The Estée Lauder Companies, Exceeding Expectations

The Estée Lauder Companies Inc last week reported net sales for its second quarter ended December 31, 2014 of $3.04 billion, a 1% increase, compared with $3.02 billion in the prior-year quarter. Net earnings for the quarter were $435.7 million, compared with $432.5 million last year and diluted net earnings per common share increased 3% to $1.13, compared with $1.09 in the prior year. For the quarter, the negative impact of foreign currency translation on diluted net earnings per common share was $.07. Excluding the impact of foreign currency translation, net sales increased 5% and diluted net earnings per common share increased 10%, which reflects a reduction in the Company’s effective tax rate.

Fabrizio Freda, President and Chief Executive Officer, said, “Our successful performance this quarter reflected solid global demand for our brands, including a strong holiday season. Our results further demonstrate our ability to grow despite currency headwinds and softness in several countries. For the quarter, our sales and profits came in higher than planned as we continued to leverage our diverse growth engines and capitalized on high-growth opportunities, which translated into excellent results in several of our higher-margin brands and channels, while efficiently managing costs. Key drivers of our performance were the United Kingdom and emerging markets, our makeup and luxury brands, and online, specialty-multi and freestanding store channels».

We began the second half of our fiscal year by successfully completing the acquisitions of Editions de Parfums Frédéric Malle and Glamglow. These brands, along with Rodin olio lusso and Le Labo, which we purchased last quarter, complement our portfolio in skin care and luxury fragrance and further strengthen our long-term strategic growth plan.

“Our second half plans call for an acceleration of sales and profit growth supported by a strong innovation pipeline and current product successes, improving trends in our large heritage brands, emerging markets and our high-growth channels and brands. With the agility we have created, we will continue to strategically invest in growth opportunities, even in the face of softness and challenges in certain markets. With half of the year behind us, we are reaffirming our full fiscal year constant currency net sales growth estimate of 5% to 6% and earnings per share of 7% to 10%, excluding the effect of the retailer orders accelerated into fiscal 2014 from the rollout of our Strategic Modernization Initiative”.

In addition to net sales, the change in operating income in each of the Company’s product categories was unfavorably impacted by the strength of the U.S. dollar in relation to certain currencies. Total operating income in constant currency increased 2%.

Skin Care

• Skin care net sales increased, reflecting the recent launches of Advanced Night Repair Eye Synchronized Complex II and Re-Nutriv Ultimate Diamond from Estée Lauder, as well as the Clinique Smart custom-repair serum and the Clinique Sonic System Purifying Cleansing Brush. Also contributing to sales were recent product launches from the Company’s luxury skin care brand, La Mer.
• The skin care category was up against a difficult comparison with the prior-year period, which featured significant launches of reformulated iconic products from certain of the Company’s heritage brands, including Advanced Night Repair products from Estée Lauder and Dramatically Different Moisturizing Lotion+ from Clinique.
• Operating income decreased, primarily reflecting lower sales from certain heritage brands.

Makeup

• 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 and Perfectionist makeup from Estée Lauder.
• Sales from makeup artist brands benefited from new product offerings, as well as expanded distribution in a number of channels, including freestanding stores.
• Sales in the category also reflect strong double-digit growth from Smashbox and the Tom Ford line of cosmetics.
• The increase in makeup operating income primarily reflected improved results from makeup artist brands, partially offset by lower results from our heritage brands.

Fragrance

• In fragrance, sales decreased, primarily reflecting lower sales of certain Estée Lauder fragrances, as well as certain designer fragrances.
• Partially offsetting these lower sales were the recent launches of Jo Malone Wood Sage & Sea Salt, DKNY MYNY and Tom Ford Velvet Orchid.
• Fragrance operating income decreased, reflecting the lower sales, partially offset by higher results from the Company’s luxury fragrance brands, as a result of new product launches and expanded distribution.

Hair Care

• The hair care category’s growth benefited from expanded global distribution, primarily in salons, department stores and travel retail for Aveda and from specialty-multi brand retailers for Bumble and bumble.
• Hair care net sales growth also reflects the recent launches of Smooth Infusion Naturally Straight by Aveda and the expansion of Bumble and bumble’s Hairdresser’s Invisible Oil line of products.
• 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 strategically lower investment spending.