Prepared remarks
Good day, everyone, and welcome to the Estée Lauder Company's Fiscal 2026 Third 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 impacts 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.
Retail sales performance discussed is based on information available as of April 29, 2026. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our presentation, our profit recovery and growth plan will be referred to as our PRGP. And now I'll turn the webcast over to Stephane.
Thank you, Rainey, and hello to everyone. Today, we raised our fiscal '26 outlook and offered our preliminary view on fiscal '27. We do so with confidence in the trajectory of our business as our third quarter results extend our strong year-to-date performance and as we begin realizing the benefits of one operating ecosystem. For the third quarter, organic sales rose 2%. Operating margin expanded significantly, bolstered in part by gross margin expansion and EPS grew 40%, further demonstrating the momentum of Beauty Reimagined. For the 9 months of fiscal '26, we have delivered progress in many areas of our business. Three of four regions grew organically, led by high single-digit growth in Mainland China and double-digit growth in our priority emerging markets. The Americas stabilized, and we remain focused on seizing its full potential. Looking at categories, fiscal year-to-date, fragrance rose double digit organically, significantly outperforming the industry and skin care grew low single digits, while hair care stabilized and makeup rate of decline slowed.
Fiscal '26 is promising to be the pivotal year we intended, one in which we restore organic sales growth and expand our operating margin for the first time in four years. We now expect to deliver organic sales growth of 3%, the high end of our prior range. Operating margin on track to be 10.7% to 11%, significantly ahead of the 10% we previously expected at the midpoint and notably better than the 8% of fiscal '25. Driving these results and expectation are retail sales growth and share gain in several key markets. In Mainland China, with our high single-digit retail sales growth, we estimate we outperformed prestige beauty for the third consecutive quarter of fiscal '26, driven by brands, including La Mer, TOM FORD, Le Labo and The Ordinary. For Travel Retail, in Hainan, we significantly outperformed prestige beauty, which itself improved sequentially to gain share as our activation for Lunar New Year drove remarkable performance.
Retail sales rose strong double digit, accelerating from high single digit in the second quarter with 10 brands growing double digit, led by La Mer, Estée Lauder, and M·A·C. In Japan, where prestige beauty declined low single digit, our share expanded overall, driven by outperformance in makeup. In Korea, we returned to retail sales growth, up high single digits and gained share in makeup. In both markets, M·A·C performed exceptionally well. In the U.S., our retail sales grew mid-single digits. We gained volume share in total prestige beauty driven by every category. On a value basis, The Ordinary gained share in skin care, while Clinique, M·A·C, Bobbi Brown Cosmetics, and Estée Lauder expanded share in makeup. The company gained value share in the U.S. prestige hair care, driven by Aveda and The Ordinary, and we are seeing evidence of Aveda's turnaround given share expansion and traction on data.
These retail sales and share trend around the world are a tribute to our team's delivery of Beauty Reimagined. During the third quarter, we continued to execute with excellence across all five action plan priorities. We accelerated best-in-class consumer coverage, expanding our portfolio presence in consumer-preferred, high-growth channels, market, media and price tiers. For Amazon Premium Beauty stores, we deepened brand reach across the 10 markets where we have launched, for instance, with Clinique launching in France and Estée Lauder in the U.K. Similarly, we increased our brand reach on TikTok Shop in markets from the U.S. to Germany and Malaysia and enhanced our online presence in China, launching The Ordinary on Douyin and Estée Lauder and M·A·C on vip.com. This work, coupled with strong performance on Douyin, Tmall and Coupang, one of the leading Korean online platforms, drove double-digit online organic sales growth in the third quarter.
Impressively, fiscal year-to-date online organic sales growth grew 10%, leading us to believe we outperformed prestige beauty in the channel. In March, we strengthened our ties in specialty-multi with M·A·C's much-anticipated entry into the U.S. Sephora. For the month, M·A·C was the #1 lead brand in makeup across the Sephora stores where it launched. For our second action plan priority, create transformative innovation, we delivered on all three areas of breakthrough, on-trend and commercial. Our newness in fragrance resonated especially well, contributing to the category's double-digit organic sales growth driven by every region. Le Labo delivered another quarter of remarkable growth with high single-digit like-for-like door growth and strong double-digit organic sales growth, driven in part by Violette 30, a recent addition to the classic collection. TOM FORD's innovation in the category went from strength to strength as the brand followed Oud Voyager's successful launch earlier in fiscal '26 with the highly sought-after Figue Érotique.
BALMAIN's Beauty Destin, the brand's new entry into prestige price tier with a refillable bold scent drove an exceptional consumer response and stronger-than-expected retail sales. Lastly, in fragrance, KILIAN PARIS's latest launch, Her Majesty, contributed to the brand's strong double-digit organic sales growth, the fastest in the company, demonstrating our ability to accelerate growth in promising emerging brands. In skin care, breakthrough launches from La Mer in eye and Estée Lauder Supreme franchise were among several drivers fueling strength for those brands in Mainland China. While we are pleased with the performance of these launches, globally, we did not have the breadth of newness in skin care relative to last year's third quarter. Fiscal year-to-date, innovation has been a vital contributor to skin care organic sales growth, and we have a rich innovation pipeline for fiscal '27.
In makeup, Estée Lauder Double Wear next-generation Matte foundation drove the brand's double-digit growth in the category, while M·A·C's Lip and Cheek Mousse captured the multi-use makeup trend. Turning to our third action plan priority, we boosted consumer-facing investment for the fifth consecutive quarter, focused on high ROI opportunities. La Mer experiential celebration for the launch of the rejuvenating eye cream were one of the several drivers making La Mer once again the greatest contributor to the company's organic sales growth. And Estée Lauder's launch of the all-new Double Wear foundation delivered exciting activation around the world to drive engagement and new consumer acquisition. We invested in groundbreaking campaigns, including Jo Malone's commercial innovation featuring the Jagger sisters, driving organic sales growth. The Ordinary showcased its brand equity with its dictionary theme pop-up across five countries as the brand extended its double-digit organic sales growth.
Our fourth action plan priority is to fuel sustainable growth through bold efficiencies. We achieved a significant milestone in the PRGP restructuring by quarter end, having approved initiatives to achieve the high end of the target gross saving range. In April, we expanded the size of the restructuring program, reflecting additional initiatives expected across the pillars of the program. This includes the expansion of the positions impacted, which largely reflects the anticipated exit of select unproductive doors in department stores and freestanding store channels as we increasingly tap into the high-growth potential of online. This was a decision we did not take lightly as it will impact beauty advisors globally as we evolve our business to better align with consumer shopping preferences. We remain committed to completing business case approvals for the restructuring program by the end of fiscal 2026.
With a line of sight to additional growth benefit driven primarily by optimization of our selling model, we are increasing the target range of gross savings. For the entirety of PRGP, we have taken decisive actions to reshape our cost structure and operations to drive speed and agility, which is now evident in our organization. We remain on track to achieve the vast majority of PRGP's full run rate benefit in fiscal '27. Since launching Beauty Reimagined, we are well on our way in executing the biggest organizational leadership and cultural transformation in our company's history, while successfully managing internal and external disruption and restoring organic sales growth and improving profitability. Finally, for our fifth action plan priority, we have now fully established One ELC, our operating model, aligning brands, regions and functions as one team with one culture and one operating ecosystem.
We swiftly deployed one team to begin fiscal '26, simplifying the organization with fewer layers and silos and clear ownership. More recently, in February, we unveiled one culture guided by our beauty commitments, reinforcing how our team works every day grounded in accountability and bold entrepreneurial thinking. On our last earnings call, I spoke of the work underway for our one operating ecosystem to build a more connected and scalable enterprise transformed by AI. At that time, we had established enterprise business services selecting Accenture and elected to modernize our direct-to-consumer omnichannel experience with Shopify. In April, we appointed WPP for a unified enterprise-led approach to media buying to enable greater scale, precision and impact. By partnering with these and other best-in-class organizations, we are transforming from a fragmented data landscape to a more unified one, enabling real-time insights, a single consumer view and more effective activation across brands and markets.
We made significant progress with Accenture over the last few months, beginning to consolidate vendors across brand, region and functions to drive simplification, ensure governance and eliminate long-tail spend. We have completed go-live across consumer care, CRM and tech infrastructure and are pleased with the early proof points that we have achieved in record time. All told, we plan to have Enterprise Business Services fully deployed by the end of calendar '26. Before I close, I'm thrilled to welcome to The Estée Lauder Company's portfolio, the #1 prestige skin care brand in India, Forest Essentials. In March, we agreed to build upon a long-term partnership as a minority owner by acquiring the remaining shares. With the transaction expected to close in the second half of the calendar year, Forest Essentials is an exquisite Indian beauty brand grounded in the science of modern, luxurious Ayurveda, and we are excited to expand the brand in India and share it with the world.
Additionally, in April, we made a minority investment in 111Skin, a luxury skin care brand, which is ideally positioned for pre- and post-procedure growing demand. This exemplifies our minority investment strategy to build brands for the future like we did with DECIEM and Forest Essentials. In closing, with strong year-to-date results and the momentum of Beauty Reimagined, we are confident we will deliver our now higher fiscal '26 outlook. Looking ahead to fiscal '27, our view is for prestige beauty's growth to accelerate as we expect retail sales growth from the China ecosystem, including travel retail to improve to mid-single digit and the global demand for prestige beauty to remain robust. In our preliminary plan, we intend to deliver another strong year in fiscal '27 as we expect accelerating organic sales growth of 3% to 5%, gaining prestige beauty share at the mid- to high end of the range and operating margin of 12.5% to 13%.
We have the right brands, the right team and a clear momentum onward and upward. Before I turn to Akhil, I extend my deepest gratitude to our colleagues around the world who have achieved so much for the Estée Lauder Companies. I also want to recognize our colleagues, retailers and suppliers across the Middle East as they navigate a challenging time in the region. We are committed to continuing to support the safety and well-being of all our employees in the affected area. I will now turn the call over to Akhil.
Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we delivered strong performance in the quarter with sales growth, continued margin expansion and strong cash generation. Across One ELC, we are executing against our strategic priorities with great efficiency, continuing to advance Beauty Reimagined with focus, discipline and speed. I'll begin with a recap of our third quarter performance and then turn to outlook covering a raised fiscal '26 outlook and a preliminary view on fiscal '27. For more details on our third quarter results, please refer to the press release we issued this morning. Starting with organic net sales. We grew 2% year-on-year, driven by double-digit growth in fragrance. Performance in the category was broad-based across most brands and all geographic regions, led by double-digit growth from our luxury brands and in both The Americas and Mainland single-digit net sales growth in Mainland China and double-digit growth collectively in our priority emerging markets.
Across our four regions, we delivered mid-single to double-digit growth online, reflecting continued momentum from expansion. In North America, sales declined low single digits, reflecting continued pressure in brick-and-mortar, including retailer bankruptcies, shop-in-shop closures and softness for some of our brands. The disruption to our business from the conflict in the Middle East negatively impacted our third quarter sales growth in EUKEM by approximately 1 percentage point. The impact to our consolidated results was not material. I'll discuss our assumption for the remainder of the fiscal year related to these disruptions when I address our outlook. Turning now to margins. Gross margin for the quarter was 76.4%, an expansion of 140 basis points compared to last year. This was largely driven by strong net benefits from a focused PRGP execution and programs covering all aspects of operational efficiencies, including our zero-waste initiatives, which drove another reduction in excess and obsolescence this quarter.
These net benefits helped to offset headwinds from incremental tariffs and inflation. This also reflects a favorable impact of 95 basis points related to an in-period charge we took last year for under-absorbed overhead costs. Our improved sales leverage also contributed to expansion in the quarter. Looking at operating margin, we expanded by 360 basis points, delivering a margin for the quarter of 15% compared to 11.4% last year. Changes in our business mix, along with the shift in spending to the fourth quarter led to better-than-expected results. Our disciplined investment allocation and PRGP net benefits drove a 4% reduction in nonconsumer-facing expenses and improved operating leverage even with the normalization of employee incentive costs. This funded a 9% increase in consumer-facing investments or 5% excluding the impact from FX. We continue to invest for growth, enhancing brand desirability and reinforcing the execution of Beauty Reimagined.
Our effective tax rate for the quarter was 31.8%, up from 30.8% last year. Diluted EPS was $0.91 for the quarter compared to $0.65 last year, an increase of 40%, driven by our sales growth and cost leverage. This also includes a dilutive impact of $0.02 related to business disruptions in the Middle East. Looking at our overall PRGP. We continue to execute with discipline, delivering results ahead of our expectations. With the establishment of One ELC operating model, we are continuing to make measurable progress against our strategic priorities, driving sales growth, improving our cost structure and fueling sustainable long-term value creation. In terms of restructuring costs, through March 31, we recorded $1.1 billion of total cumulative charges, primarily related to employee-related costs. Further to Stephane's comment on evolving our focus towards high-growth channels and reflecting approved initiatives through April 29, we now expect total restructuring and other charges of $1.5 billion to $1.7 billion before taxes.
We still expect approvals for specific initiatives under the restructuring program in total to be completed by the end of fiscal 2026. Shifting now to another key priority, cash flows. For the nine months, we generated $1.2 billion in net cash flows from operating activities. This is a meaningful improvement compared to the $671 million generated last year and primarily reflects higher earnings, excluding noncash items. Also contributing to the improvement was a favorable change in operating assets and liabilities despite the significant increase in restructuring payments. We invested $306 million in CapEx as we continue to prioritize consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the nine months, CapEx was down 23% versus last year, reflecting the phasing of projects. These results reinforce our ongoing focus on improving free cash flow. Turning to our outlook.
The current geopolitical and macroeconomic environment remains uncertain and continues to drive global volatility. Starting with fiscal '26, our solid year-to-date results supported by continued net benefits from our PRGP and disciplined cost management give us confidence in raising our fiscal '26 outlook. In terms of the conflict in the Middle East, our outlook assumes a greater year-on-year impact from disruption to our business in the fourth quarter relative to the third as shipments for key shopping moments had already gone out before the conflict began. This helped to minimize the impact to our third quarter sales and profitability. For the fourth quarter, we expect an unfavorable impact of approximately 2 percentage points to sales growth and $0.06 to EPS. Now looking at our fiscal '26 outlook. We expect organic net sales growth of approximately 3% at the high end of our prior guidance range.
For the full year, the impact of business disruptions in the Middle East is expected to be less than 1%. We assume gross margin of approximately 75% and operating margin of 10.7% to 11%. The strong margin expansion is in spite of a more normalized level of employee incentive costs, which is expected to have a greater year-on-year impact in Q4 than in the first three quarters of the year. Diluted EPS is now expected to range between $2.35 and $2.45. This represents a year-on-year growth of 56% to 62% and includes a dilutive impact of approximately $0.07 related to business disruptions in the Middle East. We also assume a weighted average share count of approximately 365 million shares. Please refer to our press release issued this morning for other assumptions included in our fiscal '26 full year outlook, including those regarding evolving trade policies and enacted tariffs. For fiscal '27, our preliminary view is based on strong progress across Beauty Reimagined and our PRGP as well as our assumption of low to mid-single-digit growth in global prestige beauty.
While we are in the process of finalizing our fiscal '27 plan, we currently assume net sales growth of 3% to 5% for the full year and operating margin of 12.5% to 13.0%. As Stephane said, we are confident in the trajectory of our business while recognizing ongoing external uncertainty and volatility. We plan to share a more complete view on fiscal '27 in August when we report our fiscal '26 full year results. At that time, we will refine our view as needed based on our assessment of prevailing geopolitical and macroeconomic conditions as well as changes in foreign currency exchange rates. In closing, we remain focused on executing our long-term strategy to become the best consumer-centric prestige beauty company with clear priorities of sales growth, margin improvement and strong cash generation. Across One ELC, we are advancing a multifaceted transformation with discipline and speed, and we are deeply grateful for the dedication, resilience and passion of our employees around the world who make this progress possible. Together, we are positioning the company to deliver sustainable long-term value creation. That concludes our prepared remarks. I'll now turn it over to Rainey.
Before we begin the Q&A, please note that management will only address questions related to our fiscal 2026 third-quarter results, the outlook for fiscal 2026, and our preliminary view on 2027 as set forth in the press release we issued this morning or discussed on today's call. The company will not comment on the status of discussions with Puig or the possibility of a transaction. The company does not intend to provide any further information prior to an official announcement detailing an agreed-upon transaction or the termination of discussions. I will now turn the call over to the operator for the Q&A session.
Questions and answers
Our first question today comes from Dara Mohsenian with Morgan Stanley.
I was hoping to maybe get a bit more perspective on long-term margin potential. You're obviously making greater-than-expected progress on margins in fiscal '26. You've announced the greater job cuts and cost savings. So I just wanted to get some updated perspective from you on how you're thinking about the path to margin expansion as you look out past the guided-to fiscal '27 level, with all the progress you're making? Do you think you can get back to the peak high teens margins you had in your business at one point? And perhaps just give us a general sense as you look out past fiscal '27 on the incrementality of cost savings and reinvestment needs as you look out longer term. I know you won't quantify that, but just a general sense of the continued opportunity there and the need to sort of reinvest behind the business.
No. Thank you, Dara, for the question. I was expecting this question. When you think about it, and I've said it consistently over the last few quarters, we're executing the biggest transformation in our company history at every level: leadership, cultural, operational. I think we've demonstrated over the last three quarters and actually since the launch of Beauty Reimagined, now the fifth quarter, that we have executed with speed and agility. We are back to growth now for the first time in four years. We are expanding margin. Now if you think about the margin that we've expanded or we are planning to expand this year at the higher end of the guide for the year, plus what we are giving in our preliminary view for fiscal '27, we would have expanded margin by 500 basis points from the starting point of Beauty Reimagined. We were at 8% margin. We could finish around 11% this year, and we have a preliminary view of 12.5% to 13% for next year.
So obviously, this is an enormous amount of work that is coming from our ability to just improve gross margin. You saw gross margin has expanded by 140 basis points in this quarter. The reduction of the nonconsumer-facing expenses that is consistent, again, minus 4%, which is showing the discipline that we are applying in the management of our SG&A. Today, we've announced the PRGP continuation and new ideas that we are putting out there to continue to further optimize our SG&A in favor of improving the consumer-facing investment behind our brands. I was very clear in February '25, when we launched Beauty Reimagined, that we needed to invest behind our brand, and we are seeing the retail momentum and the sequential improvement in many of our brands, channels and geographies around the world. Coupled with the new operating model that we are putting in place, built in partnership with best-in-class partners around the world — Accenture, Shopify and WPP that we've announced last month — this will allow us to create a unified media activation model.
All of what we are doing is to build a P&L that is designed for leverage. It's important for us to unlock additional growth. The momentum that we are seeing this year is what is giving us the confidence to give you the preliminary view for fiscal '27 at 3% to 5%, which I want to be very clear about: at the mid to the high point of this view, we will be gaining market share. That is going to create a lot of leverage in our P&L. You couple that with emerging market growth and online growth and other drivers, and that will create more operating margin leverage over time. Margin recovery is a milestone. It's not a sprint. I'm proud of what we are doing as a team to show momentum. If we deliver the top end of our view for next year, it will be a 500 basis point improvement to 13% operating margin. With the leverage that we are building in the P&L, I believe we can continue to improve over time.
The next question comes from Filippo Falorni with Citi.
So thank you for the addition of the preliminary fiscal '27 guidance. That was very helpful. I was hoping you can expand a bit more from a geographic and category standpoint, where you see the acceleration in the global prestige category and from an Estée Lauder specific standpoint, where you see the biggest opportunity in terms of improvement in market share. Just curious what regions are driving the acceleration you're expecting and where you see the biggest opportunity?
Thank you, Filippo, for the question. I'll start and Akhil will add a few things. The category of beauty is still extremely resilient and very attractive. We're seeing many indications that the life cycle of the consumer is expanding. Consumers are entering younger into the category and staying longer. This is why we've launched our venture into longevity led by the Estée Lauder brand and others. We are seeing new categories like pre- and post-procedure care, which is why we made a minority investment in 111Skin. Emerging markets continue to grow, supported by long-term demographic trends and increased accessibility through online channels. Specialty-multi is growing in every geography. When you combine this macro environment with the progress we've demonstrated — three of the four regions posting growth over the last nine months, double-digit fragrance last quarter, double-digit online, priority markets in double digit — China is in its fifth consecutive quarter of market share gain for us.
We are diversified across brands and channels in China with six brands in double-digit growth in the quarter beyond La Mer, including TOM FORD and Le Labo. Hainan is in recovery and improving sequentially; we are improving faster than the average there. Stabilization of North America and the U.S. is very important. Early in Beauty Reimagined we focused on rebalancing growth across regions and categories. In the U.S., our investments are paying dividends: every category is gaining volume share. We are reactivating recruitment and putting more innovation into the market; The Ordinary continues to perform strongly gaining market share in skin care. Over the quarter we had strong momentum in fragrance, and over the nine months skin care is accelerating while makeup and hair care are sequentially strengthening. The launch of M·A·C in Sephora in the U.S. and expansion on TikTok Shop globally are proof points that our consumer coverage, innovation acceleration and investments are working.
So, in summary, the macro conditions for beauty remain attractive alongside the acceleration we are seeing across geographies and categories. That gives us confidence in the preliminary view for next year and its positioning to gain market share if we deliver at the mid- to high-end of the range.
Filippo, I'll just add on margin progression and build upon Dara's question. At a 12.5% to 13% operating margin, our gross margin is north of 75% and SG&A or total OpEx is about 62%, so there's still significant runway. Why we feel confident is because this year we started with a guide of about 9.4% to 9.9%, and the comprehensive nature of our work — discounts, operational excellence, One ELC model, Shopify online transformation, procurement, WPP for media, and Accenture for Enterprise Business Services — is driving meaningful ROI both on consumer-facing investments and cost. With the restructuring expansion announced, this gives us additional runway beyond the 11% and 12.5% to 13% guidance. The combination of the growth flywheel Stephane described and the new cost efficiencies with restructuring, along with the everyday efficiency muscle we are building across the organization, gives us confidence to drive growth, margin, cash and total value creation.
The next question comes from Rupesh Parikh with Oppenheimer.
So just going back to Americas and maybe specifically North America. Growth there has been flattish. So just curious, as you look to FY '27, do you expect to turn the corner from a growth perspective? And just in terms of some of the inventory destocking headwinds, would you expect those to go away next year?
Thank you. The simple answer is yes. We expect to go from where we were declining to stabilization and then to acceleration. The team is doing a fantastic job. Are we happy with North America today? We're not there yet, but the team is working very hard to rebalance channels and ensure consistent brand performance. Objectively in the quarter, having all four categories gain volume share and The Ordinary continuing to gain market share in skin care, both in volume and value, along with five makeup brands gaining share in value in the quarter, shows Beauty Reimagined is working in this market. We have pivoted distribution to high-growth channels quickly. We have 12 brands on Amazon in the U.S. performing extremely well. The M·A·C Sephora launch was only four weeks old in the quarter and has already gained market share. We are seeing strong proof points in lip and other categories. We are reactivating recruitment, putting more innovation into the market, increasing presence on Amazon and TikTok Shop, expanding into Sephora, and continuing to work with Ulta and other retail partners.
Online growth in the U.S. is in the high single digits, which is encouraging. We've achieved all this while exiting some brands and channels and navigating disruptions like retailer bankruptcies that cost us up to two points of growth in the quarter. Excluding these disruptions, we would be even closer to market share gain. We narrowed market share loss to only six basis points in value versus prior year while gaining significant volume. I'm confident we can return to growth next year. Regarding inventory, inventory in North America is in a very good position and we are shipping to demand in every geography and channel. There may be one or two SKUs above ideal levels, which is normal and manageable, but nothing unusual to report at this point.
The next question comes from Lauren Lieberman with Barclays.
So I wanted to talk a bit about channel strategy in the U.S. So you guys have been outspoken and made a lot of progress, obviously, on Amazon and you've had the launch with M·A·C in Sephora. But we read this week that Bobbi Brown may be exiting U.S. department stores. And department stores have long been a challenged channel as the channel itself has been deeply pressured. So just perspective on exposure to department stores, willingness to kind of continue to make bold moves in that sense to exit channels outright to reposition because it's a big swing if the reporting on Bobbi is correct.
Yes. We are continuing to resize the channel in North America and across our Anglo markets, including the U.K. and Australia. We are moving to high-growth channels. This is why we've been quick and deliberate in putting our brands on Amazon and launching M·A·C into Sephora. I want to thank Sephora for their support on a great launch and our partners at Ulta, where we're doing well. We have to continue to rightsize department stores. As part of the PRGP expansion, approximately 70% of the employee reductions are coming from channels that are dilutive, especially department stores and freestanding store channels. We are rationalizing and in some cases exiting brands from certain channels to focus on high-growth channels. Regarding Bobbi Brown, Bobbi Brown is a fantastic brand. We love the brand. There are proof points of growth in Asia and in high-growth channels such as Amazon and specialty-multi. This is where we are putting effort and investment. Beauty Reimagined is about rebalancing geography, category and channel to align with where consumers shop. These are tough decisions, but we are making them with speed and agility, which will create momentum in the Anglo markets.
If I could add one thing, Lauren. One of the untold stories of Estée Lauder Companies is how well diversified our channels are around the world. Globally, our online business is almost one-third of our business and direct-to-consumer is more than 30%. Even in the U.S., online is getting closer to 40% and direct-to-consumer is more than 30%. Worldwide, we have capabilities across eight to ten major channels. We are bringing cross-country learnings to accelerate progress. For example, we now have a global team driving pure-play progress and we can scale platform success like Amazon and TikTok from one country to another at a rapid pace. This gives us extraordinary ability to pivot, and as part of Beauty Reimagined, we are leading that change through consumer coverage and by aligning the organization to move quickly.
The next question comes from Chris Carey with Wells Fargo.
I wanted to ask about the EUKEM segment. You flagged double-digit growth in emerging markets. I believe you had constructive commentary on France in this call, if I heard that correctly. So clearly, there's some momentum in key areas. It does suggest the U.K. is perhaps a bit more muted. Can you give us a sense of how you see the U.K., how the strategies to improve the market are evolving? And perhaps in general, as you think about this region more broadly, how you would see the key growth drivers as you march toward this organic sales target that you would have over the next 12 months or so?
Yes. EUKEM is a tale of many different stories because it includes the U.K., continental Europe and emerging markets. We are very happy with the momentum in emerging markets, which showed double-digit growth this quarter with very strong performance in India, Vietnam, Indonesia and Turkey. We also had good retail sales growth in parts of the Middle East because we shipped to be ready for Eid and Ramadan and had strong campaigns, though that performance has been impacted by the conflict in the region. UAE has been more affected, while Saudi was relatively stable for the quarter. On continental Europe, performance is more muted. We have had success in France and Spain, where we are gaining market share, deploying niche brands quickly and seeing good demand. But consumer sentiment in continental Europe has been softer, and we are being very strategic about where we invest, for example investing in Double Wear and seeing good returns. Regarding the U.K., my team and I were not satisfied a few quarters ago with its performance, and we have worked hard to turn it around. I am happy to report sequential improvement and that the U.K. is back to positive territory, though we are not fully recovered yet.
The next question comes from Bonnie Herzog with Goldman Sachs.
All right. I just had a quick follow-up on EBIT margins next fiscal year. I guess I'm wondering how critical it is for organic sales growth acceleration to ultimately drive operating margin improvement versus your PRGP savings. I also had a question on the impact from duty-free changes at Beijing and Shanghai airports, which you mentioned last year. Could you provide an update on where things stand and whether the resolution of these issues should support a sequential improvement in growth in F Q4?
Pardon me, ladies and gentlemen. It appears we lost the connection to our speaker line. Please standby while we reconnect. Thank you for your patience. Pardon me, everyone. I have our speakers joined back. We can continue.
Can you tell us where we left off? Does Stephane need to repeat that answer?
Yes, it's Bonnie. I can repeat my question. I assume you guys didn't hear it. I just did have a quick follow-up on EBIT margins fiscal year. I guess I'm wondering how critical it is for organic sales growth acceleration to drive the margin improvement in the year versus your PRGP savings. And then I do have a question on the impact from duty-free changes at the Beijing and Shanghai airports that you did highlight last quarter. Could you just maybe provide an update on where things stand and if the resolution of these issues should support a sequential improvement in F Q4?
Bonnie, I'll start with EBIT margin and then Stephane will take the other question. It's a very pertinent question given that 3% to 5% sales growth is an acceleration. We feel confident because of the work we've done on restructuring for structural cost savings and the everyday efficiency muscle we're building in the organization. With that work, we feel confident in margin at different sales ranges. When we give guidance, we do it in a risk-adjusted way to show how we can get to that margin at the top end, the bottom end, and even if the sales growth doesn't fully materialize. Sales is a critical part of margin, but we have multiple tools in the toolkit — structural cost savings, operational efficiencies, and disciplined investment allocation — to continue to drive margin expansion. On a long-term basis growth is critical, but we are still in the middle of a massive cost transformation, so the cost program itself is a huge margin expander.
And Bonnie, on travel retail — sorry for the technical issues earlier. Travel retail is moving in the right direction. Our travel retail business posted low single-digit growth in the quarter, a sequential improvement. There was an earlier potential issue with retailer transitions at Beijing and Shanghai airports and online, but the impact has been less than initially expected. I want to recognize my travel retail team and our retailer partners in Hainan who worked to ensure we did not miss Chinese New Year and other key moments. Hainan grew over 30% in retail in the quarter, significantly above the market, with six brands in double-digit growth including La Mer, Estée Lauder, Jo Malone, Clinique, M·A·C and Bobbi Brown. We are recapturing momentum and rebalancing growth across the China travel retail ecosystem. We are also accelerating travel retail around the world with improved presentation and consumer experience in key airports from Heathrow and Charles de Gaulle to Singapore and Bangkok. We are deploying our luxury fragrance brands in these channels and expect continued improvement as disruptions ease in the Middle East region.
That concludes today's question-and-answer session. If you were unable to join for the entire webcast, a playback will be available at 1:00 p.m. Eastern Time today through May 15. Please visit the Investors section of the company's website to view a replay of the webcast. That concludes today's Estée Lauder conference call. I would like to thank you all for participation and wish you all a good day.