EL - NYSE

Good day, everyone, and welcome to the Estée Lauder Company's Fiscal 2026 First Quarter Conference Call. Today's webcast is being recorded. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Hello. On today's webcast are Stephane de la Faverie, President and Chief Executive Officer; and Akhil Shrivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the noncomparable impact of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com site and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. During the Q&A session, we ask that you please limit yourself to one question, so we can respond to all of you with the time scheduled for this webcast. And now I'll turn the webcast over to Stephane.

Thank you, Rainey, and hello to everyone. It is good to be with you to discuss our first quarter results and share the great work our teams are delivering across the action plan priorities for Beauty Reimagined. Let me begin with the first quarter. We delivered organic sales growth of 3%, a significant sequential acceleration from the 13% decline in the fourth quarter. We are pleased by the diversity of our performance. As Mainland China contributed nicely to return to growth, the rest of our markets in total improved sequentially, including high single-digit growth in our priority emerging markets, led by Mexico, Turkey and India's double-digit growth. And Travel Retail grew on a favorable comparable compared to last year low base. We also got off to a strong start to the fiscal year with significant improvement in operating profitability. These results reinforce the confidence we have in our fiscal '26 outlook, a pivotal step towards restoring sustainable sales growth and rebuilding our operating margin to solid double digit in the next few years. The first three action plan priorities of Beauty Reimagined: Accelerate best-in-class consumer coverage; create transformative innovation; and boost consumer-facing investment are increasingly amplifying each other to drive accelerating retail sales growth in key markets. In China, we significantly outperformed Prestige Beauty, as our retail sales increased double digit ahead of industry up high single digit. Seven of our brands grew double digit with Le Labo nearly triple digits. We gained share in every category as well as both brick-and-mortar and online. Impressively, we have gained Prestige Beauty share in 5 of the last 6 quarters, which is unparalleled among the biggest Prestige Beauty players. In U.S. Prestige Beauty, our retail sales growth accelerated sequentially. In the quarter, we grew 8% in skin care versus the category up 6%. The Ordinary drove our share gain in skin care, while we also gained share in Hair Care led by Aveda. All told, we maintained our Prestige Beauty share calendar year-to-date. The Estée Lauder brand achieved its third consecutive quarter of overall share gain in the U.S., thanks to excellent uptake in innovation. This quarter, it gained share in each of skin care, makeup and fragrance. Impressively, we delivered strong unit share gain in U.S. Prestige Beauty, demonstrating our strategic actions are driving new consumer acquisition. In several of Western European markets, Prestige Beauty continues to see slow growth, in some cases, negative growth. In France, the biggest category in Prestige Beauty in Western Europe, we gained share in France and Spain. For the U.K., the largest market in the region and where Prestige Beauty is much more resilient, industry sales growth reaccelerated to nearly 10%, and we realized a strong sequential improvement in our retail sales trends. We still have much work to do in the U.K., but we are moving in the right direction. Our improving retail sales performance in many key markets around the world is a testament to our team's incredibly strong execution of Beauty Reimagined, starting with accelerating best-in-class coverage. We are advancing with speed to reach consumers where they are. Capitalizing on the learnings that we have had with Amazon in the U.S., Canada and Japan, we opened Amazon storefront in Mexico with Clinique, The Ordinary and Estée Lauder and the U.K. with The Ordinary. We announced our presence on TikTok Shop, launching Clinique, M·A·C and Dr. Jart in the U.S. as well as The Ordinary in Malaysia and Singapore. Impressively M·A·C was awarded TikTok Shop Top Brand Campaign Award for 2025 in Personal Care and Life, recognized for the stellar grand opening and tremendous initial success. Our newest TikTok Shop has served to strengthen the performance across channel given how consumers discover, engage and transact. This collective action in our online consumer coverage complemented first quarter growth from our existing presence on fast-growing retailers like Tmall, JD, Douyin and Notino. As a result, global online organic sales growth accelerated to double digit from mid-single digit in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel. For our European Travel Retail business, we made great progress in expanding our consumer coverage in fragrance through new retail activation, new doors and upgrading the existing fleet across our luxury portfolio. This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter. We also drove similarly strong retail sales growth in the Americas Travel Retail for fragrance, in part from our all new distribution with Duty Free Americas. Looking at innovation, newness from TOM FORD, KILIAN PARIS, Jo Malone London and Aramis kicked off France rich pipeline for fiscal '26. These launches, some of which created halo benefit on existing products, combined with the Le Labo outstanding growth made France our best-performing category, rising 13%. We continue to expect France to be Prestige Beauty's fastest-growing category for fiscal '26, driven by luxury, the largest mix of our France business and where we are the leader as well as over the next few years, driven by both domestic markets and the Travel Retail channel. On that note, we are thrilled to have opened our new France atelier in Paris, where our team will blend state-of-the-art technology, data-driven intelligence, leveraging AI and olfactory expertise to craft the next generation of extraordinary scents, all while innovating much quicker than we have in the past. Skin care further drove our organic sales growth in the first quarter. We had an exciting slate of innovation in high-growth subcategory and across Prestige price tiers, including breakthrough launches in eye, acne and longevity targeting all age groups. This introduction, coupled with newness from earlier in the calendar year, contributed to skin care's growth. We continue to boost our consumer-facing investment to drive new consumer acquisition, focusing on high ROI opportunities like our brand building, freestanding stores and demand generation media activation. We opened 14 net new freestanding stores for our fragrance portfolio, including a row of new boutique in New York City's SoHo District for Frédéric Malle, TOM FORD, Jo Malone London and KILIAN PARIS. We introduced stunning new campaign from TOM FORD debut of Black Orchid Reserve to I Only Wear M·A·C and La Mer Gives Skin Life. And we are reengaged in creating new consumer experience across Travel Retail corridors. To fuel our first three action priorities, we made great strides delivering on the promise of PRGP, which Akhil will describe in more detail. Finally, we are especially encouraged by the momentum we are building as we reimagine the way we work, our fifth action plan priority. Our new executive team is fully in place. Our four newly reorganized regions are fully operational and throughout the organization, we are empowering faster decision-making. As you will recall, we committed in February to increasingly collaborate with partners in areas of business where they can support us to become the best consumer-centric Prestige Beauty company in the world. We are, therefore, thrilled to announce our new partnership with Shopify to modernize and scale our direct-to-consumer business in a phased approach, creating a best-in-class omnichannel consumer experience globally. Looking ahead, for the balance of the fiscal year, we continue executing on our action plan priorities, including investing in exciting holiday activation and expanding consumer coverage. As announced yesterday, this includes M·A·C entering U.S. Sephora spanning select stores as well as online and Sephora at Kohl's, which allows us to better connect with younger consumer and accelerate M·A·C turnaround in the U.S. Before I close, I want to share a few accomplishments from our just published fiscal 2025 Social Impact and Sustainability report. Since we announced our first set of public goals in 2019, we are proud to have achieved several of them across climate, water, waste, sourcing, ingredient transparency and impactful social investment. In introducing additional 2030 goals, we are reemphasizing our focus on women and girl advancement guided in spirit by our founder, with a new commitment to contribute $50 million to support health, education, leadership and entrepreneurship. In closing, the first quarter marked the beginning of our return to growth as anticipated for our fiscal 2026 outlook. While the macroeconomic environment globally continues to be dynamic with a variety of headwinds and tailwinds, we remain vigilant and focused on achieving our ambition for Beauty Reimagined. I am incredibly grateful to our employees around the world, who delivered a strong start to fiscal '26 onward and upward. I will now turn the call over to Akhil.

Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we are encouraged with our return to growth and the improvement in margins and cash flow results, thanks to the tremendous efforts of our teams globally. We are determined to continue driving value creation and executing with excellence and urgency across the pillars of Beauty Reimagined. Before I share an update on our reaffirmed full year outlook, I'll start with a quick recap of our first quarter results. For more detail on our first quarter performance, please refer to our press release issued this morning. Starting with organic net sales, we grew 3% compared to last year. This was driven by double-digit growth in fragrance and low single-digit growth in skin care. Together, these led to high single-digit growth in both Asia Pacific and Mainland China. Sales from our makeup and hair care categories declined, partially driving the low single-digit decrease in the Americas. Turning now to margins. Our gross margin expanded 60 basis points and was 73.3% in the quarter. This was driven by sales growth as well as strong net benefits from our PRGP, reflecting operational efficiencies, lower promotional activity and ongoing reductions in excess and obsolescence. These results more than offset the headwinds from inflation and foreign exchange transactions. In terms of operating margin, we expanded 300 basis points to 7.3% compared to 4.3% last year. This expansion reflects net benefits from our PRGP. Specifically, they drove a 3% reduction in nonconsumer-facing expenses, even with the normalization of employee incentive costs. As a result, we were able to fund consumer-facing investments, which increased by 4%. We are delivering on our strategic priority to improve operating margin for the full year as we strengthen overall cost efficiency and leverage under our PRGP. We are continuing to fuel consumer-facing investments that build brand desirability while maintaining discipline on nonconsumer-facing expenses. Our effective tax rate for the quarter was 40.5%, up from 38.8% last year. The quarterly rate is based on our estimated full year geographical mix of earnings and is expected to improve in the second half of the year as profitability builds throughout the year. In addition, the elevated rate includes the unfavorable impact associated with previously issued stock-based compensation. We are evaluating tax planning opportunities aligned with the strategic changes we have been making to our organizational structure and mix of business. Our return to sales growth, combined with strong cost efficiency and leverage, more than doubled diluted EPS to $0.32, up from $0.14 last year. In terms of our overall PRGP, building upon the work we did last year, we are continuing to execute with rigor, discipline and clear purpose to optimize key elements across our cost structure. We are driving momentum across the P&L, focusing on operational excellence to improve gross margin, streamlining our organization to enhance agility, effectiveness and efficiency through ongoing restructuring and leveraging our competitive approach to procurement to reduce costs and maximize ROI across all areas of spend. These efforts continue to advance our PRGP initiatives, creating fuel for growth, improving profitability and positioning the company for sustainable long-term value creation. Proceeding now to the restructuring component of our PRGP. Through September 30, we recorded $697 million of total cumulative charges, primarily in employee-related costs. Turning now to cash flows. For the 3 months, we used $340 million in net cash flows from operating activities, a significant improvement as compared to the $670 million use of cash last year. The improvement primarily reflects higher earnings as well as a favorable change in operating assets and liabilities despite an increase in restructuring payments. We invested $96 million in CapEx, prioritizing consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the quarter, CapEx was down 32% versus the prior year, reflecting the phasing of projects. With a full year outlook to invest roughly 4% of projected sales and CapEx, we are maintaining a more efficient and normalized level of investment to drive long-term sustainable growth. Also in the quarter, we paid $150 million in deferred consideration associated with the fiscal 2023 acquisition of the TOM FORD brand. Turning now to outlook. We are reaffirming our fiscal 2026 full year outlook. While we don't expect a linear path, given macro volatility and prior year comparisons, our first quarter results give us confidence as we remain focused on delivering our full year outlook. In terms of organic net sales, we still expect flat to 3% growth for the full year. We anticipate stronger performance in the first half with favorable comparisons in Asia Pacific, driven by our global Travel Retail business as well as in Mainland China. We are seeing improvement in consumer sentiment in Mainland China, though it remains subdued and has yet to fully recover from historical lows. In our global Travel Retail business, we have good momentum in the West, fueled by consumer-facing investments and distribution expansion. That said, persistent challenges in the east continue to pressure retail sales. We expect these challenges to have a greater impact in the second half, particularly as we face tougher comparisons to last year when Mainland China returned to growth and our global Travel Retail business started shipping in line with retail. Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth. Before I close, let me reaffirm our assumptions regarding evolving trade policies and enacted tariffs. Based on information available and net of our planned mitigation actions through October 24, we continue to expect tariff-related headwinds to impact profitability by approximately $100 million. This does not include any subsequent or future changes. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. In closing, our focus remains on being the most consumer-centric beauty company and creating long-term value through sustainable growth, margin improvement and cash productivity. To our teams around the world, thank you. Your dedication to executing across all pillars of Beauty Reimagined is reflected in our results and is driving a return to sustainable sales growth and rebuilding our operating margin to solid double digit over the next few years. That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

[Operator Instructions] Our first question today will come from Lauren Lieberman of Barclays.

I was hoping you could talk a little bit about volume trends versus price mix. I know it's not something you usually talk about regularly, but it is disclosed in your 10-Qs. And I think this quarter, given some of the comparisons and the distribution gains, there probably has been a nice move in volumes within your overall organic sales growth. But I'd love to just hear a little bit more about your perspective on the importance of driving volume over time as part of the algorithm.

Thank you, Lauren. I'll start and maybe Akhil can just add some flavors to it. I think let me start from the comment that I made on the U.S. because for us, we saw in the quarter significant share gain from a volume standpoint, which has been driven by several things. Some of the price adjustments that we've done with new launches in part of the Beauty Reimagined, all the new innovation that we've put forward, if you remember, have clearly committed to make sure that we are at the right price point, at the right price band for every single of our four categories. And we've done that already with products like Studio Fix in M·A·C, but also we've done it in other geographies where we adjusted prices, namely Clinique in U.K., where we have had great, great success with the repositioning of DDML. But in the U.S., the most significant part for us was actually the market share gain in units that is showing that we are bringing new consumer to the company and to our brand. And if you remember, that's part of Beauty Reimagined, it was really important for us that we are investing in the demand generation at the top of the funnel to just bring new consumers to our brands. So I think we're seeing the momentum from a unit standpoint going on. Obviously, it's driven by also macroeconomic trends that's where we see a lot more demand at the entry of Prestige, and we've seen a strong acceleration with The Ordinary. We've seen a rebound also with M·A·C in the U.S. and starting to see some momentum in many markets. So I think it's a combination, Lauren, of categories, consumer demand also, but price points that we are driving throughout the organization. And we believe that allows us to just bring a lot new consumer to the company overall and contributing to the market share gain in many markets and the rebound and the growth that we are seeing in the quarter.

Thank you, Stephane. Lauren, as we have spoken, fundamentally, the strategy is to start winning more consumers. So as part of that, one of the things we have done, and Stephane has talked about it in many forums, we have looked at our pricing to be in the right band in many core categories where our pricing -- we adjusted pricing, and we have seen overall unit response. In addition, after many years of inflationary pricing that we have done, we did take a careful look at our overall portfolio and our pricing this year is lower than overall in the prior year, simply because as inflation has subsided and overall industry had taken a lot of pricing. So we believe -- of course, our business is made up of many different categories. I mean, makeup -- and so it's hard to make unit comments, but with the 3% organic sales growth, and pricing, we believe, is sub-2%, we expect to have unit growth barring the mix. And of course, we are working to understand the drivers of unit mix and volume by business where it makes the most sense because in our business between fragrance and skin care, it's hard to make an overall comment. But our goal is to drive unit. Our goal is to bring more consumers and we are starting to see positive results here. I hope that answers.

One quick thing, Lauren, just to add like a very data point that is important. Where we see the biggest move in terms of unit is also in the perfume category for us. And we've had a significant influx of innovation, and that's also linked to what, Akhil, and I said about accelerating innovation, accelerating innovation at the right price point, and we are seeing a lot more also smaller sizing driving the growth over the world for perfume. And this is one of the things that we are seeing, and we are doubling down and accelerating going forward.

Yes. We returned to unit growth this quarter, which is a great positive.

The next question comes from Dara Mohsenian of Morgan Stanley.

So first, just short-term clarity. You referenced the strong start to the year with 3% organic sales growth in fiscal Q1, but kept the full year top line guidance at the high end, that implies the balance of the year is more in line with Q1 or below if you use the lower end of the guidance. So just conceptually, is that conservatism or early in the year? Trying to understand if the Q1 result gives you more optimism, particularly given the comments about a stronger first half. And then also just longer term, obviously, solid share gains in Mainland China in the last few quarters, you've made a number of internal improvements. Just as you look out longer term over the next few years, do you think those share gains can continue, maybe give us a bit of a short-term report card on what's driving that and how sustainable those factors may be as you look out?

Thank you, Dara. A multiple-pronged question. Let me start maybe with Douyin because I think it's going to be important to really understand like the impact of China, also on the full year guidance. And I'll start and Akhil will give some flavor about the balancing of our year. So first of all, in China, we are really happy with our share gain. As mentioned in our prepared remarks, we are well ahead of the market, and we are in double-digit growth. We have 7 brands in double digit, and we have actually many more in positive for the quarter. And that's been really encouraging because for us, it is no longer just growth on a few brands, but it's basically across the portfolio, across categories, and like I said, also in brick-and-mortar and online where we are gaining significant share. So when I see China, I see obviously a stabilization to a slight acceleration of the market that is mainly driven by us. We're seeing a peak of consumer confidence on the Chinese consumer starting to rebound, but don't get me wrong, it's still subdued compared to historical peak. But we're seeing all of that moving in the right direction. But if you remember, our balance between the first half and the second half are very different because we are still lapsing in the first half of our fiscal year lower number, both in China and Travel Retail. And in the second half, this is where we're starting to anniversary the beginning of the recovery that we experienced last year in China, which obviously, we are early in the fiscal year. And while we are as a team extremely confident in our outlook for the year, we need to understand the balance between the two. And I would say a few macro environment things that are taking into consideration. One, there's still a lot of volatility out there. And I said like the environment is extremely dynamic. Trade policies are still there. Obviously, it's still very fluid as we saw even in the middle of the night, things are changing and one day is positive; some days, we have to just mitigate new news, but we are navigating a lot of volatility. And there's still many areas of the world where while we are seeing a recovery of consumer confidence, as I said, like in China, it is still very subdued in other areas, mainly in the West and in Europe. So all of that taking into consideration gives us that we still have to navigate early into the fiscal year, a great start, but a lot of volatility. And I think what I wanted is, Akhil, to just give a little bit more flavor also how do we see the balance of the first half and the second half.

Yes. Thank you, Stephane. Dara, I mean, when we gave you the full year guidance, it was a very thoughtful guidance, which allowed us to run our long-term play to start investing in a business, start driving retail and really consistently doing the right thing to build retail. So that guidance was well done. We are pleased to see that we are progressing against that guidance. However, to your question on why we are not reaffirming guidance, first of all, the macro environment continues to, overall, be challenging. We are pleased to see the progress in China definitely, and not only pleased to see the overall market progress, our significant outperformance, as Stephane called out, in China. So we are happy to see that. But when you look at the broader beauty market around the world, there are pluses and minuses. So they're still there, and of course, we're also happy to hear the trade news this morning, but the environment continues to be overall macro with significant variability. Secondly, our industry outlook we gave you was 2% to 3%. We still believe that is the outlook. If we see positive to that, our intention, as Stephane has consistently said, is to grow share. So not only we want to be in line with the market, we want to be ahead in key places, as we have said. And then last point is our cadence. Our cadence, as you can see, last year, our Travel Retail business was significantly lower in shipments in first half, and China also was having significant declines. That is in our first half. So when we see the positives this first quarter and what we expect in the first half of the year, that will be helped by that base period. Second half base period would be more challenging in Travel Retail and China. So all of that was incorporated in our full year outlook. Of course, we are not giving you specific quarter outlook, but we expect quarter 2 to see similar type strengths, as we have seen. We have the strong holiday plans. We are executing with excellence in all our markets. So there is definitely a front-half, back-half story. But overall, we are confident that we want to grow in line and ahead of retail, which we said, what, 2% to 3%. And that's why we kept the broader guidance because of the variability. So hopefully, this gives you a good perspective. And then we will continue to invest when we see the right opportunities because we want this turnaround that we are architecting to be sustainable for many, many years to come.

The next question comes from Filippo Falorni of Citi.

I wanted to ask on margins. Obviously, solid performance in Q1, both at the gross and operating margin line. Can you just discuss your outlook for the year? Is it broadly unchanged, both at the gross and operating margin? And just the solid start, does it give you more confidence in potentially being towards the higher end of those margin targets, just given the strength of the business and also like the news this morning on tariffs? And then maybe just lastly, what's embedded from a reinvestment standpoint, if you can talk about that as well?

Thank you, Filippo. So overall, when we gave the guidance on margin, 9.4% to 9.9%, it included that the gross margin will be likely flat to positive. We will offset the tariff impact within the year-on-year and try to build a flat-to-positive gross margin. So a lot of our gross margin progress was going to come from SG&A, which is what we demonstrated in Q1. So that's the overall picture, which means, as we said in our prepared remarks as well, that consumer facing, we will invest, which was your other question. So we invested in consumer-facing, positive, and nonconsumer facing was down, which is creating the leverage. That's what you see -- saw play out in quarter 1. Of course, you have to remember that in quarter 1, there is not a lot of tariff because these things come as a variance release. So there is a lag between when tariffs happen and when they hit our P&L. So you should see that impacting gross margin in rest of the year starting from Q2, Q3 to Q4. So the guidance we gave on gross margin still broadly stands. Today morning announcements are definitely a favorable welcome. The improve things not only on tariffs, they improve things on consumer sentiment, which is very important for all the businesses operating in both countries. So that, we take as definitely as a positive, but the tariff amount dollars while we haven't done the math, it is not going to be material because we do not bring -- I mean our manufacturing is not coming in from China here. We do bring materials. So overall, we stand by our margin progression. We, of course, want to drive this margin progression quarter-on-quarter. But as we said, our goal is to deliver it on the year. we see an investment opportunity, we will reinvest. We have consistently reinvested since Stephane and I started giving guidance in February. We increased consumer-facing last year, as you saw, while the sales was down, and we increased it this year as well. So that is part of a plan to build a sustainable long-term turnaround.

Yes. And just maybe one thing, Filippo, to just confirm all of that. We're not changing our guidance for the time being. We are just reaffirming our guidance. But it is important that you realize that as a team, we're feeling really confident because of the strong start of the fiscal year, especially with what we've delivered in Q1 because a lot of the action that we'll put as part of Beauty Reimagined, that it is consumer coverage, that is the acceleration of innovation or, as Akhil said, the fact that we've increased consumer-facing investment by 4% in the first quarter are starting to just really activate the demand. And we've seen actually in many places, as we discussed earlier with one of the questions, that you need growth going. And I would say, just to give some sign of additional confidence, Q2 is a big quarter in beauty in general for us because you're going into 11/11, you have like Cyber Monday, you have the holidays. So this is just like one of the largest quarter. We are basically pleased with the beginning of the quarter. We have a very strong holiday programs that are in place. And while it's too early to comment on 11/11, in China, Golden Week, which was the first week of October, was really strong, and we believe that we grew ahead of the market, again, in a very dynamic China, which -- and actually, the interesting also note, it was not only in China Mainland, but we've seen actually a recovery of air traffic even in China, where air traffic was up 14% in Hainan, which drove a lot of strong demand, and we were in double-digit growth during Golden Week. So all of that gives us the confidence that we are off to a very strong start of the year. It is not about guiding in any way, shape or form Q2, but it is about saying that we're confident and we are reaffirming our guidance in the year. And as we are seeing all the benefits of Beauty Reimagined from a consumer-facing starting to pay dividend, then we will adjust the year accordingly.

The next question comes from Bonnie Herzog of Goldman Sachs.

I had a question on Asia travel retail. Could you provide just, I guess, a little more color on inventory levels and movements in the quarter? And then overall, I guess, how would you characterize the demand backdrop and conversion trends that you're seeing within Travel Retail? I guess I'm trying to get a sense of if we're past the trough and when we should start to see better conversion trends, especially with some of the benefits of your activations?

Thanks, Bonnie. I'll start. Look, Travel Retail is still very volatile. That's where we start basically with the market. And you've asked specifically a question for TR Asia in general, but TR West is actually in a good place, and we're seeing a lot of positive. But let me focus on TR East. It's a tale of different cities because I think we are starting to just lapse some of the worst decline. But let me divide Asia in several buckets because we are seeing a lot of momentum, for instance, in Travel Retail Japan. We were in double-digit growth like in the first quarter, which was good. If you look at the rest of Travel Retail APAC, if you exclude China and Korea, we also believe that we are gaining share with some positive momentum, especially in the emerging market, Oceania. Now when you look at the China ecosystem of Travel Retail, and I reaffirm what we've said, we are back to the right level of inventory, and we are managing the inventory based on the demand, and this is it. This is the way we are doing it for now and for the future. And we are back in line to industry penetration of Travel Retail that we intend to maintain as long as the demand continues to be what it is. What is interesting within the China ecosystem of Travel Retail, we're seeing for the first time, as I said in the past question, traffic starting to be positive again in September. I was myself in Hainan a few weeks ago and experienced actually a high foot traffic. Conversion, Bonnie, is slightly -- is still down, okay? I don't want to just say like conversion is picking up. But we, as The Estée Lauder Companies, are putting a lot in place to drive retail activation. We are investing in retail podium with like Estée Lauder, with Jo Malone, with Le Labo, with TOM FORD. We are really deploying the entire arsenal of our brand, which led us to believe that the strong performance that we've seen during Golden Week, which tends to just drive a lot more traffic, showed us actually gaining market share. Now obviously, Golden Week is October 1 to October 8. So I'm just not concluding anything for the quarter. But I'm showing some beginning of rebound through strong retail activation on our part, but also traffic resuming and some level of conversion getting better when you provide the right experience to the consumer.

Thank you, Stephane. And just to add to it, Bonnie, your comment on inventory. So as we have consistently communicated, both Stephane and I, that, look, our Travel Retail inventory are now more rightsized relative to the retail we are seeing. And we are working to drive retail, which, of course, as you asked, and Stephane commented, is coming back, but not everywhere overall. It's starting to come back in parts of Travel Retail. So our inventory is -- you should feel good that our inventory is in the right range. Of course, we adjust it up and down based on the retailers, working capital needs, et cetera, but there is nothing that should concern anybody that our Travel Retail inventory is elevated or less. It's in the right place, and it is significantly lower than where it was 1 year ago, both in absolute terms and ratios of forward-looking retail. So we feel good about that, which has really allowed us to focus on building the business and really managing it to retail and all of the points that Stephane made. And on Travel Retail, we are starting to really double down in the West and Americas. So not only our position of strength in East, but now we want to position ourselves in a much stronger way in the global Travel Retail.

The next question comes from Steve Powers of Deutsche Bank.

Stephane, I think, you've mentioned in the past, several times that you felt coming into the role that Estée Lauder just hadn't moved fast enough into new channels to keep up with the consumer. Clearly, we've seen lots of action in recent quarters to close that gap, be it Amazon, Shopee in Southeast Asia, Amazon or even the move to M·A·C into Sephora. So I guess acknowledging that consumers will continue to move around and you'll have to adjust. I'm curious as to what degree you think you still have opportunities to catch up and how that plays into future planning? And I guess a little bit of how that varies across regions, if you could?

Steve, first of all, thank you for acknowledging that we are moving with speed like where the consumer is moving. I've made it very clear to you and to, frankly, first of all, to the entire organization is we are moving where the consumer is moving. As long as where we go, we can build equity and desirability for our brand. And this is what we've done today. You actually yourself mentioned, we are in Amazon in the U.S., in Canada, in Japan, in the U.K., in Mexico, and we're continuing to look for other places. We have TikTok Shop, which is really interesting for us because TikTok Shop not only -- I don't necessarily consider it as a channel, I consider it as really an ecosystem that allows us to recruit new consumers, and we are able to retain them on the channel and on other channels. So it was also Shopee in Asia. It was like Kakao also where we accelerated our brand. M·A·C in the U.S. with Sephora is a major step in the right direction, let alone also the partnership that we've announced 24 hours ago with Shopify, that is really going to allow us to be best-in-class direct-to-consumer where we are really tackling all our online connection and freestanding store connection with this really first-in-class partnership that we've announced. So I think you're seeing us moving with speed and clarity of what it is. And so I've been, frankly, traveling around the world next -- nonstop over the past few months, in the past few quarters. There's not a market where the team is not focused on looking at new channels, but also going deeper in the existing channel. I can tell you, for instance, that in Europe, Continental or even the emerging market, the team is, as we speak, rolling out more distribution for TOM FORD, for Jo Malone, for KILIAN. We've added 40 net new freestanding stores across our Forest brand, led by Le Labo and Jo Malone. So you're seeing us really moving quickly. And I can tell you, this is now deeply embedded in the organization. We are going fast. And the new organization that we've put in place with the new 4 cluster geographical region, and the brand and who does what in the organization allows us, frankly, to just move much faster through the organization and frankly, deploy the innovation according to the need of the retailers where we move and deploy much more sophisticated media targeting that allows us, by age group and by retail and by region, to deploy our media and to really go after the highest ROI possible. So you can count on us to see our brand being deployed again in more channel in the future. But again, as long as this channel maintain, preserve or enhance our brand equities around the world. Hope it helps.

The next question comes from Peter Grom of UBS.

So I wanted to go back to Filippo's question just on margin, but more on the phasing. Akhil, I think back in August, you mentioned greater operating margin expansion in the back half and that it would build sequentially through the year. And I guess, if that were still the case? Based on what we saw in the first quarter, that would suggest maybe some decent upside relative to the full year guidance. So recognize that you have greater confidence today, but just wanted to ask if there's a change in view on the phasing.

I think overall, when you look at our margin range between 9.4% to 9.9%, I mean, 7% margin that we have is still lower. So clearly, we will build in absolute terms sequentially. And I think in our business, we definitely should continue to look at sequential progress relative to -- even on a quarter-on-quarter barring for seasonality. So we are not changing our -- it's 1 quarter of information, there's not enough information for us to change that phasing. Of course, we are working to make sure every day we are adding things to plan, so that we can, of course, deliver our plan in spite of any situations and hopefully, be able to come better than that. That would be the ambition of any company, and that's our ambition as well. But at this point, there is not enough information to change our phasing. What you are seeing this quarter definitely is the good work on SG&A and investment in consumer-facing. However, to build consistent sales, we do want to make sure that we have enough fuel to invest so that we can keep driving the business. And the work on PRGP is broad-based. I just want to reiterate that. While we are focusing on the quarterly point, the bigger point is, the company has built a cost muscle in a way that it never had before beyond the growth work -- the points we talked. So the cost muscle that we have built is allowing us to look at COGS area, allowing us to look at OpEx area through the enterprise business services work we have set, procurement work, continued restructuring. So we continue to believe the significant long-term opportunity on SG&A. While your question is definitely related to the specific quarter phasing, we believe there is a significant opportunity, as both Stephane and have commented, on expanding margin to solid double digit over the next few years. And that is the work we are every day focused on while, of course, giving you good guidance on quarter and quarterly phasing. So the overall upside remains, and we are working to bring that home every day, every month.

And Peter, what I would add to just Akhil, I just want you to just see, obviously, what I said a few minutes ago. Very strong confidence of where we started the year. In case so we're starting, we're off to a very strong start with the 3% growth and the 300 basis point margin improvement. As Akhil said, obviously, we're not there yet to the full year profit, which we continue to build, and we have actually a path to get there. Absolutely, I reinforce the fact that we are confident in delivering the guidance that we gave, both on the top line and the bottom line, on the growth margin, investing in our brands and et cetera. What I'm actually really encouraged in what we're seeing is actually the fast reacceleration of our retail in geographies like China, the ability to maintain our market share in the U.S., which is the first time in many, many years, as I mentioned many times, but also our ability to just grow in unit, again, which means that we are bringing new consumers. Let alone, we haven't really talked much about innovation. We have a slew of innovation coming in Q1, but we have a lot coming in Q2 and Q3 that we can discuss, which is going to allow us to just connect with the consumer at different price point, different age groups, different categories. Every single of our brands and regions are working on deploying new innovation. So I think you are going to see a continuous acceleration of ourselves and the continuous rebuilding of the operating margin towards the guidance that we are giving for the year and towards the solid double-digit operating margin for the future. And that's really what we are laser-focused as a team at delivering sequential improvement, and proving the organization and the world that we can do it sequentially, but in a very strong fashion as demonstrated in the first quarter.

The next question comes from Chris Carey of Wells Fargo Securities.

So I have a question that tracks well potentially with how you answered the prior question. I think as we look over the next few years toward solid double-digit margins, there's a few different ways you can get there. Obviously, growing the top line is paramount, perhaps you can improve gross margins a bit or you can manage -- lower your cost structure over time. I think I hear, of course, that you're certainly committed to staying well invested over this time horizon so as to deliver the most important metric, which is sustainable accelerating revenue growth. So can you just talk about perhaps your ability to sustain stable, let's call it, SG&A dollars over the next few years, even while you'll be leading into consumer-facing investments? I think sometimes with the cost savings program it's difficult to parse out the net numbers, but just the ability to kind of hold stable cost even as you're investing? And connected to that, there's a pretty significant earnings leverage opportunity in the tax rate. I get a ton of questions about this. And candidly, I don't always have great answers. Can you just give us a sense of how tax planning will factor over the next 3 to 5 years and what the opportunities are?

Thank you, Chris. Let me take the first part of the question, and Akhil will just go into the tax. Look, I think your question kind of answered already a little bit where we are going because if I just take it a little bit like from Beauty Reimagined, we're doing all of the above. We are improving gross margin. And if you remember, in fiscal '25, we made significant improvement in our gross margin. And this year, we said that we are maintaining it while absorbing the impact of, you know, the tariff. But actually, you said it, Chris, we're building a lot of leverage in our gross margin for future because I made it very clear that the innovation that we are bringing to market, not only is at the right suggested retail price for the consumer, but is also built to be accretive to the category where we are launching it, that is skin care, that is makeup, that is hair or that is like perfume. So we are just really making sure that we are building it. We've also demonstrated a significant discipline on the management of inventory that also helps us from a cash flow management tremendously. And I really believe that we are going towards like being best-in-class. And our value chain team is continuing to do a lot -- to create a lot of efficiency that when we go to unit growth, as we are starting to experience, we're going to get a lot of leverage because that's important. The P&L that we are building is being built for leverage. SG&A, we decreased 3% in Q1 and through the PRGP, and I can't believe that it's -- Chris, like question #7, we haven't even mentioned PRGP up to this point. But PRGP is here to create also a lot of leverage to reduce the penetration of SG&A in our total P&L. And there is a strong discipline now the way that we are managing expenses and we are always putting expense in favor of consumer-facing to further accelerate the top line because with top line, we know we'll get more units, we will get more leverage, gross margin will improve, percentage of SG&A will go down and then we are able to ignite growth and obviously get a lot of leverage from an operating margin. So we haven't really talked about the PRGP today, but PRGP is going in the right direction, giving us actually the right momentum to invest in consumer-facing and to delay the P&L of the organization to be much more agile, to be faster, but more importantly, also to create a lot more efficiency that is going to allow us to, frankly, go not only to maintaining share, but to beat -- and to beat the market and to grow share in the future and to get a lot of leverage. So that's the way I would like you to see the P&L and what we are building and the momentum that we have. We are actually quite early into the process because we are not even at the 1-year anniversary of the launch of Beauty Reimagined. We're only in the third quarter and a lot of progress has been made, and it gives you kind of a sense of where and how the P&L is going to be dealt. Obviously, tax is something that we are focused on, as Akhil said, and he's just going to say a few more words about it.

Yes. And before I go into tax, I just want to add one thing on the margin part, which Stephane said. Like with 3% sales growth this quarter, you can see the leverage that we got. So there are multiple paths to the solid double-digit margin. One, like you said, gross margin where we ended last year at 74%. That still has significant upside on gross margin. And when you break our SG&A into consumer-facing and nonconsumer-facing, in nonconsumer-facing, we are already demonstrating to you significant cost reduction. And with a company that could be much bigger on sales, that trend on nonconsumer-facing, we intend to continue. Even within consumer-facing, we are bringing significant tools to drive ROI. So we intend to buy marketing inputs at much better price and much better effectiveness, so not only we will improve nonconsumer-facing, we intend to improve consumer-facing investment ROI in a significant way. So there are three pronged ways to go from the current margin we have to solid double digit across all of those three pillars as Stephane said. On tax rate, we have commented on our high tax rate. We gave a guidance for 36% this year, which should be lower than last year, so it should start to move in the right direction, but there is significant -- we are not happy with this tax rate. It is driven by our geographical mix of earnings. We are looking through our PRGP restructuring to look at tax planning opportunities. A significant part of our business is international markets, as you know. So that is driven by that, plus the stock comp effect, negative effect of stock comp previously has impacted us. So we intend to give you more clarity as we work through this year and drive this favorability on tax rate. I mean every point of tax rate gives us significant improvement as you're pointing out. And as I commented in the last call, this is clearly a piece of work we are doing. These things do take a little bit of time and have to be done very methodically and in the right way. But this is clearly one of our top priorities. So expect to hear more from us in the coming calls.