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The Estée Lauder Companies Inc. reported net sales for its third quarter ended March 31, 2014 of $2.55 billion, an 11% increase compared with $2.29 billion in the prior-year quarter. Excluding the impact of foreign currency translation, net sales increased 12%. The company reported a 270 basis-point increase in operating margin, and net earnings for the quarter rose 19% to $213.2 million, compared with $178.8 million last year. Diluted net earnings per common share rose 20% to $.54, compared with $.45 reported in the prior year.
Fabrizio Freda, The Estée Lauder Companies’ president and CEO, said, “Our excellent results this quarter reflect our multiple engines of growth across product categories, countries and channels, enabling us to achieve strong local currency sales growth in every geographic region. Sales came in higher than our expectations and we again exceeded our earnings per share forecast. These results were driven by the broad global demand for our diverse prestige beauty brands, the strength of our emerging markets, accelerated growth in certain developed markets and solid progress in skin care.”
“Our outlook for the balance of the year remains positive and we expect to achieve our financial objectives,” Freda also noted. “We continue to forecast local currency sales growth of 6–7%, and we are raising our earnings per share guidance to $2.86–2.90, before charges and the effect of potential accelerated sales orders relating to our SMI go-live in July 2014. Driving this performance will be new and recent product offerings across categories, particularly in skin care and makeup. For the remainder of the fiscal year we also expect our growth will continue to be fueled by our success in high-growth channels and emerging markets, while enhancing our local relevance. Importantly, our mid-size brands continue to grow faster than the average, increasing their contribution to the company’s sales and profitability, while strengthening our portfolio. We are flexible in our investment spending, targeting opportunities that provide the highest returns, promote demand for our brands and foster global growth. At the same time, we are improving operating leverage and eliminating non-value added costs to further improve operating margins and profitability.”
In the skin care category, which is a strategic priority for The Estée Lauder Companies and is well positioned to capitalize on its strong pipeline of innovative products, the company saw net sales of $1.13 billion for the quarter, a 12% reported basis increase and 13% local currency increase over the same time period in 2013. The company gained share during the quarter in this category in certain countries where its products are sold, and operating income increased sharply, including the shift, primarily reflecting higher-margin product launches from certain of the company’s heritage brands, as well as increased results from higher-end prestige skin care products.
Net sales in makeup for the quarter were $1.01 billion, up 10% on a reported basis and up 11% in local currency. Higher makeup sales primarily reflected strong growth from the company’s makeup artist brands and from recent launches, such as Pure Color Envy Sculpting Lipstick from Estée Lauder and All About Shadow from Clinique. Sales from makeup artist brands benefited from new product offerings, as well as expanded distribution in line with the company’s retail store strategy. The increase in makeup operating income primarily reflected improved performance from the company’s makeup artist brands due to the higher sales, and certain heritage brands.
In fragrance, strong sales growth (up 16% reported and in local currency, to $270.5 million for the quarter) came from luxury brands Tom Ford and Jo Malone. Sales gains were also generated from the recent launches of Estée Lauder Modern Muse, Tory Burch and the Michael Kors Fragrance Collection. Fragrance operating loss increased, due to the Venezuela remeasurement charge. Operating results also reflected higher net sales from recent launches, partially offset by higher investment spending.
Net sales for hair care were $120.8 million, up 4% reported and 5% in local currency. Hair care net sales growth was primarily driven by Aveda, reflecting gains in the salon channel and the continued success of its Dry Remedy and Damage Remedy franchises. Sales increased at Bumble and bumble, primarily due to higher sales to specialty multi-brand retailers. Ojon sales decreased, primarily due to its exit from the direct response television channel. The category growth also benefited from expanded global distribution, in particular to specialty-multi brand retailers for Bumble and bumble and to salons and travel retail for Aveda. Hair care operating income increased more than 100%, primarily reflecting higher net sales driven by expanded global distribution and new product launches, as well as lower investment spending.
In the Americas, net sales for the quarter were $1.07 billion, up 8% on a reported basis and up 10% in local currency. Net sales in the U.S. increased, reflecting growth from the company’s makeup artist and luxury brands and certain heritage brands. Sales also increased in Latin America and Canada, and sales of the company’s online business grew double digits. Operating income in the Americas rose, reflecting the increased sales and a more measured approach to spending. Additionally, operating income in the region reflects the charge of $38.3 million in the current-year period to remeasure net monetary assets in Venezuela.
Net sales were $959.4 million in the Europe, Middle East and Africa (EMEA) region, up 13% reported and 12% local currency. In constant currency, net sales increased in each major product category and in virtually all countries in the region, and the company estimates that it continued to outperform prestige beauty in many markets. The net sales increase was led by double-digit growth in a number of areas, including the United Kingdom, Germany, Switzerland, Turkey, France and Russia. Net sales growth in Switzerland and France were due, in part, to the accelerated retailer orders, as previously discussed. Certain European countries continued to experience soft retail environments. In travel retail, sales increased high-single digits, primarily reflecting higher sales from the company’s luxury brands, an increase in global airline passenger traffic and expanded distribution.Operating income increased, as higher results from the United Kingdom, Switzerland, France and Russia were partially offset by lower operating results in Spain and certain Eastern European countries.
The Asia/Pacific region saw the quarter’s net sales rise 14% reported and 18% in local currency to $518.4 million. Constant currency net sales increased in the majority of countries in the region. The strongest growth was generated in China, Japan, Hong Kong, Taiwan and Australia. The sales increase in China, Hong Kong and Taiwan reflect the shift in retailer orders, as previously discussed. Sales were lower in Thailand, Korea and the Philippines, but the company estimates that it gained share in certain countries within its points of distribution during the quarter. In Asia/Pacific, operating income increased, led by China, Japan, Korea and Taiwan. Results in China and Taiwan primarily reflect the impact from the accelerated retailer orders. Lower operating results were posted in Hong Kong and the Philippines.
For its outlook for the full fiscal 2014 year, the Estée Lauder Companies expects global prestige beauty to grow approximately 3–4%, tempered by continued softness in certain European countries and Korea, and slower near-term growth in China and the United States. The company also expects to further improve its gross and operating margins by leveraging its strong sales growth and continuing to reduce non-value-added costs. Additionally, net sales are forecasted to grow between 6–7% in constant currency, and foreign currency translation is expected to negatively impact sales by approximately 1% versus the prior-year period.