Morgan Stanley expects strong Estee Lauder earnings, adds to catalyst watch

Morgan Stanley has upgraded Estée Lauder (EL) to Overweight and placed it on Positive Catalyst Watch, anticipating a fourth-quarter revenue beat and a constructive multiyear thesis. The upgrade is driven by expectations for positive like-for-like sales by December 2025, the full realization of benefits from EL's Profit Recovery and Growth Plan (PRGP) in fiscal 2027 leading to EPS upside, and five consecutive quarters of gross margin expansion. Operational improvements, including enhanced forecasting accuracy and strategic digital investments, further support the outlook, with Morgan Stanley raising FY26 and FY27 adjusted EPS estimates to $2.27 and $3.41, respectively.

Analysis

Morgan Stanley has upgraded Estée Lauder (EL) to Overweight and placed the stock on a Positive Catalyst Watch, signaling strong conviction ahead of its August 20 earnings release. The bank's bullish multiyear thesis is underpinned by several key factors, starting with the expectation for a near-term revenue beat driven by better-than-anticipated online performance and results from the '6.18' shopping event. Looking forward, Morgan Stanley projects a critical inflection point with like-for-like sales turning positive by 0.9% in the December 2025 quarter, suggesting the negative impact of retail destocking is now largely concluded. The company's profitability profile is showing significant improvement, evidenced by five consecutive quarters of gross margin expansion and a projected increase in EBITDA margin from 15.5% in fiscal 2024 to 17.7% in fiscal 2027. This is further supported by tangible operational enhancements, such as a ten-point improvement in forecasting accuracy that has halved excess and obsolescence. The full financial benefits of Estée Lauder’s Profit Recovery and Growth Plan are anticipated to materialize in fiscal 2027, prompting Morgan Stanley to raise its adjusted EPS estimates to $2.27 for FY26 and $3.41 for FY27.

Key Decisions for Investors

• Investors with a long-term growth focus may consider this upgrade a signal to initiate or add to positions in Estée Lauder, given the constructive multiyear outlook on sales, margins, and earnings.
• The upcoming August 20 earnings report serves as a critical near-term catalyst; performance against revenue guidance and management's commentary on like-for-like sales will be key to validating Morgan Stanley's thesis.
• Monitor gross margin trends and management execution on the Profit Recovery and Growth Plan, as the projected benefits in FY27 are a significant component of the bull case.
• Pay close attention to commentary regarding the new Chief Digital and Marketing Officer's strategy, as accelerating online performance is a core pillar of the expected recovery.