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The Estée Lauder Companies Reports Solid Fiscal 2013 Second-Quarter Results

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.

Fabrizio Freda, President and Chief Executive Officer, said, “Our performance this quarter reflected the global appeal of our brands in all regions. These results demonstrate our ability to continue to grow, on top of the double-digit trends we generated in the prior year, even in the face of macro-economic headwinds and challenges in certain international countries. Organic sales growth for the quarter was in line with our expectations, while earnings per share exceeded our forecast.

“We began the second half of our fiscal year by successfully launching another wave of our Strategic Modernization Initiative in early January, a key driver to achieving additional long-term efficiencies. Our recent increased strategic marketing spending behind key innovations and existing winning products in countries with good momentum should help drive sales growth in coming months. We expect continued solid growth in the U.S., many emerging markets and e-commerce and improving trends in travel retail. For the full fiscal year, we are re-affirming our sales growth forecast of between 6% and 7% in local currency, while raising our earnings per share guidance to $2.51 to $2.59.”

The global prestige beauty industry continues to experience mixed results and overall growth has slowed from the prior year as the Company expected. Nonetheless, the Company’s performance was broad-based, generating local currency sales gains in each of its geographic regions and major product categories. Sales growth was solid in the United States and certain developed countries and strong overall in emerging markets.

During the quarter, the Company made substantial progress on its strategic goals, with a strong improvement in cost of sales 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 $26 million during the quarter. As planned, the Company increased global advertising spending versus the prior-year quarter to build momentum and gain share in its key markets and product categories. As a percentage of net sales, certain significant operating expense categories were lower. Gross margin expanded 80 basis points, operating expense margin remained unchanged and operating margin rose 80 basis points, before charges.

     
         

Results by Product Category

Three Months Ended December 31

(Unaudited; Dollars in millions)

Net Sales     Percent Change     Operating

Income (Loss)

   

Percent Change

2012     2011

Reported Basis

   

Local Currency

2012     2011

Reported Basis

 
Skin Care $ 1,279.9 $ 1,165.9 10 % 10 % $ 356.7 $ 312.2 14 %
Makeup 1,049.3 983.6 7 7 226.5 208.5 9
Fragrance 458.8 441.1 4 5 77.3 73.2 6
Hair Care 131.9 121.4 9 9 10.1 12.5 (19 )
Other 13.2 25.6 (48 ) (49 ) (2.9 ) (3.3 ) 12
Subtotal 2,933.1 2,737.6 7 7 667.7 603.1 11
Returns and charges associated with restructuring activities (0.1 ) (0.1 ) (14.6 ) (6.1 )
Total $ 2,933.0 $ 2,737.5 7 % 7 % $ 653.1 $ 597.0 9 %
                                                                   
 

The net overall change in net sales and operating income for the quarter were favorably impacted by the shifts in orders from certain retailers due to the Company’s implementation of SAP, as previously mentioned, in the following product categories:

  • Net sales: Skin care, approximately $32 million; makeup, approximately $23 million; fragrance, approximately $8 million and hair care, approximately $1 million.
  • Operating income: Skin care, approximately $27 million; makeup, approximately $20 million; fragrance, approximately $7 million; hair care, 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 7%, 4%, 2% and 8%, respectively.
  • Operating results in skin care, makeup, fragrance and hair care would have increased/(decreased) 6%, (1)%, (4)% and (34)%, respectively.

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 13% growth reported in the prior-year quarter.
  • The Estée Lauder brand benefited from the recent launches of Perfectionist CP+R, Advanced Time Zone, Advanced Night Recovery Eye Serum Infusion 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.
  • Operating income increased double-digits, primarily reflecting improved results from higher-margin product launches from the Estée Lauder and La Mer brands.

Makeup

  • Higher makeup sales primarily reflected an increase in net sales from the Company’s makeup artist brands.
  • Sales growth included the recent launches of Chubby Stick Intense and Stay-Matte Oil-Free Makeup from Clinique. Higher sales from existing products, such as Chubby Stick Moisturizing Lip Colour and Even Better Makeup from Clinique, as well as sales gains from Smashbox, contributed to the category’s growth.
  • Makeup operating income increased, primarily reflecting the higher sales.

Fragrance

  • In fragrance, notable sales increases were generated from the recent launch of Coach Love and higher-end fragrance products from Jo Malone and Tom Ford.
  • These increases were partially offset by lower sales of Estée Lauder Sensuous Nude and DKNY Golden Delicious, which were launched in the prior-year period, as well as from certain other fragrances.
  • Fragrance operating income increased, primarily reflecting the higher sales.

Hair Care

  • Hair care net sales growth was driven by Aveda, reflecting the continued success of its Invati line of products and the recent launches of Pure Abundance Style Prep and Be Curly Curl Controller.
  • The category also benefited from expanded global distribution, in particular to salons and multi-brand specialty retailers.
  • Bumble and bumble posted lower sales to salons and sales declined at Ojon, due, in part, to softness of its business in the direct response television channel.
  • Hair care operating results decreased, primarily reflecting lower results at Bumble and bumble, increased support spending behind new launches and additional costs related to distribution expansion initiatives.
     
         

Results by Geographic Region

       
Three Months Ended December 31

(Unaudited; Dollars in millions)

Net Sales     Percent Change     Operating

Income (Loss)

   

Percent Change

2012     2011

Reported Basis

   

Local Currency

2012     2011

Reported Basis

 
The Americas $ 1,140.2 $ 1,071.3 6 % 6 % $ 132.1 $ 112.4 18 %
Europe, the Middle East & Africa. 1,105.3 1,046.3 6 7 324.6 310.1 5
Asia/Pacific 687.6 620.0 11 9 211.0 180.6 17
Subtotal 2,933.1 2,737.6 7 7 667.7 603.1 11
Returns and charges associated with restructuring activities (0.1 ) (0.1 ) (14.6 ) (6.1 )
Total $ 2,933.0 $ 2,737.5 7 % 7 % $ 653.1 $ 597.0 9 %
                                                                   
 

In the quarter, the net overall change in net sales and operating income in the Company’s geographic regions were favorably impacted by the shifts in orders from certain retailers as previously mentioned, as follows:

  • Net sales: the Americas, approximately $27 million; Europe, the Middle East & Africa, approximately $12 million and Asia/Pacific, approximately $25 million.
  • Operating income: the Americas, approximately $22 million; Europe, the Middle East & Africa, approximately $9 million; 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 4%, 4% and 7%, respectively.
  • Operating income in the Americas, Europe, the Middle East & Africa and Asia/Pacific would have increased/(decreased) (2)%, 1% and 5%, respectively.

The Americas

  • 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 makeup artist brands and certain heritage and hair care brands.
  • Sales increased in each of the Company’s major product categories, except fragrance.
  • The higher sales also reflect double-digit local currency gains in Canada and Latin America.
  • Sales to North American department stores grew mid-single digits and sales of the Company’s products online grew double-digits.
  • Net sales growth included accelerated retailer orders, as previously discussed.
  • Operating income in the Americas increased sharply, primarily reflecting the solid sales gains, largely offset by higher strategic investment spending in the current-year period.

Europe, the Middle East & Africa

  • In constant currency, net sales increased in the majority of countries in the region and in each product category. Economic uncertainties in some Southern European countries impacted the beauty markets, but the Company continued to generate growth in most markets.
  • In constant currency, double-digit net sales growth was recorded in a number of areas, including Switzerland, France, the Nordic countries, South Africa and Turkey, while solid sales gains were generated in the United Kingdom, Benelux and the Middle East.
  • The higher sales in Switzerland, France, Benelux and Nordic included accelerated retailer orders, as previously discussed.
  • The Company’s net sales in travel retail grew high-single digits, while retail sales grew double-digits in the quarter, which was more than twice the increase in airline passenger traffic. Continued select retailer destocking impacted net sales growth.
  • These increases were partially offset by lower net sales, primarily in Russia, Spain and Italy.
  • The Company estimates that it gained share in certain countries within its distribution in this region during the quarter.
  • Operating income in the region increased, led by travel retail, the United Kingdom, the Nordic countries and the Middle East, which were partially offset by lower results in Spain and Germany.

Asia/Pacific

  • In the region, the Company’s strongest local currency sales growth was generated in China and Hong Kong, primarily reflecting strong sales of skin care products. In China, the increase reflected sales to new consumers in expanded distribution in tier two and three cities. Japan and Taiwan posted solid sales gains.
  • Net sales growth in China, Hong Kong and Taiwan included accelerated retailer orders, as previously discussed.
  • The region’s sales growth of 9% improved upon the prior-year quarter, when sales grew 18% 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. Sales in Australia also declined. 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 China, Hong Kong and Taiwan reporting the largest increases, primarily reflecting the impact from the timing of orders. Lower results were recorded primarily in Korea and Australia.

Six-Month Results

  • For the six months ended December 31, 2012, the Company reported net sales of $5.48 billion, a 5% increase from $5.21 billion in the comparable prior-year period. Excluding the impact of foreign currency translation, net sales increased 6%. Net sales grew in each of the Company’s geographic regions and major product categories. These results were delivered against a 12% local currency sales increase in the six months ended December 31, 2011.
  • The fiscal 2013 six-month results comparison was favorably impacted by the acceleration of sales orders from certain retailers previously discussed.
  • The Company reported net earnings of $747.0 million for the six months ended December 31, 2012, an 11% increase from the $675.3 million in the same period last year. Diluted net earnings per common share for the six months ended December 31, 2012 increased 11% to $1.89, compared with $1.70 reported in the prior-year period.
  • The fiscal 2013 six-month results included returns and charges associated with restructuring activities of $15.0 million ($9.9 million after tax), equal to $.03 per diluted common share. Additionally, during the six months ended December 31, 2012, the Company redeemed $230.1 million principal amount of its 7.75% Senior Notes due 2013. As a result, the Company recorded a pre-tax charge to earnings of $19.1 million ($12.2 million after tax), for the impact of the extinguishment of debt, equal to $.03 per diluted common share.
  • The fiscal 2012 six-month results included returns and charges associated with restructuring activities of $10.2 million ($7.3 million after tax), equal to $.02 per diluted common share.
  • Excluding these returns and charges, net sales for the six months ended December 31, 2012 increased 5% to $5.48 billion, net earnings rose 13% to $769.1 million and diluted net earnings per common share rose 13% to $1.95, versus a comparable $1.72 in the prior-year period.

Cash Flows

  • For the six months ended December 31, 2012, net cash flows provided by operating activities increased 7% to $655.1 million, compared with $610.2 million in the prior-year period.
  • The increase primarily reflected the higher net earnings and an increase in other liabilities, partially offset by a net decrease in cash from certain working capital components.
  • Days of inventory at December 31, 2012 were 15 days higher compared to December 31, 2011. This increase primarily reflects the building of inventory in advance of the Company’s January 2013 implementation of SAP at certain locations.
  • During the six months, 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). Cash on hand was also used for the payment of the annual dividend, which reflected a 37% increase over the previous dividend rate.

Outlook for Fiscal 2013 Third 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 Southern European countries and Korea continue to face weakness due to economic uncertainties.

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