30, 2025 (In millions) Gross Carrying Value Accumulated Amortization Total Net Book Value Gross Carrying Value Accumulated Amortization Total Net Book Value Amortizable intangible assets: Customer lists and other $ 1,954 $ 1,355 $ 599 $ 1,984 $ 1,

View on Read The Filing