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Lauder Sees 10% Sales Increase for $2.49 Billion Net in Q2 2011

Posted: February 8, 2011

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Fragrance. The fragrance category posted solid double-digit net sales growth compared with the prior-year quarter. Sales gains were strongest in the Americas. Incremental sales were generated from the recent launches of pureDKNY, Hilfiger Loud for Her, Coach Poppy and Estée Lauder pleasures bloom, as well as higher sales of Jo Malone and Tom Ford fragrances, and certain other designer fragrances through self-select outlets. Partially offsetting these increases were lower sales of Clinique Happy and Aromatics Elixir. The company anticipates future net sales growth in this category to be impacted by its efforts to improve profitability through a more strategically focused approach to investment spending, as well as competitive dynamics. Fragrance operating results improved substantially. The improved results primarily reflected higher net sales of designer fragrances and recent product launches, cost reductions and a more strategically focused approach to support spending on winning launches and classics, and in markets with the greatest potential.

Hair Care. Hair care net sales increased primarily because of incremental sales from expanded distribution, particularly outside the United States, as well as from the recent launch of Control Force and Volumizing Tonic from Aveda. These improvements were partially offset by lower net sales resulting from the reformulation and anticipated relaunch of Ojon brand products. Hair care operating results increased, primarily reflecting the absence of goodwill and other intangible asset impairments recognized in the prior-year period, partially offset by the impact of the reformulation and anticipated re-launch of Ojon brand products.

Geographic Regions

The Americas. Net sales growth in the region was primarily attributable to higher sales in the United States. The improvement reflects net sales increases from the company's heritage brands, makeup artist brands and increases from various designer fragrances. The higher sales also reflect the inclusion of the Smashbox brand and gains in Canada and Latin America. The company had lower sales of Prescriptives products, due to the brand's exit from global wholesale distribution after the prior-year period. During the quarter, excluding the Prescriptives brand, the company's share increased in U.S. prestige department and specialty stores. Operating income in the Americas increased, reflecting improved results from the company's heritage and makeup artist brands. Additionally, the increase reflects a favorable comparison to the prior-year period when the company incurred goodwill and other intangible asset impairments. These increases were partially offset by the timing and level of spending activities in the current quarter, which are in line with the current level of sales, and by the impact of reduced profitability in Venezuela due to unfavorable exchange rates.

Europe, the Middle East & Africa. In local currency sales increased in nearly all countries in the region and in each major product category. The company's travel retail business generated significant net sales and profit growth during the quarter, resulting from successful product launches, increased distribution and cost containment. This reflects both an improvement in global airline passenger traffic and stronger conversion of shoppers into buyers, driven by improved marketing and distribution. In constant currency, double-digit net sales growth was recorded in a number of countries, with the largest gains coming from emerging markets, such as the Middle East and Russia, as well as Italy and Germany. Solid sales growth was also posted in the United Kingdom, France and Turkey. Net sales in Spain and the Balkans declined in the quarter. The company estimates that it gained share in certain countries in its points of distribution in this region during the quarter. In the third quarter of fiscal 2010, the company undertook an initiative to identify certain underperforming stock keeping units as part of a program to realign the product assortment at our perfumery retailers. Sales in the current-year quarter benefited from selling in higher demand and faster moving products as part of the program. Replenishment of products is not expected to continue at the same pace in upcoming quarters. Operating income increased, reflecting improvements in travel retail and most countries in the region. The strongest improvements came from the travel retail business, Russia, the United Kingdom, the Middle East and South Africa. The higher results also reflect the favorable comparison to the prior-year period, which included an impairment charge of other intangible assets. Partially offsetting these improvements were lower results in the Balkans and Spain.

Asia-Pacific. The company generated solid local currency sales growth in this region, with most countries posting increases. All product categories had sales gains except fragrance, which was relatively flat. Including the favorable impact of foreign currency translation, all major product categories improved. The strongest gains were generated in China, Hong Kong, Taiwan and Malaysia. These increases were partially offset by lower sales in Japan and Australia. The company estimates that for the quarter it gained share in the Asia region within its points of distribution. Operating income in the region rose, with virtually all countries showing improved results, led by China, Taiwan and Hong Kong. The company has continued incremental investment spending in China to support its growing business in this emerging market.