The Estée Lauder Companies First Quarter Sales Rise 6% in Local Currency

The Estée Lauder Companies Inc. (NYSE:EL) today reported net sales for its first quarter ended September 30, 2013 of $2.68 billion, a 5% increase compared with $2.55 billion in the prior-year quarter. Excluding the impact of foreign currency translation, net sales increased 6%. Net earnings for the quarter were $300.7 million, compared with $299.5 million last year and diluted net earnings per common share were $.76, which was flat with the prior year.

The fiscal 2014 and 2013 first quarter results included charges associated with restructuring activities of $1.2 million and $0.4 million, respectively. Additionally, in the fiscal 2013 first quarter, the Company recorded a pre-tax charge of $19.1 million ($12.2 million after tax), for the extinguishment of debt, equal to $.03 per diluted common share.

Excluding these charges in the first quarters of fiscal 2014 and 2013, net earnings for the three months ended September 30, 2013 were $301.6 million, and diluted net earnings per common share were $.76, versus a comparable $.79 in the prior-year period. A reconciliation between GAAP and non-GAAP financial measures is included in this release.

Fabrizio Freda, President and Chief Executive Officer, said, “I’m pleased that our sales growth was in line with our target and we exceeded our earnings per share estimate for the quarter, despite softer-than-expected market conditions in certain countries. We achieved these results on the strength of our brands, many of which have introduced successful new innovations that we have supported with strong marketing programs. Our luxury brands, online and travel retail channels, and emerging markets continued to generate excellent results, lead our growth and contributed to broad sales gains in each of our geographic regions and major product categories.

“Looking ahead, we are well positioned for the important holiday shopping period, with the strongest slate of new fragrances in more than a decade, as well as other innovative products across our categories. We are focused on achieving superior top-line growth by driving sales momentum throughout the fiscal year with our product and service innovations, backed by creativity, product quality and comprehensive marketing programs. For the full fiscal year, we continue to expect to grow sales 6% to 8% in local currency, which is double our global prestige beauty estimate, and we are revising our earnings per share estimate to $2.80 to $2.87, after taking up the bottom of the range.”

Net sales growth during the quarter was particularly strong in the Company’s luxury and M•A•C brands, online and travel retail channels and overall in emerging markets. Many developed countries reported solid gains as well. The Company made further progress on its strategic goals and realized a solid improvement in cost of sales. As planned, the Company increased global advertising spending versus the prior-year quarter to support its biggest innovations and certain existing products.

Skin Care

• The skin care category is a strategic priority for the Company. The Company gained share during the quarter in this category in certain countries where its products are sold.
• Sales gains reflect the launches of the Company’s new Advanced Night Repair Synchronized Recovery Complex II from Estée Lauder and Dramatically Different Moisturizing Lotion + from Clinique, as well as the recent launch of Advanced Night Repair Eye Serum Infusion from Estée Lauder.
• Continued strong growth from the Company’s luxury skin care brand, La Mer, also contributed to sales growth.
• Operating income declined, because of increased investment spending behind recent major product launches to accelerate sales growth, as well as new capabilities.

Makeup

• Higher makeup sales primarily reflected strong growth from the Company’s makeup artist brands and the recent launch of All About Shadow from Clinique.
• 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 M•A•C brand, partially offset by certain heritage brands.

Fragrance

• In fragrance, sales increases were generated from the recent launches of Estée Lauder Modern Muse, Zegna Uomo and Michael Kors Sexy Amber. Higher fragrance sales were also generated from luxury brands Jo Malone, including its new Peony and Blush Suede fragrance, and Tom Ford.
• Fragrance operating income decreased, as higher marketing investments behind new launches were partially offset by the success and profitable progress of certain luxury brands.

Hair Care

• Hair care net sales growth was driven by Aveda, reflecting the continued success of its Invati line of products. The launch of Dryspun Finish from Bumble and bumble added incremental sales.
• 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 Ojon due, in part, to its exit from the direct response television channel, which is expected to be completed by the second quarter of fiscal 2014.
• Hair care operating results decreased, due, in part, to additional investments related to expanded distribution and an increase in advertising expenses during the current-year period.

The Americas

• Net sales in the United States increased moderately, reflecting growth from certain of the Company’s luxury, makeup artist, hair care and designer fragrances brands, partially offset by declines at certain heritage brands.
• Double-digit sales growth was recorded in Latin America, and net sales in Canada also increased.
• Sales to specialty-multi stores rose high-single digits, and the Company’s online business grew double-digits.
• Operating income in the Americas decreased, reflecting the planned higher marketing spending during the current-year period to support major product launches. The decrease also reflected lower sales on some base business in certain heritage brands in softer markets.

Europe, the Middle East & Africa

• In constant currency, net sales increased in the majority of 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 high-single-digit growth in the Company’s travel retail business and double-digit growth in the United Kingdom and Switzerland. Germany and France generated solid growth, while sales in Southern Europe, where the retail environment continues to be challenging, were relatively flat.
• The Company’s net sales growth in travel retail primarily reflected a stronger retail environment for the Company’s products, particularly luxury brands, and to a lesser extent, an increase in global airline passenger traffic.
• Operating income decreased, as higher results from the Company’s travel retail business and the Balkans were more than offset by lower operating results in most other countries, primarily due to increases in investment spending for recent major launches and initial costs associated with freestanding retail store expansion.

Asia/Pacific

• In the region, every country posted net sales increases except Korea. The Company’s strongest local currency growth was generated in China, Hong Kong and Taiwan, each posting strong double-digit increases.
• Results in China included sales to new consumers in expanded distribution in tier two, three and four cities and new skin care product launches. Sales at retail continued to grow strong double-digits.
• 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.
• 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 increased slightly, with higher results, primarily from China, Taiwan and Hong Kong, being partially offset by lower operating results in Japan and Vietnam.

Cash Flows

• For the three months ended September 30, 2013, net cash flows provided by operating activities were $29.9 million, compared with $125.2 million of net cash flows used for operating activities in the prior year.
• The change primarily reflected a net increase in cash from certain working capital components.

Outlook for Fiscal 2014 Second Quarter and Full Year

The Company continues to expect global prestige beauty to rise approximately three to four percent, tempered by continued weakness in certain Southern European countries and Korea. The Company continues to expect beauty market growth in the U.S., but at a slower pace than in fiscal 2013. The Company expects to further improve its gross and operating margins by leveraging its strong sales growth and maintaining its successful pull advertising strategy, while continuing to reduce non-value added costs.

Second Quarter Fiscal 2014

• Net sales are forecasted to grow between 3% and 5% in constant currency.
• Foreign currency translation is expected to negatively impact sales by approximately 1% versus the prior-year period.
• The Company expects to increase advertising spending in the quarter to support major new product launch activity, including fragrances during the important holiday period, which is expected to continue to build sales momentum in the coming quarters.
• Diluted net earnings per share are projected to be between $.99 and $1.04.
• Comparisons with the current fiscal year second quarter will be affected by certain events/items that took place in the second quarter last year, including: The accelerated sales orders shifted into the Company’s fiscal 2013 second quarter from its third quarter in advance of the Company’s January 2013 implementation of SAP. This amounted to approximately $94 million in sales and about $78 million in operating income, equal to approximately $.13 per diluted common share. Adjusting for the shift, sales growth for the fiscal 2014 second quarter is expected to be between 6% and 8% in local currency.
  Additionally, in December 2012, 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 in other income, equal to approximately $.04 per diluted common share.

Full Year Fiscal 2014

• Net sales are forecasted to grow between 6% and 8% in constant currency.
• Foreign currency translation is expected to negatively impact sales by between 1% to 2% versus the prior-year period.
• Diluted net earnings per share are now projected to be $2.80 to $2.87, increasing the mid-point of the range. The 1% to 2% negative currency impact on the sales growth equates to about $.07 of earnings per share.

The Company expects to roll out the last major wave of its Strategic Modernization Initiative (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 Company’s 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. As the Company gets closer to its fiscal fourth quarter, it will provide an estimate of the sales and operating income impact of the shift.

Conference Call

The Estée Lauder Companies will host a conference call at 10:00 a.m. (ET) today, October 31, 2013 to discuss its results. The dial-in number for the call is 888-294-4716 in the U.S. or 706-902-0101 internationally (conference ID number: 78520821). The call will also be webcast live at http://investors.elcompanies.com.

Forward-Looking Statements

The forward-looking statements in this press release, including those containing words like “expect,” “plans,” “may,” “could,” “anticipate,” “estimate,” “projected,” “forecasted,” those in Mr. Freda’s remarks and those in the “Outlook for Fiscal 2014 Second Quarter and Full Year” section involve risks and uncertainties. Factors that could cause actual results to differ materially from those forward-looking statements include the following:

The Estée Lauder Companies Inc. is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company’s products are sold in over 150 countries and territories under the following brand names: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M•A•C, Bobbi Brown, Tommy Hilfiger, Kiton, La Mer, Donna Karan, Aveda, Jo Malone, Bumble and bumble, Darphin, Michael Kors, American Beauty, Flirt!, GoodSkin Labs, Grassroots Research Labs, Tom Ford, Coach, Ojon, Smashbox, Ermenegildo Zegna, Aerin Beauty, Osiao, Marni and Tory Burch.

An electronic version of this release can be found at the Company’s website, www.elcompanies.com.

This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring activities and the extinguishment of debt. The following is a reconciliation between the non-GAAP financial measures and the most directly comparable GAAP measure for certain consolidated statements of earnings accounts before and after the charges associated with restructuring activities and the extinguishment of debt. The Company uses these non-GAAP financial measures, among other things, to evaluate its operating performance and the measures represent the manner in which the Company conducts and views its business. Management believes that excluding these items that are special in nature or that are not comparable from period to period helps investors and others compare operating performance between two periods. While the Company considers the non-GAAP measures useful in analyzing its results, it is not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with GAAP.

The Company operates on a global basis, with the majority of its net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect the Company’s results of operations. Therefore, the Company presents certain net sales information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of its underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency information by translating current-period results using prior-year period weighted average foreign currency exchange rates.