0001001250-26-000019
SEC filingRevenue grew 5% to $3.7B but $308M in restructuring and litigation charges compressed operating margin to 6.7%.
For the three months ended March 31, 2026, net sales rose 5% to $3,712 million, driven by a favorable FX translation of 3%, volume growth of 1%, and pricing of 1%. Gross margin improved 140 basis points to 76.4%, benefiting from favorable product mix, lower obsolescence charges, and cost efficiencies, partially offset by FX transactions and tariff impacts. Operating income fell 19% to $249 million as operating expenses included $224 million in restructuring charges and an $84 million securities litigation settlement. Excluding these items, non-GAAP operating income grew 38%. Net income declined 44% to $89 million, with diluted EPS of $0.24 versus $0.44 in the prior year. The effective tax rate rose to 50.3% from 34.0%, primarily due to the One Big Beautiful Bill Act.
All product categories posted revenue gains. Skin care increased 3% to $1,856 million, driven by La Mer and Estée Lauder innovation, with segment operating income up 23% to $444 million. Makeup grew 4% to $1,072 million on new foundation launches and M·A·C lip products, but swung to an operating loss of $3 million due to increased consumer-facing investments and an allocated litigation charge. Fragrance surged 13% to $628 million, led by Le Labo, TOM FORD, and Kilian Paris, though operating income fell 34% to $21 million on higher investment. Hair care rose 2% to $128 million; operating loss narrowed to $5 million. Other revenue (royalties) increased 12%.
Management emphasized ongoing volatility from tariffs, geopolitical tensions, and the transitory headwind in Asia travel retail from airport duty-free changes. The Profit Recovery and Growth Plan (PRGP) restructuring program was expanded, now targeting 9,000–10,000 position reductions and $1.5–$1.7 billion in total charges, with expected annual gross benefits of $1.0–$1.2 billion. The company aims to return to double-digit operating margins over the next few years. No specific quantitative guidance was provided for the next quarter, but the outlook notes higher tariffs will adversely affect fiscal 2026 profitability and cash flows.
As of March 31, 2026, the Company held $3,126 million in cash and cash equivalents, up from $2,921 million at June 30, 2025. Total debt stood at $7,312 million (current debt of $502 million and long-term debt of $6,810 million), compared to $7,317 million at fiscal year-end. Shareholders' equity increased to $3,993 million from $3,865 million, driven by stock-based compensation and net earnings, partially offset by dividends and treasury stock acquisitions. Inventory decreased to $1,917 million from $2,074 million, reflecting ongoing working capital management. Deferred revenue totaled $503 million, of which $294 million is expected to be recognized within the next twelve months.
During the fiscal 2026 second quarter, the Company entered into a significant contract under the Profit Recovery and Growth Plan (PRGP) Enterprise Business Services initiative. As of March 31, 2026, unconditional purchase obligations related to this contract are estimated to be approximately $1,600 million, payable through fiscal 2033. This represents a material new commitment not previously disclosed in MD&A. Additionally, the Company recorded a $210 million loss contingency in Other accrued liabilities for the securities class action litigation settlement, with insurance coverage expected to offset a portion of costs. For the cosmetic talcum powder matters, $25 million and $66 million are recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, as of March 31, 2026.
Share repurchases remain suspended since December 2022; only $70 million was spent on treasury stock acquisitions during the nine months ended March 31, 2026, primarily for stock-based compensation. Dividends totaled $385 million ($1.05 per share) for the nine-month period, with a quarterly dividend of $0.35 per share declared. Debt repayments were minimal at $3 million, with no new debt issued. Capital expenditures were $306 million, representing 2.7% of net sales, down from $395 million in the prior-year period. The Company also paid $300 million in deferred consideration related to the TOM FORD acquisition.
For the three months ended March 31, 2026, segment net sales (excluding other category and restructuring returns) were $3,684 million. Skin Care led with $1,856 million in sales and $444 million in operating income (23.9% margin). Makeup reported $1,072 million in sales but a slight operating loss of $3 million. Fragrance generated $628 million in sales and $21 million in operating income (3.3% margin). Hair Care contributed $128 million in sales with an operating loss of $5 million. Other category operating income was $16 million. Geographic net sales (including other category) were: The Americas $1,076 million, Europe, UK, Ireland and Emerging Markets $859 million, Asia/Pacific $1,003 million, and Mainland China $774 million. The Company reorganized its geographic regions effective July 1, 2025.
Operating cash flow of $1.197 billion significantly exceeded net earnings of $298 million, indicating strong cash conversion. The primary driver was a $391 million increase in other accrued and noncurrent liabilities, alongside a $135 million decrease in inventory. Depreciation and amortization of $598 million and non-cash stock-based compensation of $254 million further supported cash flow. Capex of $306 million represented a 25.6% cash flow intensity (capex/CFO), down from 58.9% in the prior period. Free cash flow (CFO minus capex) was $891 million, covering dividends ($381M) and share repurchases ($70M) 2.0x. Notable working capital swings included a $228 million increase in accounts receivable and a $168 million decrease in accounts payable, partially offset by the liability increase. No one-time tax payments or restructuring cash outflows were significant. Overall, cash generation was robust and well-supported by operational improvements.