Title: Friday POW! — Estée Lauder (EL): a turnaround morphing into a growth story
Show: Haymaker — Friday POW! (Pick of the Week)
Author: David Hay (lead author/idea generator: Daniel Bustamante) — The Haymaker Team
Date: 2026-05-22
URL: https://haymaker.substack.com/p/friday-pow-ec8
Length: written post (PAID), no timestamps
Note: Full article body, lightly cleaned (section labels kept). The bottom "Buys" and "Trims/Holds" lists render as images and are not captured. A PALL footnote ("cost basis adjusted to reflect 5:1 split") appears under the Buys image but its full list is not text-readable.

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"Beauty, to me, is about being comfortable in your own skin. That, or a kick-ass red lipstick." — Gwyneth Paltrow

Key Points
- A turnaround to growth story in an 80-year legacy brand
- Improving margins, cash flows inflecting, and recovery on the way
- A depressed valuation that can lead to a large re-rating of the multiple in the next 12-24 months

So, what's this week's Pick…?

We want to preface the main larger piece by saying that, after finishing this write-up on Thursday, EL popped about 12% in after-hours trading on news that it would not merge with Spanish beauty company, Puig. It's trading up roughly 11 1/2%, as we prepare to publish; accordingly, we'd advise waiting for the stock to ease back a bit before taking a position.

We're back with another turnaround morphing into a growth story in the legacy brand, Estée Lauder (EL). EL has been around since 1946 and has been in the business of buying and selling brands ever since. At the first glance of a long-term chart, you could look at it and recognize that clearly something went awry in the name starting in early 2022. However, the chart of EL looks like many others post-Covid, once the "stimmies-" driven liquidity high wore off.

Over the last few months, money flows have been chasing the "gold rush" in AI and other tech names with negative free cash flow (FCF), dilution, and debt loads that would even make the U.S. Government worried. Meanwhile, EL has quietly been executing on its turnaround.

It's important to understand the entire story, as with any investment, and to comprehend the Estée Lauder downfall we need only look to China. At one point, China was nearly 30% of sales and post-Covid this demand dropped significantly. This led to inventory overstock, producing downward pressure on margins — an adverse domino effect.

What also did not help the cause was the 2022 Tom Ford acquisition for $2.8B. This led to a write down of nearly $1B, precipitating a drop in margins and free cash flow. (Analyzing those critical metrics seems to be a lost art in today's investing environment).

This is the backstory that got us to the new CEO, Stéphane de La Faverie, during last year's first quarter. He wasted no time throwing the kitchen sink at the company to get to work with their "Beauty Reimagined" strategy or PRGP (Profit Recovery and Growth Plan). These initiatives (cost cuts, innovation focus, channel optimization) began showing early traction with margin expansion and stabilized trends which is where we are with the story nearly a year later.

The Core thesis here is relatively straightforward (which we like):
- The PRGP plan is working and on track to fix prior issues
- Margins are increasing again
- China was a headwind and is now, once again, a large tailwind (see point five below)
- A depressed valuation can lead to a re-rating, giving us an asymmetric upside/downside risk-reward.

That being said let's talk about five key points worth knowing…

1. Turnaround Momentum with "Beauty Reimagined" Strategy (PRGP)

EL is executing a multi-year turnaround here, focusing on five priorities: consumer-centric coverage across high-growth channels/markets/price tiers, transformative innovation (especially boosted marketing, operational efficiency, and disciplined financials). Its main focus is shifting from inventory destocking and margin pressure to sustainable growth.

Recent quarters show clear, even dramatic, progress:
- FY2026 Q2 (ended Dec 2025): +6% reported sales, +4% organic; adjusted EPS +43% YoY. Fragrance posted double-digit growth.
- Q3 results and raised full-year FY2026 guidance: Organic net sales growth now at the high end of prior range (targeting 3-5%), adjusted operating margin expansion approaching 300 bps, or three full percentage points, (to 12.5-13%).
- FY2025 marked the earnings trough; analysts expect FY2026 to be the start of a multi-year recovery with potential 35%+ EPS compound annual growth rate (CAGR) through 2028 in optimistic scenarios.

2. Structural Tailwinds in Prestige Beauty (A Big Deal)
- Fragrance strength: double-digit growth in recent periods, a high-margin, resilient category.
- Channel optimization: Travel retail (previously 30% of sales, now normalized lower) is stabilizing. Direct-to-Consumer (DTC), e-commerce, and domestic markets are expanding. There is now reduced China-exposure risk as that market rebounds.
- Broader industry growth: Prestige beauty grows mid-to-high single digits globally, supported by rising middle-class consumers in Asia, social media influence, and trading-up behavior. EL's focus keeps it ahead of mass-market players.

3. Margin Recovery and Free Cash Flow is Back! (The Heart of a Business)

In what might seem to be a lost art in investing, cash flows and margin still matter and guess what? Estée Lauder is bringing them back with a big bang in the last earnings report.
- Net Cash Provided by Operating Activities: $1.2 billion — up significantly from $671 million in the prior-year period (+79%).
- Free Cash Flow (FCF): $891 million — sharply higher than $276 million in the prior-year period.
- Gross Margin: 76.4% from 75%, 140bps (1.4%) improvement. Drivers: Benefits from the PRGP, improved sales leverage, and a favorable comparison to prior-year under-absorbed manufacturing costs. Partially offset by incremental tariffs and inflation.
- Adjusted Operating Margin: 15.0% from 11.4% (+360bps YOY). Strong expansion driven by gross margin gains, operating leverage, and PRGP cost savings which funded increased consumer-facing investments.

4. Attractive Valuation with Re-Rating Potential (The Big Bucks!)

As you can see, EL is trading near the most compressed P/S and P/E ratios of the last decade.

Now, for sure, 25x earnings per share (EPS) isn't remotely cheap, at least superficially. But as the P/S ratio indicates, which is essentially rock bottom, this is because profit margins have collapsed, jacking up the P/E. With turnarounds, we'd argue the P/S ratio is the more important metric. This is where the fun could potentially happen due to the depressed valuation relative to sales, making a re-rating, and subsequent upside, asymmetric. Per the above graphic, a return to just 3x sales per share, the return would be around 60%. We like that set-up!

The stock has faced pressure from macro softness, China weakness, and prior destocking, but is showing signs of bottoming. Forward multiples look reasonable for a high-quality prestige name with recovery embedded.

25–35x forward P/E potential on higher earnings should conform to the above Price/Sales target. This aligns with current forward multiples expanding as earnings normalize. With FY2026 adjusted EPS guidance around $2.35–$2.45 (and growth thereafter), this supports analysts' 12-month price targets of $90–$100 (implying 15–30% upside from $78). That's much less upside than the P/S ratio implies but it is still likely to be better than the overall market which looks fully, if not over-, priced.

5. China Sales Leading the Way Again (From Headwind to Tailwind)

Mainland China has become a key growth driver for Estée Lauder in FY2026, helping offset softness in other regions (especially the Americas). This is contributing to the company's overall organic sales stabilization and raised guidance. Management now expects China (including travel retail) to continue supporting mid-single-digit retail sales growth into FY2027, helping drive the company's raised full-year FY2026 organic sales target (3%, high end of prior range).
- Net Sales in Mainland China: $774 million, up 11% reported and +6% organic.
- High single-digit organic growth in Mainland China for the first nine months, where EL has outperformed the prestige beauty market and gained share for multiple consecutive quarters (fourth or fifth straight quarter, depending on the metric).

Technical Profile

Turnarounds, by definition, are rarely chart-breakout situations. EL is no exception. Yet, importantly, as you can see, it has broken the vicious downtrend it's been in since 2022.

Conclusion

As today's lead author/idea generator, Daniel Bustamante, always says to investors; you have to know what you own and why you own it, as everything finds a place in the portfolio for a reason (or at least it should). Estée Lauder is not a name that is going to run 30% in a month, or even two (though 12% in one day is indicative of the coiled spring nature of this situation!). It's a legacy-brand business with 80-years of operations, and its management team knows what they're doing — aka, it's not their first rodeo.

The PRGP plan is working, with improving margins, cash flow and operational efficiencies. These factors make this name one to own if you're after asymmetry in your portfolio — maybe a double, possibly more — but not without some bumps along the way as they work to get back to their proper form. It is also likely to take time to produce a potential 100% return, like two or three years.

As long as we continue to see China sales perform and as they continue to pull on financial levers (to help with margins) this undervalued name will go from turn-around to growth… and who knows, maybe when it's up 30%, we'll even get the CNBC Talking Heads belatedly touting it (to include Jim Cramer).

Thanks for reading!
The Haymaker Team