S&P Revises Estee Lauder Outlook to Stable on Turnaround Progress

S&P Global Ratings has revised its outlook on The Estee Lauder Companies (NYSE: EL) to stable from negative, signaling renewed confidence in the beauty company's financial trajectory. The ratings agency affirmed all its existing ratings, including the 'A-' long-term issuer credit rating and the 'A-2' short-term and commercial paper ratings.

The outlook change is a direct result of Estee Lauder's improving operational performance and credit metrics, which S&P attributed to the company's ongoing turnaround efforts. The company has posted four straight quarters of top-line growth and gross margin expansion, with its most recent fiscal fourth-quarter results exceeding S&P's expectations.

Deleveraging Ahead of Schedule

A key driver for the revision is a more optimistic forecast for the company's debt reduction. S&P now projects Estee Lauder's adjusted leverage will fall below 2x in fiscal 2027, a significant improvement from its previous expectation of 2.4x.

The ratings agency anticipates a clear deleveraging path, with adjusted leverage expected to decrease to 2.6x in fiscal 2026 before reaching 1.9x in fiscal 2027. This improved outlook comes despite a forecast for lower free operating cash flow of about $700 million in fiscal 2027, impacted by the timing of restructuring charges.

Profitability and Cash Flow Outlook

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S&P projects a substantial recovery in profitability, forecasting that Estee Lauder's adjusted EBITDA margin will expand by more than 500 basis points to 21.4% in fiscal 2027. The agency also expects mid-single-digit revenue growth, with consolidated revenues increasing by approximately 4% in fiscal 2027.

However, the agency noted that cash flows will face near-term pressure due to several factors:

• Cash payments of over $500 million tied to restructuring charges.
• Ongoing working capital investments and higher capital expenditures.
• Expected dividend payments of around $540 million.

These outlays are projected to cause reported discretionary cash flow to decline to about $150 million in fiscal 2027 from $738 million in fiscal 2026. S&P expects Estee Lauder to use its existing cash balance, which stood at $3.5 billion at the end of fiscal 2026, to repay an upcoming $500 million debt maturity in March 2027.