The China Secret That’s Making Smart Money Load Up on Estee Lauder While Everyone Else Runs for the Exit

At a Glance

• EPS: $0.89 vs. $0.86 estimate (3.5% beat)
• Revenue: $4.23 billion vs. $4.34 billion estimate (in line), up 6% year-over-year
• Adjusted Operating Margin: 14.4%, up 290 basis points from prior year
• Guidance Raised: FY2026 adjusted EPS now $2.05-$2.25 (36-49% growth)
• Stock Reaction: Shares dropped 18.7% over the past week despite raised guidance

Financial Performance Highlights

Estée Lauder delivered a mixed quarter, beating earnings expectations while revenue met estimates. The company posted operating income of $401 million, a dramatic swing from the $(580) million loss in the prior year period that included $861 million in impairments. Gross margin expanded 40 basis points to 76.5%, while first-half free cash flow surged to $581 million from $114 million a year earlier.

The revenue figure reflects ongoing challenges in makeup and travel retail. Makeup declined 1% organically to $1.16 billion, impacted by an accrual for returns ahead of the Double Wear relaunch. However, skin care grew 6% organically to $2.05 billion, led by La Mer, Estée Lauder, and The Ordinary. Fragrance also rose 6% to $812 million, driven by TOM FORD and Le Labo.

China Momentum Continues

The standout narrative remains China’s recovery. Mainland China sales jumped 13%, marking the second consecutive quarter of double-digit growth. This momentum helped offset weakness in Northern Asian travel retail and a transitory headwind from Beijing and Shanghai airport duty-free retailer changes expected in the second half.

Guidance and Outlook

Management raised full-year guidance, now projecting organic sales growth of 1% to 3% and adjusted EPS of $2.05 to $2.25. However, the company warned of approximately $100 million in tariff-related headwinds concentrated in the second half, tempering enthusiasm. CEO Stéphane de La Faverie emphasized the company’s transformation, stating that Beauty Reimagined has invigorated the business as the company executes the biggest operational, leadership, and cultural transformation in its history.

Strategic initiatives include expanding M·A·C into Sephora US stores in March 2026 and scaling digital presence across Amazon and TikTok Shop.

Market Reaction

Despite the guidance raise and China strength, shares plunged following the report. The disconnect likely stems from the revenue miss, tariff concerns, and a forward P/E of 58x that leaves little room for execution missteps. With the stock down 8.7% year-to-date, investors appear skeptical that operational improvements can offset macro headwinds.

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