Estee Lauder's 2025 Net Sales Decline 8% Despite Earnings Beat

Estee Lauder, one of the world's largest skincare, cosmetics, and fragrance companies, experienced a decline in performance during the 2025 fiscal year. The company's net sales for the year decreased by approximately 8% year-over-year, with Q4 sales amounting to about 3.41 billion dollars, a 12% decrease from the previous year. Despite this, the results were better than market expectations. However, the company's profit guidance for the 2026 fiscal year fell short of expectations, and it also anticipated that an increase in U.S. tariff rates would result in a 100 million dollar reduction in earnings.

Following the release of the lackluster performance data and guidance, Morgan Stanley, a major financial institution, issued a research report maintaining its "neutral" rating on Estee Lauder's stock. The report predicts that the company's stock price will continue to decline, with a target price of 66 dollars, suggesting a potential drop of over 20% in the next 12 months. The report highlights that the company's net sales decline indicates that the slight earnings per share (EPS) beat was primarily driven by cost improvements and margin enhancements, rather than strong sales growth. The market had anticipated better performance based on signs of improvement in Asia, particularly China, but the actual results did not meet these expectations.

Despite the pressure on sales, Estee Lauder's Q4 earnings performance exceeded expectations. The adjusted gross margin remained stable, slightly increasing to 71.9% year-over-year, primarily due to price increases, product mix optimization, and cost savings that offset the decline in sales volume. Operating expenses were slightly higher than expected, but due to the better-than-expected gross margin, the company achieved an operating profit of 1.37 billion dollars, surpassing market expectations of 1.16 billion dollars. The company's adjusted EPS was 0.09 dollars, slightly exceeding analyst estimates of approximately 0.07 to 0.08 dollars. However, this earnings level was significantly lower than the same period last year, which was 0.64 dollars per share.

Morgan Stanley's analysis team noted that the decline in net sales indicates that the slight EPS beat was more driven by cost and margin improvements rather than strong sales growth. The lack of surprises in sales and guidance disappointed investors, who had expected better performance based on signs of improvement in Asia. On the day the earnings report was released, Estee Lauder's stock price fell by approximately 4%.

For the 2026 fiscal year, the company provided a cautious outlook, forecasting an organic net sales change of 0% to +3% and a reported net sales growth of +2% to +5%. This growth guidance is roughly in line with market consensus expectations of approximately +2% to +3%. Estee Lauder anticipates that the global high-end beauty market will grow by about 2% to 3% in the 2026 fiscal year, providing a moderate industry backdrop. Under this assumption, the company's adjusted EPS guidance for the 2026 fiscal year is 1.90 to 2.10 dollars, indicating a potential year-over-year growth of 26% to 39%. However, this EPS guidance is lower than the previous consensus estimate of approximately 2.10 to 2.20 dollars, which would have represented a year-over-year growth of around 46%.

Morgan Stanley's analyst team stated that Estee Lauder's guidance for the new fiscal year is generally conservative, particularly in terms of profit guidance, which is lower than expected. The main reason for the EPS guidance being lower than market expectations is the higher assumed tax rate: the company expects an effective tax rate of approximately 36% for the 2026 fiscal year, significantly higher than the previously anticipated 32%. This difference could result in the EPS guidance being approximately 0.14 dollars lower than expected. Morgan Stanley noted that, excluding the impact of the tax rate, the company's underlying earnings guidance is more in line with market expectations.

The analyst team also pointed out that the guidance provided by the new CEO for the first full year is cautiously optimistic, which partly explains why the guidance is slightly lower than expected. Additionally, the company's outlook for the first quarter of the 2026 fiscal year is also cautious, with an expected organic sales change of a low single-digit decline to flat. This quarterly guidance is roughly in line with the market consensus range of negative 1% to 0%, indicating that management's assessment of the recovery pace aligns with market expectations. Notably, the company expects the travel retail channel to achieve high single-digit growth in the early part of the 2026 fiscal year, with the China market returning to steady growth. However, it anticipates that declines in other regions will ease.

Morgan Stanley maintains a "neutral" rating on Estee Lauder, reflecting a cautious stance. The 12-month target price of 66 dollars is significantly lower than the current stock price. This target price is based on an estimated EPS of 2.93 dollars for the 2027 fiscal year, applied to an expected price-to-earnings ratio of approximately 22.5 times. In contrast, Estee Lauder's average forward price-to-earnings ratio before the COVID-19 pandemic was around 26 times.

Morgan Stanley's use of a lower valuation multiple is primarily due to the current state of the company's earnings base and net sales, which are under pressure. Additionally, there is uncertainty surrounding the effectiveness and execution of the "Beauty Reimagined" transformation plan, as well as the impact of Trump-era tariffs, which collectively reduce the visibility of the company's ability to recover. In other words, Morgan Stanley believes that until the company's performance fully recovers or shows significant signs of improvement, it is not appropriate to assign a high valuation multiple based on historical averages.

Morgan Stanley continues to hold a cautious view on Estee Lauder's performance outlook. If demand for high-end beauty products in China and North America remains weak, or if the global travel retail business does not recover as expected or worsens, it will continue to weigh on the company's sales. Additionally, if the company loses market share in key categories or markets, or faces execution challenges in implementing the "Beauty Reimagined" transformation plan, it could negatively impact earnings. Furthermore, intense price competition from rivals in Europe and China could also lower profit margins. The cumulative impact of these unfavorable factors could result in the company's performance and stock price underperforming even the current expectations set by Morgan Stanley.