J.P. Morgan: Estée Lauder’s Growth and Deleveraging Improve, Credit Rating Upgraded to Neutral

Why did first-quarter results exceed expectations?

In the first quarter of fiscal 2027, Estée Lauder’s sales rose 7% year over year to 3.715 billion dollars, above market expectations of 3.655 billion dollars. Organic sales grew 6%, also above the market expectation of 4.8%. Volume contributed 7 percentage points, offsetting a 1 percentage point drag from pricing and product mix.
New products and fragrance were growth highlights: new products accounted for 29% of quarterly revenue, above management’s full-year target of 25%, reflecting earlier product launches. Organic fragrance sales rose 20% year over year, above the 10% growth rate in fiscal 2026.
Asian travel retail returned to growth, with increased restocking after the handover of duty-free retailers at Beijing and Shanghai airports. Organic sales in mainland China rose 9% year over year. The chief financial officer noted, however, that net shipments in Asia-Pacific and travel retail grew faster than retail sales, and that the comparison base was low.

Adjusted gross margin rose 2.4 percentage points year over year to 75.7%, above market expectations of 73.9%. An improved product mix, lower manufacturing costs and foreign exchange together drove the margin increase. Procurement and manufacturing savings under the cost program, together with strategic pricing, offset the impact of inflation.
Adjusted EBITDA rose to 640 million dollars, above market expectations of 549 million dollars, and the margin increased from 13.1% a year earlier to 17.2%. Cost savings also allowed the company to increase consumer-facing investment by 8% while addressing inflation and tariffs.
The recovery is uneven: pricing and product mix held back growth in makeup and hair care by 3 and 7 percentage points, respectively; makeup and skin care value share in the US has yet to grow. Makeup segment margin was just 0.3%, and hair care margin was 3.9%. JPMorgan believes profit recovery will remain primarily dependent on cost reductions until volume translates into value share.

Management raised its fiscal 2027 organic sales growth guidance from 3%–5% to 4%–5.5%, and its adjusted earnings per share guidance from 3.10–3.35 dollars to 3.20–3.45 dollars. The company incorporated part of the first-quarter outperformance into its full-year guidance and allocated the remainder to reinvestment in brands.
Management expects growth to be faster in the first half than in the second, citing the timing of new product launches, travel retail restocking in the first half and a higher travel retail comparison base in the second half. JPMorgan estimates that if second-quarter organic growth matches the first quarter’s 6%, full-year guidance implies second-half growth of approximately 2%–5%.
The company expects commodity and freight costs to have a greater impact in the second half, so full-year gross margin expansion will be only modest. Guidance also assumes that the Middle East conflict will not be a significant drag and that other markets in Europe, the UK, the Middle East and Africa will stabilize.

The company’s gross leverage fell from 3.5 times a year earlier to 2.7 times, and net leverage fell from 2.5 times to 1.5 times. JPMorgan noted that the improvement came almost entirely from EBITDA growth, with debt down only 72 million dollars year over year. Free cash flow over the past 12 months increased from 540 million dollars to 1.01 billion dollars.
Uses of cash flow remain constrained. According to the bank’s estimates, fiscal 2027 operating cash flow guidance implies free cash flow of approximately 255 million–365 million dollars after capital expenditure and dividends of approximately 505 million dollars. The acquisition of the remaining stake in Forest Essentials and related payments cost 197 million dollars in October. The company expects restructuring cash outlays to fall from approximately 530 million dollars in fiscal 2027 to approximately 78 million dollars in fiscal 2028.
JPMorgan upgraded its credit rating from underweight to neutral, but believes the wider spread on its benchmark bond due in 2034 relative to high-quality consumer staples companies is justified: Estée Lauder’s earnings are more volatile and more sensitive to discretionary spending. The bank also noted that a large debt-financed acquisition could put downward pressure on the credit rating and push bond spreads higher.