The Estée Lauder Companies Inc. reported net sales for its second quarter ended December 31, 2013 of $3.02 billion, a 3% increase compared with $2.93 billion in the prior-year quarter. Excluding the impact of foreign currency translation, net sales increased 4%. Net earnings for the quarter were $432.5 million, compared with $447.5 million last year.
Comparisons between the current fiscal year and the prior year second quarters were affected by the company’s accelerated sales orders shifted into the its fiscal 2013 second quarter from its third quarter in advance of the company’s January 2013 implementation of SAP as part of its Strategic Modernization Initiative (SMI). This amounted to approximately $94 million in sales and $78 million in operating income, equal to approximately $.13 per diluted common share. Excluding the impact of the shift and restructuring activities, net sales in local currency and operating income for the three months ended December 31, 2013 would have increased 7% and 11%, respectively.
Additionally, in the prior-year second quarter, the company amended the agreement related to the August 2007 sale of Rodan + Fields to receive a fixed amount in lieu of future consideration and other rights and, as a result, recognized $21.3 million as other income, equal to approximately $.04 per diluted common share.
Fabrizio Freda, president and CEO of The Estée Lauder Companies, said, “Our fiscal second quarter sales growth was in line with our expectations, despite softer than expected markets in some geographies. Earnings per share exceeded our forecast, due to strong results in several of our brands and high margin channels, as well as our ability to leverage costs. These results confirm that our business strategy is sound and effective. Adjusting for the accelerated sales orders in the prior year, our local currency sales increased more than 7%. Underscoring our sustainable growth is our strong and diverse portfolio of brands that is balanced by geography, product category and channel. Key drivers of our sales gains in the quarter were the United States and the United Kingdom, our luxury and makeup artist brands, and online and travel retail channels. These factors and continued strength overall in emerging markets more than compensated for soft results in certain European countries and solid but slowing Chinese market growth.
“Our strategy prioritizes the fastest growing areas of our business to drive top-line growth and increase profitability and margins. To achieve this, we plan to continue appropriate levels of targeted investment spending, while leveraging efficient cost management in other expense categories. At the same time, we will bring a steady flow of new products to market and increase brand awareness by further expanding digital and social media capabilities and high-touch in-store service innovation.
“With half of our year behind us, we are narrowing our full fiscal year sales estimate to 6–7% in local currency, reflecting softening in some key markets. At the same time, we are reaffirming our earnings per share estimate of $2.80–2.87 for the full fiscal year. Our forecast reflects our ability to leverage high growth opportunities while recognizing and navigating tougher environments to deliver our financial goals,” Freda concluded.
For company results by product category, the net overall change in net sales and operating income for the quarter was unfavorably impacted by the shift last year in orders from certain retailers, due to the company’s implementation of SAP, as previously mentioned, in the following product categories—net sales: skin care, approximately $48 million; makeup, approximately $32 million; fragrance, approximately $10 million; and hair care, approximately $4 million; and operating income: skin care, approximately $40 million; makeup, approximately $26 million; fragrance, approximately $9 million; and hair care, approximately $3 million.
Excluding the impact of the shift in orders reported net sales in skin care, makeup, fragrance and hair care would have increased 2%, 11%, 7% and 5%, respectively. And operating results in skin care, makeup, fragrance and hair care would have increased/(decreased) 7%, 24%, (12)% and 8%, respectively.
Specifically for skin care, net sales were $1.261 billion for the three months ended December 31, 2013, a 1% decrease from the same period in 2012 in reported currency and flat on a local basis. The skin care category is a strategic priority for The Estée Lauder Companies, and the company is well positioned to capitalize on its strong pipeline of innovative products. The company gained share during the quarter in this category in certain countries where its products are sold. Sales reflect the recent launches of the company’s new Advanced Night Repair Synchronized Recovery Complex II from Estée Lauder and Dramatically Different Moisturizing Lotion + from Clinique. Combined, sales from these launches were offset by lower sales of existing products. However, continued strong growth from the company’s luxury skin care brand La Mer was more than offset by lower sales of certain heritage brand products that were launched in the prior-year period. And operating income declined, including the shift, because of increased investment spending behind recent major product launches.
For makeup, net sales for the quarter were $1.129 billion, an 8% reported and local currency rise over the same time period in 2012. Higher makeup sales primarily reflected strong growth from the company’s makeup artist brands, certain product offerings from Estée Lauder and the recent launch of All About Shadow from Clinique. Also, increased sales from Smashbox and the Tom Ford line of cosmetics contributed to the category’s growth. The increase in makeup operating income primarily reflected improved performance from the company’s makeup brands.
Net sales for fragrance for the quarter were $477.8 million, a 4% reported and local currency rise over the same quarter in 2012. Sales increases were generated from the recent launches of Estée Lauder Modern Muse and the Michael Kors Fragrance collection. Higher fragrance sales were also generated from luxury brands Jo Malone, including its new Peony and Blush Suede fragrance, and Tom Ford. However, fragrance operating income decreased, as higher holiday marketing investments behind new launches were partially offset by the success and profitable progress of certain luxury brands.
And in hair care, net sales were $135.1 million, a 2% reported rise and a 3% local currency increase over the same period in 2012. Hair care net sales growth was driven by Aveda, reflecting gains in the salon channel and the continued success of its Invati line of products, as well as products in its Dry Remedy and Damage Remedy franchises. The category growth also benefited from expanded global distribution, in particular to specialty-multi retailers for Bumble and bumble and to salons for Aveda. Sales declined at Bumble and bumble, primarily due to lower salon sales. Ojon sales decreased, primarily due to its exit from the direct response television channel. And hair care operating income decreased, including the shift, due, in part, to additional investments related to expanded distribution and an increase in advertising expenses.
For the results by region, in the quarter, the net overall change in net sales and operating income in the company’s geographic regions was unfavorably impacted by the shift last year in orders from certain retailers as previously mentioned, as follows—net sales: the Americas, approximately $29 million; Europe, the Middle East & Africa, approximately $15 million; and Asia/Pacific, approximately $50 million; and operating income: the Americas, approximately $23 million; Europe, the Middle East & Africa, approximately $12 million; and Asia/Pacific, approximately $43 million.
Excluding the impact of the shift in orders, reported net sales in the Americas, Europe, the Middle East & Africa and Asia/Pacific would have increased 8%, 8% and 1%, respectively. Also, operating income in the Americas, Europe, the Middle East & Africa and Asia/Pacific would have increased 40%, 6% and 0%, respectively.
Net sales for The Americas for the quarter were $1.194 billion, a 5% reported increase and 6% rise in local currency. Net sales in the U.S. increased, reflecting growth from certain of the company’s makeup artist and luxury brands, partially offset by declines at certain heritage brands. Sales of the company’s online business also grew double digits. Double-digit sales growth was recorded in Latin America, due, in part, to price increases in Venezuela as a result of rising inflation, but net sales in Canada declined. Operating income in the Americas rose, reflecting the increased sales and a more measured approach to spending. Partially offsetting these higher results were an increase in investment spending and an adjustment made in the prior-year period related to the overstatement of accounts payable balances.
For the Europe, Middle East and Africa region, the net sales rose 7% reported and 6% local currency to $1.18 billion for the period. In constant currency, net sales increased in each product category and in the majority of countries in the region. The company estimates 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 company’s travel retail business, Russia, South Africa, Turkey and Israel, and high-single-digit growth in the U.K. Sales were lower in certain European countries where the retail environment continues to be challenging. Lower net sales in Switzerland, the Nordic countries and France were due, in part, to the accelerated retailer orders, as previously discussed. The company’s net sales growth in travel retail primarily reflected a stronger retail environment for the company’s products, particularly luxury brands, an increase in global airline passenger traffic and expanded distribution. And operating income increased, as higher results from the U.K., Russia, the company’s travel retail business, Israel and Iberia were partially offset by lower operating results in Switzerland and Italy.
And for Asia-Pacific, the company recorded sales of $643 million for the quarter, a 6% decrease reported and 3% decrease in local currency. Net sales decreased in the region, primarily reflecting lower local currency sales in China, Taiwan and Korea. The sales decline in China and Taiwan reflect the accelerated retailer orders, as previously discussed. The company’s strongest local currency growth was generated in Australia, Japan, Hong Kong and the Philippines. Net sales in China included sales to new consumers in expanded distribution in tier three cities and new skin care product launches. The lower sales in Korea reflected continuing difficult economic conditions and competitive pressures. The company expects to see continued weakness in prestige beauty in Korea, albeit at a more moderate pace. The company estimates that it gained share in certain countries, including China, within its points of distribution during the quarter. In Asia-Pacific, operating income declined, with China, Hong Kong and Taiwan reporting double-digit decreases, primarily reflecting the impact from the accelerated retailer orders. Lower operating results were also posted in Japan and Thailand, partially offset by higher results in Korea and Australia.
For the six months ended December 31, 2013, the company reported net sales of $5.69 billion, a 4% increase from $5.48 billion in the comparable prior-year period. Excluding the impact of foreign currency translation, net sales increased 5%. In local currency, net sales grew in each of the company’s geographic regions and major product categories. The company also reported net earnings of $733.2 million for the six months ended December 31, 2013, compared with $747 million in the same period last year.
In its outlook, the company noted it expects global prestige beauty to rise approximately 3% to 4%, tempered by continued weakness in certain European countries and Korea, as well as a slowing of the near-term growth trend in China and Hong Kong. The company continues to expect prestige beauty growth in the U.S., but at a slower pace than in fiscal 2013. Additionally, the company is monitoring the ongoing macroeconomic uncertainties in Venezuela and the potential devaluation of the bolivar fuerte, as well as unfavorable currencies in certain emerging countries. The company expects to further improve its gross and operating margins by leveraging its strong sales growth and successful advertising strategy, while continuing to reduce non-value-added costs.
The company expects its strong sales growth trend to continue throughout the remainder of the fiscal year. The company’s third quarter estimates reflect the cadence of innovation and related marketing spending, and the market softness mentioned above. Net sales are forecasted to grow between 10–11% in constant currency, and foreign currency translation is expected to negatively impact sales by approximately 1% to 2% versus the prior-year period.
Expectations for full year fiscal 2014 include net sales are forecasted to grow between 6% and 7% in constant currency, and foreign currency translation is expected to negatively impact sales by 1% to 2% versus the prior-year period.
The company also expects to roll out the last major wave of SMI in July 2014 in certain of its locations. As a result, some retailers may accelerate sales orders that the company believes would normally occur in its fiscal 2015 first quarter into the fiscal 2014 fourth quarter, in advance of this implementation to provide adequate safety stock to mitigate any potential short-term business interruption associated with the SMI rollout. The company’s fiscal 2014 full year outlook does not include the impact of this potential shift. The company will provide an estimate of the sales and operating income impact of the shift when it reports its fiscal third quarter results.