The Estée Lauder Companies Inc. reported a solid financial performance for its third quarter ended March 31, 2012. For the quarter, the company had net sales of $2.25 billion, a 4% increase compared with $2.17 billion reported in the prior-year quarter. Excluding the impact of foreign currency translation, net sales increased 5%. The company also reported net earnings for the quarter of $130.4 million, a 5% increase compared with $124.7 million last year.
In the second quarter of fiscal 2012, some retailers, primarily in Asia/Pacific, accelerated their orders in advance of the company’s January 2012 implementation of SAP at certain of its locations and brands. Those additional orders amounted to approximately $30 million in sales that would have likely occurred in the company’s fiscal 2012 third quarter. Additionally, the company’s fiscal 2011 third quarter included approximately $42 million of sales resulting from accelerated orders, primarily by retailers in Europe, in advance of the company’s April 2011 implementation of SAP at certain of its locations. Combined, these actions created a difficult comparison between the fiscal 2012 third quarter and the fiscal 2011 third quarter of approximately $72 million in sales and $54 million in operating income, equal to $.09 per diluted common share. Additionally, in the current third quarter, the company established a provision for anticipated returns of approximately $16 million as a result of repositioning certain products due to changes in regulations related to sunscreen products in the United States, which reduced net sales growth by approximately 70 basis points.
Fabrizio Freda, Estée Lauder Companies’ president and CEO, said, “Our third quarter sales came in slightly ahead of our forecast and, importantly, we were able to leverage part of that growth into an overachievement of earnings per share. Driving our performance are focused investments on our distinctive product innovations, supported by strong creative capabilities and elevated high-touch services. These elements provide a foundation for continuous growth and, coupled with cost savings and productivity improvements, increased and sustainable profitability. On the strength of our brands, we posted across-the-board sales gains in our regions, strong skin care growth and increases in most channels, while further generating substantial gross margin improvements. Our outlook for the balance of the year remains positive, giving us the confidence that for the full fiscal year we will achieve double-digit local currency sales growth and the ability to raise our full-year earnings per share estimate, before restructuring charges, to $2.21 to $2.26.”
The company’s performance was due to solid overall business, particularly from its largest brands. The company reported sales gains in every region, including strong skin care growth within each region. Sales growth in other product categories in each region was mixed. Sales growth was particularly strong in travel retail and emerging markets, along with solid gains in several developed countries.
During the quarter, the company made substantial progress on its previously stated strategic goals, with a strong improvement in cost of sales as a percentage of net sales. All product categories and geographic regions benefited from companywide efforts to reduce or eliminate non-value added costs. In connection with the long-term strategic plan and certain ongoing initiatives, the company realized savings of $40 million during the quarter. As a percentage of net sales, advertising, merchandising and sampling expenses increased to support the company’s biggest innovations. Gross margin expanded 140 basis points, while operating margin remained unchanged, before restructuring charges.
By product category, net sales and operating income for the quarter were unfavorably impacted by the shifts in orders from certain retailers due to the company’s implementation of SAP, as previously mentioned. For skin care, the company reported net sales of approximately $32 million; makeup, approximately $26 million; fragrance, approximately $8 million; hair care, approximately $5 million; other, approximately $1 million. For operating income, skin care clocked in at approximately $24 million; makeup, approximately $19 million; fragrance, approximately $6 million; hair care, approximately $4 million; other, approximately $1 million. Excluding the impact of the shifts in orders, reported net sales in skin care, makeup, fragrance and hair care would have increased 13%, 3%, 3% and 5%, respectively, and operating results in skin care, makeup, fragrance and hair care would have increased/(decreased) 35%, (16%), 43% and over 100%, respectively.
In the quarter, net sales and operating income in the company’s geographic regions were unfavorably impacted by the shifts in orders from certain retailers due to the company’s implementation of SAP, as previously mentioned. Net sales for the Americas were at approximately $2 million; Europe, the Middle East & Africa, approximately $39 million; and Asia-Pacific, approximately $31 million. Operating income for the Americas was approximately $1 million; Europe, the Middle East & Africa, approximately $29 million; and Asia-Pacific, approximately $24 million. Excluding the impact of the shifts in orders, reported net sales in the Americas, Europe, the Middle East & Africa and Asia-Pacific would have increased 5%, 9% and 9%, respectively, and operating income in the Americas, Europe, the Middle East & Africa and Asia-Pacific would have increased 60%, 15% and 26%, respectively.
Regarding the company’s outlook for the fiscal 2012 fourth quarter and full year, the company has benefitted from the strength in global prestige beauty, particularly in North America, China and travel retail and expects this positive industry trend to continue. The company’s growth has outpaced prestige beauty and should continue to grow faster than the industry. Certain European countries, Japan and Australia are soft due to ongoing economic uncertainties and volatility in financial markets. The company has been able to offset to some extent the impact of these factors, demonstrating its ability to grow ahead of global prestige beauty in both soft and strong environments. During the remainder of fiscal 2012, the company will continue to execute its winning strategy and expects continued solid results.
Specifically, in the context of its strategy, during the remainder of fiscal 2012, the company expects to further increase global advertising spending on winning brands, new initiatives, impactful product launches and successful existing products. The company’s strong performance has enabled it to substantially increase year-over-year global advertising, while still significantly improving its operating margin. The increased advertising spend is financed by fewer promotions, non-value added cost reductions, as well as mix improvements. The Company believes its successful advertising pull strategy will continue to stimulate and sustain its growth.
Additionally, the company will continue its planned investment behind its strategic modernization initiative, including the rollout of SAP and upgraded capabilities to support its human resources and retail operations, which is part of a broader plan to modernize the company’s systems and infrastructure.