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

The Estée Lauder Companies Inc. reported financial results for the second quarter ended Dec. 31, 2010, that were sharply higher than the prior-year period. For the quarter, the company had net sales of $2.49 billion, a 10% increase compared with $2.26 billion reported in the prior year. Excluding the impact of foreign currency translation, net sales increased 11% from a year ago. Fabrizio Freda, president and CEO, said, "Our outstanding performance this holiday season demonstrates that we have the right strategies, product innovation and high-touch services in place for continued profitable growth. Consumers' appetite for our brands was fantastic and garnered strong sales and profit gains. We successfully leveraged our broad-based growth with meaningful improvements in operating margin over the prior-year quarter.

"As we continue our strategic journey, we are learning what has worked and what needs refinement. Throughout the year we will invest more resources in those areas that are winning and capable of generating sustainable, profitable growth. Our company's second-quarter results cap a strong fiscal 2011 first half, and we believe we are well positioned to achieve another successful year.”

During the quarter, the company's performance was better than anticipated, due to stronger overall holiday business, particularly from the company's largest brands, as well as from a weaker U.S. dollar. The company posted sales gains in each of its geographic regions and product categories. Sales growth was led by its international businesses, particularly in travel retail and emerging markets. These results reflect solid increases from higher-margin product launches and the positive impact of more effective advertising spending.

Product Categories

Skin Care. The skin care category is a strategic priority for the company, and skin care net sales grew in each of the company's regions. Across each region, the Estée Lauder brand had strong sales from the recent launches of Advanced Night Repair Eye Synchronized Complex and Re-Nutriv Ultimate Lift Age- Correcting Collection. Contributing to the increased sales were the successful recent launches of Even Better Clinical Dark Spot Corrector, Repairwear Laser Focus Wrinkle & UV Damage Corrector and All About Eyes Serum De-Puffing Night Massage from Clinique. The Regenerating Serum and The Eye Balm Intense, recent product launches from La Mer, as well as other successful products from La Mer, also contributed incremental sales. These sales gains were partially offset by lower sales from existing products.

Makeup. Makeup net sales grew in each geographic region. The majority of the sales increase came from the company's makeup artist brands, which included incremental sales from the acquisition of the Smashbox brand in July 2010. The higher makeup sales reflected increases across a broad range of products, such as the recent launches of new Pure Color eye products from Estée Lauder and Acne Solutions Liquid Makeup and Redness Solutions Makeup SPF 15 from Clinique. Partially offsetting these increases were lower sales of Prescriptives products, due to the brand's exit from global wholesale distribution after the prior-year period, and from existing products of other brands. Operating income increased, primarily reflecting improved results from certain of the company's heritage brands and from its makeup artist brands.

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.

Further information on this financial report is available here.


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