The Estée Lauder Companies Reports Fiscal 2023 Third Quarter Results

Net Sales Decreased 12% and Diluted EPS Declined 72% to $.43

Organic Net Sales1 Decreased 8% and Adjusted Diluted EPS Fell 74% in Constant Currency

Overall Results Impacted by Slower Asia Travel Retail Recovery while Nearly All Markets
Delivered Net Sales Growth Ahead of Expectations

Lowering Full-Year Outlook to Reflect More Gradual Recovery in Asia Travel Retail

Focused on Accelerating Balanced Growth Post-Pandemic

The Estée Lauder Companies Inc. (NYSE: EL) today reported net sales of $3.75 billion for its third quarter ended March 31, 2023, a decline of 12% from $4.25 billion in the prior-year period, including the negative impact from foreign currency. Organic net sales fell 8%, primarily driven by Asia travel retail in Hainan and Korea. Partially offsetting the pressures affecting the Company’s Asia travel retail business, organic net sales grew in nearly every market, including the developed markets of the United States, the United Kingdom and Hong Kong, and in emerging markets globally. The Fragrance category grew double digits.

The Company reported net earnings of $156 million, compared with net earnings of $558 million in the prior-year period2. The Company’s reported effective tax rate was 44.6% in the quarter, compared to 18.5% in the prior-year period. The increase in rate was primarily due to the expected change in the Company’s geographical mix of earnings for fiscal 2023. Diluted net earnings per common share was $.43, compared with $1.53 reported in the prior-year period. Excluding restructuring and other charges and adjustments as detailed on page 3, adjusted diluted net earnings per common share declined 75% to $.47, decreasing 74% in constant currency. The reported and adjusted declines include a negative impact of 3% from certain foreign currency transactions in key international travel retail locations.

Fabrizio Freda, President and Chief Executive Officer said, “In the context of a quarter which we anticipated to be challenging, we are pleased to have delivered the high-end of our outlook for the third quarter of fiscal 2023. Our developed and emerging markets grew strongly and exceeded our expectations to offset an even slower-than-expected recovery in Asia travel retail. Each of The Americas and Asia/Pacific returned to organic sales growth, bolstered by increases in the United States and China, while the markets of EMEA continued to prosper. Moreover, we continued to grow our prestige beauty share in many markets, including a sequential acceleration in gains in China and Western Europe.

“As the shape of recovery from the pandemic for Asia travel retail comes into better focus, it is proving to be both far more volatile than we expected and more gradual relative to what we experienced in other regions. We are, therefore, lowering our organic sales and EPS outlook for fiscal 2023 to reflect significantly greater headwinds in our fourth quarter than we expected in February.”

Freda concluded, “While we work through the serious but we believe temporary headwinds facing Asia travel retail, we are encouraged by the strong momentum in the rest of our business. Indeed, consumer demand is robust for our diverse portfolio of brands in developed and emerging markets around the world, evidenced in both organic sales growth and retail sales trends, which drives our confidence in the long-term. What is more, we are thrilled to have acquired the TOM FORD brand last week and are optimistic about its promising growth opportunities.”

Business Update
During the fiscal 2023 third quarter, the phase and pace of recovery from the COVID-19 pandemic continued to vary across markets globally. In the West, in both developed and emerging markets, the momentum of post-COVID recovery growth continued with strong organic net sales performance in The Americas and markets in Europe, the Middle East & Africa, excluding travel retail. In Asia/Pacific, markets emerged from COVID restrictions more gradually and over a longer period of time, compared to the pace of recovery experienced in the West. These markets continued to evolve in recovery during the fiscal 2023 third quarter, evidenced by strong organic net sales growth in nearly all Asia/Pacific markets.

While the Company saw recovery in many markets globally, its Asia travel retail business continued to be pressured by the slower than anticipated recovery from the COVID pandemic. Specifically, in Hainan, while traffic into the island exceeded prior year levels, conversion of travelers to consumers in prestige beauty lagged. This led to the slower than anticipated depletion of elevated levels of retailer inventory and, therefore, lower replenishment orders. In Korea, the shipments to duty free retailers were pressured owing to the transition to post-COVID regulations as traveling consumers gradually return. In Korea, as well as in Asia more broadly, the travel retail recovery was challenged by the slower than anticipated resumption of international flights, granting of visas, and organized group tours.

In mainland China, organic net sales grew in the fiscal 2023 third quarter. While January 2023 was pressured by low retail traffic and retailer destocking from the rise in COVID cases that began in November 2022 and continued into January 2023, organic net sales returned to growth, rising double digits in February and March 2023. However, prestige beauty growth was slower than expected for the fiscal 2023 third quarter.

Finally, the Company’s business also continued to be pressured by the strong U.S dollar, historically high inflation and recession concerns.

Fiscal 2023 Third Quarter Results
Reported net sales decreased 12%, including the impact of the license terminations related to certain of the Company’s designer fragrances and the negative impact from foreign currency translation.

Adjusted diluted net earnings per common share excludes restructuring and other charges and adjustments as detailed in the following table.

Net sales in the Company’s product categories and regions and operating income in most of its product categories and regions were unfavorably impacted by a stronger U.S. dollar in relation to most currencies. Reported net sales was negatively impacted by 3% of foreign currency translation, primarily reflecting a negative impact in Asia/Pacific of 7%. In addition, reported and organic net sales were negatively impacted by 1% from foreign currency transactions in key international travel retail locations, with a negative impact in Europe, the Middle East & Africa of 2%.

Total reported operating income was $297 million, a 60% decrease from $738 million in the prior-year period. In constant currency, adjusted operating income decreased 65%, primarily reflecting lower net sales and higher cost of sales, and excludes the following items:

• Fiscal 2023 third quarter: $19 million restructuring and other charges and adjustments.
• Fiscal 2022 third quarter: $216 million of other intangible asset impairments related to Dr.Jart+ and GLAMGLOW and $23 million of restructuring and other charges, partially offset by $60 million of income related to the change in fair value of acquisition-related stock options.
• The unfavorable impact of foreign currency translation of $9 million.

The product category net sales commentary below reflects organic performance, excluding the negative/(positive) impacts which are reflected in the preceding table.

Skin Care

• Skin Care net sales declined 17%, primarily reflecting the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic. This included lower shipments to retailers in Hainan due to lower conversion of travelers to consumers and the slower than anticipated depletion of elevated levels of retailer inventory, as well as lower shipments to Korean duty free retailers primarily due to the transition to post-COVID regulations as traveling consumers gradually return. In Korea and Asia more broadly, the travel retail recovery was challenged by the slower than anticipated resumption of international flights, granting of visas, and organized group tours. Net sales declined from La Mer, Estée Lauder and Dr.Jart+, partially offset by growth from The Ordinary and M·A·C.
• Net sales from La Mer, Estée Lauder and Dr.Jart+ declined, primarily reflecting the aforementioned challenges in Asia travel retail.
• Net sales from The Ordinary grew strong double digits compared to the prior-year period, primarily reflecting growth across every region and benefiting from continued strength from hero products, successful innovation, such as the Multi-Peptide Eye Serum, and the brand’s launch into India and the Middle East in fiscal 2023.
• M·A·C net sales more than doubled, fueled by the successful launch of the Hyper Real franchise line of products in the fiscal 2023 third quarter.
• Skin Care operating income decreased, primarily reflecting the decline in net sales from Asia travel retail, an increase in cost of sales and the unfavorable impact from the change in fair value of acquisition-related stock options compared to the prior year, partially offset by the prior year other intangible asset impairments of $216 million relating to Dr.Jart+ and GLAMGLOW. The increase in cost of sales included the unfavorable impacts from obsolescence charges and promotional items.

Makeup

• Makeup net sales were virtually flat to the prior-year period, reflecting growth in most markets as they continued to evolve in recovery and as usage occasions increased, offset by the challenges and the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic. Net sales declined from Estée Lauder, partially offset by growth from M·A·C, Clinique and TOM FORD Beauty.
• Net sales from Estée Lauder were negatively impacted by the aforementioned challenges in Asia travel retail.
• M·A·C net sales growth reflected continued success from hero products and recent launches, particularly in the face and lip subcategories. The increase in net sales also reflected the benefit from changes to the brand’s take back loyalty program made in the fiscal 2023 second quarter.
• Net sales from Clinique rose double digits, benefiting from solid performance in the lip, concealer and eye subcategories.
• Double-digit net sales growth from TOM FORD Beauty reflected strength from products in the lip subcategory, including Lip Color Satin Matte and Soleil Lip Blush.
• Makeup operating income decreased, primarily reflecting an increase in cost of sales, including obsolescence charges, and the decrease in net sales from Asia travel retail.

Fragrance

• Fragrance net sales grew double digits, reflecting strong growth in every region and double-digit growth from TOM FORD Beauty, Le Labo and Estée Lauder.
• Net sales from TOM FORD Beauty rose double digits, reflecting growth in hero franchises like Ebene Fume and Ombre Leather and successful innovation, such as TOM FORD Noir Extreme Parfum and the fiscal 2023 third quarter launch of The Private Blend Cherry Collection.
• Strong double-digit growth from Le Labo was fueled by growth in every region and virtually all channels of distribution, primarily due to the continued consumer demand for the brand’s hero product franchises, such as Santal 33 and Another 13, and high-touch services, as well as targeted expanded consumer reach.
• Estée Lauder net sales grew double digits, driven by the success from existing product franchises, such as Beautiful and Estée Lauder Pleasures.
• Fragrance operating income decreased, driven primarily by an increase in cost of sales, including the change in brand mix.

Hair Care

• Hair Care net sales increased 3%, reflecting growth from The Ordinary’s hair care products, partially offset by a decline from Aveda.
• Aveda net sales declined, driven by softness in North America, partially offset by the launch of the brand in mainland China and growth in Europe, the Middle East & Africa.
• Hair Care operating results decreased, reflecting an increase in cost of sales, including obsolescence charges.

The geographic region net sales commentary below reflects organic performance, excluding the negative impacts which are reflected in the preceding table.

The Americas

• Net sales rose 6%, returning to growth and benefiting from increases in Makeup, Skin Care and Fragrance.
• Net sales in North America grew mid-single-digits, driven by the United States, reflecting growth in Skin Care, Makeup and Fragrance owing to double-digit growth from The Ordinary, M·A·C and Le Labo.
• In Latin America, net sales rose strong double digits, fueled by growth in every country as well as in all major categories, led by the Makeup and Fragrance categories.
• Operating income in The Americas decreased, primarily reflecting $338 million of lower intercompany royalty income due to the decline in income from the Company’s travel retail business. The decrease also reflects higher cost of sales, including obsolescence charges and changes in the mix of business.

Europe, the Middle East & Africa

• Net sales declined 24%, due to the slower than anticipated recovery of Asia travel retail from the COVID-19 pandemic, partially offset by growth in virtually all markets, led by the United Kingdom and Germany.
• Global travel retail net sales decreased double digits, reflecting the aforementioned challenges that led to lower product shipments primarily to retailers in Hainan and Korea. Travel retail net sales grew strong double digits in Europe, the Middle East & Africa and The Americas, benefiting from the increase in domestic and international travel compared to the prior-year period.
• Net sales rose double digits in the United Kingdom, fueled by strong growth in Skin Care, led by The Ordinary, Estée Lauder and Clinique, as well as the progression of recovery in Makeup as usage occasions returned. Double-digit net sales growth in Germany reflected double-digit growth in each major product category, powered by Estée Lauder, M·A·C, Clinique and TOM FORD Beauty owing to strong demand for hero products and successful innovation.
• Net sales rose in nearly all emerging markets in the region3.
• Operating income decreased, driven by the decline in net sales, partially offset by $338 million of lower intercompany royalty expense due to the decline in income from the Company’s travel retail business.

Asia/Pacific

• Net sales grew 7%, driven by the ongoing recovery from eased COVID-related restrictions compared to the prior-year period, led by Hong Kong, Australia, Japan and mainland China. This was somewhat offset by the slower than anticipated recovery of Dr.Jart+ travel retail in Korea from the COVID-19 pandemic.
• Net sales in Hong Kong doubled, benefiting from the reopening of borders, the resumption of travel and the return of brick-and-mortar traffic.
• Net sales in Australia rose strong double digits, reflecting the return of brick-and-mortar traffic and benefiting from double-digit growth in each of the major product categories.
• Double-digit net sales growth in Japan reflected the ongoing recovery from eased COVID-related restrictions compared to the prior-year period.
• Net sales in mainland China returned to growth, reflecting double-digit increases in February and March 2023, partially offset by the decline in January 2023 due to the impact from the increase in the number of COVID cases, including slower brick-and-mortar traffic.
• Nearly all emerging markets in Asia/Pacific4 grew double digits.
• Operating income increased, driven by the prior-year period other intangible asset impairment of $205 million related to Dr.Jart+, partially offset by an increase in cost of sales, including promotional items, and the decrease in net sales.

Nine-Months Results

• For the nine months ended March 31, 2023, the Company reported net sales of $12.30 billion, a 13% decrease compared with $14.18 billion in the prior-year period. Organic net sales decreased 8%.
• Net earnings5 were $1.04 billion, and diluted earnings per share was $2.88. In the prior year nine months, the Company reported net earnings of $2.34 billion and diluted earnings per share of $6.39.

• During the nine months ended March 31, 2023, the Company recorded restructuring and other charges, other intangible asset impairments, and change in fair value of acquisition-related stock options, that, combined, resulted in an unfavorable impact of $238 million ($182 million less the portion attributable to redeemable noncontrolling interest and net of tax), equal to $.50 per diluted share, as detailed on page 15. The prior-year period results include restructuring and other charges, other intangible asset impairments, change in fair value of acquisition-related stock options, and other income related to a gain on a previously held equity investment in Deciem Beauty Group Inc. that, combined, resulted in an unfavorable impact of $201 million ($151 million less the portion attributable to redeemable noncontrolling interest and net of tax), equal to $.41 per diluted share.
• Excluding restructuring and other charges and adjustments referred to in the previous bullet, adjusted diluted net earnings per common share for the nine months ended March 31, 2023 was $3.38, and declined 47% in constant currency. For the nine months ended March 31, 2023, diluted earnings per common share included the unfavorable impacts of foreign currency translation and foreign currency transactions in key international travel retail locations of $.23 and $.26, respectively.

Cash Flows

• For the nine months ended March 31, 2023, net cash flows provided by operating activities were $1.02 billion, compared with $1.97 billion in the prior-year period. This reflects lower earnings before taxes, excluding non-cash items, partially offset by lower working capital.
• Capital Expenditures were $652 million, virtually flat to the prior year.
• The Company ended the quarter with $5.53 billion in cash and cash equivalents after returning $0.95 billion cash to stockholders through dividends and share repurchases. This includes $2.23 billion from the issuance of commercial paper, most of which was issued at various times throughout the quarter.
• On April 28, 2023, the Company completed the acquisition of the TOM FORD brand. The amount paid by the Company at closing, approximately $2.25 billion, was funded by cash on hand and proceeds from the issuance of commercial paper, and approximately $250 million received from Marcolin S.p.A. (a continuing TOM FORD licensee). An additional aggregate amount of $300 million in deferred payments, at 5% interest per annum, to the sellers becomes due from the Company beginning in July 2025.

Outlook
The Company expects organic net sales to return to growth in the fourth quarter, reflecting continued momentum of post-COVID recovery growth in nearly all markets globally. The impacts from the ongoing pressures in Asia travel retail, driven primarily by risks associated with the volatile and slower than originally anticipated pace of recovery, are expected to partially offset the growth in other markets.

The Company remains focused on accelerating balanced growth post-pandemic and optimistic about the prospects and future growth in global prestige beauty. Notwithstanding this difficult environment, the Company plans to continue to invest in its business to support recovery, share gains and long-term growth, including strategic investments in advertising, innovation, support of the retail acceleration of its travel retail business, the growth of its emerging markets, targeted expanded consumer reach and in its new manufacturing facility in Japan.

The full year outlook reflects the following assumptions and expectations:

• A slower than expected return to growth in Asia travel retail, reflecting:
  • The progress towards the rebalancing of inventory levels in Hainan, given the disruptions from the COVID-related impacts throughout fiscal 2023 and the tightening of inventory by retailers.
  • The temporary pressure to the Company’s travel retail business in Korea due to retailers transitioning to post-COVID regulations as traveling consumers gradually return.
  • A slower pace of resumption of Asia travel retail net sales than previously anticipated given the more gradual return of international flights, granting of visas, availability of organized group tours, and consumer conversion in the beauty category. We now expect the return of traffic and conversion to build gradually over the fiscal 2023 fourth quarter and the first half of fiscal 2024.
• Balanced growth in the fourth quarter across nearly all other markets globally and accelerated consumer demand in mainland China.
• Strategic price increases, increased productive distribution to retailers that provide new consumer reach and continued strategic entry into new countries for some of the Company’s brands.
• Incremental savings from the Post-COVID Business Acceleration Program and reinvestment in advertising and capabilities.
• An increase in the full year effective tax rate to approximately 27%, reflecting the expected change in the geographical mix of earnings, notably due to the Company’s travel retail business as previously discussed, for the remainder of the year.
• The acquisition of the TOM FORD brand is expected to be approximately $.03 to $.04 dilutive to full year diluted earnings per common share.

The Company is mindful of risks related to the effects of the global macro environment, including the risk of recession; geopolitical tensions; foreign currency volatility; inflationary pressures; supply chain disruptions; social and political issues; residual impacts related to the COVID-19 pandemic; regulatory matters, including the imposition of tariffs and sanctions; and global security issues. The Company is also mindful of inflationary pressures on its cost base and consumer behaviors.

Full Year Fiscal 2023

Sales Outlook

• Reported net sales are forecasted to decrease between 12% and 10% versus the prior-year period. This range includes:
  • The slower than expected return to growth in Asia travel retail, as detailed above.
  • Currency exchange rates are volatile and difficult to predict. Using March 31, 2023 spot rates for the fourth quarter of fiscal 2023, a 4% headwind due to foreign currency translation, as well as an additional 1% due to certain foreign currency transactions in key international travel retail locations.
  • The negative impact of 1% from the termination of the Company’s license agreements for the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines effective June 30, 2022.
• Organic net sales, which excludes returns associated with restructuring and other activities; non-comparable impacts from acquisitions, divestitures and brand closures; as well as the impact of foreign currency translation, are forecasted to decrease between 7% to 5%. This includes the impact related to foreign currency transactions, noted above.

Earnings per Share Outlook

• Reported diluted net earnings per common share are projected to be between $2.62 and $2.76. Excluding restructuring and other charges and adjustments, diluted net earnings per common share are projected to be between $3.29 and $3.39.
• Adjusted diluted earnings per common share are expected to decrease between 51% and 50% on a constant currency basis. Currency exchange rates are volatile and difficult to predict. Using March 31, 2023 spot rates for the fourth quarter of fiscal 2023:
  • The foreign currency translation impact equates to about $.26 of dilution to earnings per share.
  • As reported and adjusted diluted earnings per share in constant currency are expected to be dilutive by 4% from certain foreign currency transactions in key international travel retail locations.

Conference Call The Estée Lauder Companies will host a conference call at 9:30 a.m. (ET) today, May 3, 2023 to discuss its results. The dial-in number for the call is 877-883-0383 in the U.S. or 412-902-6506 internationally (conference ID number: 6722860). The call will also be webcast live at http://www.elcompanies.com/investors/events-and-presentations.

Cautionary Note Regarding Forward-Looking Statements
Statements in this press release, in particular those in “Outlook,” as well as remarks by the CEO and other members of management, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address the Company’s expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, the Company’s long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, actual results may differ materially from the Company’s expectations.

Factors that could cause actual results to differ from expectations include, without limitation:

The Estée Lauder Companies Inc. is one of the world’s leading manufacturers, marketers and sellers of quality skin care, makeup, fragrance and hair care products, and is a steward of outstanding luxury and prestige brands globally. The Company’s products are sold in approximately 150 countries and territories under brand names including: Estée Lauder, Aramis, Clinique, Lab Series, Origins, M·A·C, La Mer, Bobbi Brown Cosmetics, Aveda, Jo Malone London, Bumble and bumble, Darphin Paris, TOM FORD, Smashbox, AERIN Beauty, Le Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, KILIAN PARIS, Too Faced, Dr.Jart+, and the DECIEM family of brands, including The Ordinary and NIOD.

ELC-F
ELC-E

This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring and other activities and adjustments, as well as organic net sales. Included herein are reconciliations between the non-GAAP financial measures and the most directly comparable GAAP measures for certain consolidated statements of earnings accounts before and after these items. The Company uses certain non-GAAP financial measures, among other financial measures, to evaluate its operating performance, which represent the manner in which the Company conducts and views its business. Management believes that excluding certain items that are not comparable from period-to-period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze operating performance from period-to-period. In the future, the Company expects to incur charges or adjustments similar in nature to those presented herein; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. The Company’s non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While the Company considers the non-GAAP measures useful in analyzing its results, they are 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, operating results and diluted net earnings per share 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 monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.

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