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The Estée Lauder Companies Reports Solid Fiscal 2013 First-Quarter Results - Earnings Per Share Rose 12% To $.79 - Before Charges

“Looking ahead, we continue to focus our resources on the most attractive areas of growth and on drawing new consumers into our business via successful product and service innovation and effective investment spending. We are very mindful of the uncertain market dynamics in several countries and of the solid growth in others, but we are judicious in our resource allocation to maximize our results in this dynamic market situation. We are confident that we have developed the necessary agility to manage our business effectively. We expect that we will grow our sales 6 to 7% in local currency this fiscal year, or double the rate of global prestige beauty, while raising the lower end of our earnings per share range.”

The Company’s performance was due to solid overall business, particularly from its largest brands. The Company generated local currency sales gains in each of its product categories and geographic regions. Sales growth was particularly strong in the United States and overall in emerging markets, along with solid gains in certain developed countries.

During the quarter, the Company made substantial progress on its previously stated strategic goals, with a strong improvement in cost of sales and operating expenses as a percentage of net sales. All product categories and geographic regions benefited from Company-wide 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 $17 million during the quarter. As a percentage of net sales, all significant operating expense categories were lower. Gross margin expanded 50 basis points, operating expense margin improved 90 basis points and operating margin rose 140 basis points, before charges.

     

Results by Product Category

  Three Months Ended September 30
    Operating   Percent
(Unaudited; Dollars in millions) Net Sales Percent Change Income (Loss) Change
  Reported   Local   Reported
2012 2011 Basis Currency 2012 2011 Basis
 
Skin Care $ 1,113.5 $ 1,072.9 4 % 7 % $ 259.0 $ 223.7 16 %
Makeup 960.4 928.8 3 6 161.3 159.6 1
Fragrance 347.6 356.8 (3 ) 0 53.4 48.3 11

 

Hair Care 113.9 103.8 10 12 10.7 5.1 100

+

Other 14.1 13.7 3 4 (2.0 ) (2.6 ) 23
Subtotal 2,549.5 2,476.0 3 6 482.4 434.1 11
Returns and charges associated with restructuring activities 0.7 (0.4 ) (4.1 )
Total $ 2,549.5 $ 2,476.7 3 % 6 % $ 482.0 $ 430.0 12 %
                                               

Skin Care

  • The skin care category is a strategic priority for the Company. The Company gained share in this category during the quarter in certain countries where its products are sold. Skin care sales growth was strong, particularly in view of the 25% growth reported in the prior-year quarter.
  • The Estée Lauder brand benefited from the recent launches of Perfectionist CP+R and the Optimizer line of products, as well as higher sales of Advanced Night Repair Synchronized Recovery Complex.
  • The recent launches of The Moisturizing Soft Cream from La Mer and Even Better Eyes Dark Circle Corrector from Clinique contributed strong incremental sales.
  • These sales gains were partially offset by lower sales from certain existing products.
  • Operating income increased double-digits, primarily reflecting improved results from higher-margin product launches in certain of the Company’s heritage brands, as well as from higher-end prestige skin care products.

Makeup

  • Makeup net sales increased, which built upon the 17% growth in the prior-year quarter.
  • Higher makeup sales reflected the recent launches of Pure Color Vivid Shine Lipstick and Pure Color Gelee Powder Eyeshadow from Estée Lauder, along with Pore Refining Solutions Makeup, High Impact Extreme Volume Mascara and Stay-Matte Oil-Free Makeup by Clinique.
  • Higher sales from Smashbox and certain products from the Company’s makeup artist brands, along with the success of the Tom Ford Beauty line of cosmetics, contributed to the category’s growth.
  • Lower sales from certain existing products partially offset these sales gains.
  • Makeup operating income increased, primarily reflecting the higher sales.

Fragrance

  • In fragrance, notable sales increases were generated from the recent launches of DKNY Be Delicious So Intense, Coach Poppy Blossom, Estée Lauder pleasures Eau Fraiche and Jo Malone Blackberry and Bay.
  • These increases were more than offset by lower sales of DKNY Golden Delicious, Estée Lauder Sensuous Nude and Coach Poppy Flower, all of which were new launches in the prior-year period.
  • Fragrance operating income increased, primarily reflecting a more strategically focused approach to spending as part of the Company’s strategy to improve profitability. Operating income also reflects a favorable comparison to the prior-year period, which included higher spending in support of new launches of designer fragrances.

Hair Care

  • Hair care double-digit net sales growth was primarily driven by Aveda, reflecting the recent successful launches of its Invati line of products and Pure Abundance Style Prep.
  • The category also benefited from sales generated from expanded global distribution, in particular to salons and multi-brand specialty retailers.
  • Lower net sales at Ojon were due, in part, to softness of its business in the direct response television channel.
  • Hair care operating results increased significantly, primarily reflecting the higher sales, driven by new product launches and expanded global distribution.
     

Results by Geographic Region

  Three Months Ended September 30
    Operating   Percent
(Unaudited; Dollars in millions) Net Sales Percent Change Income (Loss) Change
  Reported   Local   Reported
2012 2011 Basis Currency 2012 2011 Basis
 
The Americas $ 1,182.1 $ 1,105.4 7 % 8 % $ 172.3 $ 149.2 15 %
Europe, the Middle East & Africa. 824.9 858.2 (4 ) 2 196.9 187.7 5
Asia/Pacific 542.5 512.4 6 7 113.2 97.2 16
Subtotal 2,549.5 2,476.0 3 6 482.4 434.1 11
Returns and charges associated with restructuring activities 0.7 (0.4 ) (4.1 )
Total $ 2,549.5 $ 2,476.7 3 % 6 % $ 482.0 $ 430.0 12 %
                                               

The Americas

  • The region’s sales growth improved a strong 8% upon the prior year, when sales grew 10% in constant currency.
  • The net sales increase in the region was primarily attributable to strong growth in the United States, which benefited from successful new product offerings. The improvement reflects growth from the Company’s heritage and makeup artist brands, as well as increased sales in each of the Company’s product categories.
  • The higher sales also reflect strong local currency gains in Canada and Latin America. Sales in Brazil continued at a strong double-digit pace.
  • Sales to North American department stores grew mid-single digits and sales of the Company’s products online grew double digits.
  • Operating income in the Americas increased sharply, primarily reflecting the strong sales gains.

Europe, the Middle East & Africa

  • In constant currency, net sales increased in most countries in the region and in each product category, except fragrance. Economic uncertainties in some Western European countries impacted the beauty markets more than anticipated, but the Company continued to generate growth in most of the markets.
  • The region’s sales growth of 2% improved upon the prior-year quarter, when sales grew 19% in constant currency.
  • In constant currency, double-digit net sales growth was recorded in a number of areas, including the Middle East, South Africa, Turkey and the Nordic countries, while solid sales gains were generated in the United Kingdom and Germany.
  • In travel retail, the Company experienced double-digit retail sales growth in the quarter, which was more than twice the increase in airline passenger traffic. Weakness in Korea and select retailer destocking impacted net sales growth.
  • These increases were partially offset by lower net sales, primarily in Russia, Switzerland, France, the Balkans and Spain.
  • The Company estimates that it gained share in certain countries within its points of distribution in this region during the quarter.
  • Operating income in the region increased, led by travel retail, Russia and South Africa, which were partially offset by lower results in Germany, Spain and Italy.

Asia/Pacific

  • Local currency sales growth was generated in several countries in the region, with the strongest gains coming from China, Hong Kong and Thailand, primarily reflecting strong sales of skin care products. In China, the increase was primarily due to sales to new consumers in expanded distribution in tier two and three cities.
  • The region’s sales growth of 7% improved upon the prior-year quarter, when sales grew 15% in constant currency.
  • The increases in certain Asian countries were partially offset by lower net sales, predominantly in Korea, reflecting difficult economic conditions and competitive pressures. The Company expects to see continued weakness in prestige beauty in Korea, which also impacted the travel retail business there.
  • The Company estimates that for the quarter it gained share in certain countries, including China, within its points of distribution.
  • In Asia/Pacific, operating income increased, with most countries posting higher profits. China, Taiwan, Thailand and Japan reported the largest increases, while lower results were recorded primarily in Korea.

Cash Flows

  • For the three months ended September 30, 2012, net cash flows used for operating activities were $125.2 million, compared with $36.2 million in the prior-year period.
  • The increase primarily reflected changes in accounts payable and accounts receivable levels, due to the timing of payments and collections, respectively, as well as higher inventory levels in advance of the Company’s implementation of SAP at certain affiliates. These changes were partially offset by an increase in other liabilities and net earnings.
  • Days of inventory at September 30, 2012 were 14 days higher compared to September 30, 2011. This increase reflects the building of inventory to support expected near-term sales growth and maintain service levels, as well as in advance of the Company’s implementation of SAP at certain affiliates.
  • During the quarter, the Company used operating cash flows primarily for the repurchase of shares of the Company’s Class A Common Stock and capital expenditures, including increased expenses related to the Company’s Strategic Modernization Initiative (“SMI”).

Outlook for Fiscal 2013 Second Quarter and Full Year

The Company has benefited from the strength in prestige beauty in North America and China. While overall the Company’s business is performing well, certain Western European countries and Korea are seeing worse than expected weakness due to economic uncertainties.

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