The Estée Lauder Companies Inc. reported a solid financial performance for its first quarter ended September 30, 2012. For the quarter, the company had net sales of $2.55 billion, a 3% increase compared with $2.48 billion reported in the prior-year quarter. Excluding the impact of foreign currency translation, net sales increased 6% from a year ago. These results were delivered against a 14% local currency sales increase in the prior-year quarter and softer than expected markets, particularly in Western Europe. The company reported net earnings for the quarter rose 8% to $299.5 million, compared with $278.6 million last year. Diluted net earnings per common share rose 9% to $.76, compared with $.70 reported in the prior year.
The fiscal 2013 first-quarter results included charges associated with restructuring activities of $0.4 million. Additionally, in the quarter the company redeemed $230.1 million principal amount of its 7.75% senior notes due 2013. As a result, the company recorded a pre-tax charge to earnings of $19.1 million ($12.2 million after tax), for the impact of the extinguishment of debt, equal to$.03 per diluted common share. The fiscal 2012 first quarter results included charges associated with restructuring activities of$4.1 million. Excluding these charges in the first quarters of fiscal 2013 and 2012, net earnings rose 11% to $312.1 million. Diluted net earnings per common share rose 12% to $.79 versus a comparable $.70 in the prior-year period.
Fabrizio Freda, president and CEO of The Estée Lauder Companies, said, “In this new fiscal year, we continue to be guided by our winning strategy and commitment to profitable growth. Our first quarter results demonstrate the solid fundamentals underlying our business, and I am pleased and encouraged with our performance even in softer markets. Organic sales growth for the quarter was in line with our expectations, while earnings per share were better than planned. In particular, strong growth in North America and China drove our sales gains and, when coupled with cost of sales improvements and effective expense management, we generated a significant operating margin increase.
“Looking ahead, we continue to focus our resources on the most attractive areas of growth and on drawing new consumers into our business via successful product and service innovation and effective investment spending. We are very mindful of the uncertain market dynamics in several countries and of the solid growth in others, but we are judicious in our resource allocation to maximize our results in this dynamic market situation. We are confident that we have developed the necessary agility to manage our business effectively. We expect that we will grow our sales 6–7% in local currency this fiscal year, or double the rate of global prestige beauty, while raising the lower end of our earnings per share range,” Freda concluded.
The company’s performance was due to solid overall business, particularly from its largest brands. The company generated local currency sales gains in each of its product categories and geographic regions. Sales growth was particularly strong in the United States and overall in emerging markets, along with solid gains in certain developed countries.
The skin care category is a strategic priority for the company, and it gained share in this category during the quarter in certain countries where its products are sold. Skin care sales growth was strong, particularly in view of the 25% growth reported in the prior-year quarter. The Estée Lauder brand benefited from recent launches, as did the La Mer and Clinique, though these sales gains were partially offset by lower sales from certain existing products. Operating income increased double-digits for skin care, primarily reflecting improved results from higher-margin product launches in certain of the company’s heritage brands, as well as from higher-end prestige skin care products.
Makeup net sales increased, which built upon the 17% growth in the prior-year quarter. Higher makeup sales reflected recent launches from Estée Lauder and Clinique. Higher sales from Smashbox and certain products from the company’s makeup artist brands, along with the success of the Tom Ford Beauty line of cosmetics, contributed to the category’s growth. Lower sales from certain existing products partially offset these sales gains, but makeup operating income increased, primarily reflecting the higher sales.
In fragrance, notable sales increases were generated from the recent launches of DKNY Be Delicious So Intense, Coach Poppy Blossom, Estée Lauder Pleasures Eau Fraiche and Jo Malone Blackberry and Bay. These increases were more than offset by lower sales of DKNY Golden Delicious, Estée Lauder Sensuous Nude and Coach Poppy Flower, all of which were new launches in the prior-year period. Fragrance operating income increased, primarily reflecting a more strategically focused approach to spending as part of the company’s strategy to improve profitability. Operating income also reflects a favorable comparison to the prior-year period, which included higher spending in support of new launches of designer fragrances.
Hair care double-digit net sales growth was primarily driven by Aveda, reflecting the recent successful launches. The category also benefited from sales generated from expanded global distribution, in particular to salons and multi-brand specialty retailers, while lower net sales at Ojon were due, in part, to softness of its business in the direct response television channel. Hair care operating results increased significantly, primarily reflecting the higher sales, driven by new product launches and expanded global distribution.
Regionally, for the Americas, sales growth improved a strong 8% upon the prior year, when sales grew 10% in constant currency. The net sales increase in the region was primarily attributable to strong growth in the U.S., which benefited from successful new product offerings. The improvement reflects growth from the company’s heritage and makeup artist brands, as well as increased sales in each of the company’s product categories. The higher sales also reflect strong local currency gains in Canada and Latin America. Sales in Brazil continued at a strong double-digit pace. Sales to North American department stores grew mid-single digits and sales of the company’s products online grew double digits, and operating income in the Americas increased sharply, primarily reflecting the strong sales gains.
In constant currency, net sales increased in most countries in the Europe, the Middle East & Africa region and in each product category, except fragrance. Economic uncertainties in some Western European countries impacted the beauty markets more than anticipated, but the company continued to generate growth in most of the markets. The region’s sales growth of 2% improved upon the prior-year quarter, when sales grew 19% in constant currency. In constant currency, double-digit net sales growth was recorded in a number of areas, including the Middle East, South Africa, Turkey and the Nordic countries, while solid sales gains were generated in the United Kingdom and Germany. In travel retail, the company experienced double-digit retail sales growth in the quarter, which was more than twice the increase in airline passenger traffic. Weakness in Korea and select retailer destocking impacted net sales growth. These increases were partially offset by lower net sales, primarily in Russia, Switzerland, France, the Balkans and Spain. The company estimates that it gained share in certain countries within its points of distribution in this region during the quarter, and operating income in the region increased, led by travel retail, Russia and South Africa, which were partially offset by lower results in Germany, Spain and Italy.
Local currency sales growth Asia/Pacific was generated in several countries in the region, with the strongest gains coming from China, Hong Kong and Thailand, primarily reflecting strong sales of skin care products. In China, the increase was primarily due to sales to new consumers in expanded distribution in tier two and three cities. The region’s sales growth of 7% improved upon the prior-year quarter, when sales grew 15% in constant currency. The increases in certain Asian countries were partially offset by lower net sales, predominantly in Korea, reflecting difficult economic conditions and competitive pressures. The company expects to see continued weakness in prestige beauty in Korea, which also impacted the travel retail business there, and it estimates that for the quarter it gained share in certain countries, including China, within its points of distribution. In Asia/Pacific, operating income increased, with most countries posting higher profits. China, Taiwan, Thailand and Japan reported the largest increases, while lower results were recorded primarily in Korea.
For its outlook, the company has benefited from the strength in prestige beauty in North America and China. While overall the company’s business is performing well, certain Western European countries and Korea are seeing worse than expected weakness due to economic uncertainties. Specifically, in the context of its strategy, during fiscal 2013, the company expects to continue to increase gross margins and reduce operating expenses, which allows it to increase global advertising spending and finance SMI, while increasing profitability. Investment in advertising behind strong innovation should continue to create growth well beyond the industry average.