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TheStreet Open House

The Estée Lauder Companies Reports Record Fiscal 2013 Fourth Quarter And Full Year Results

In fiscal 2013, the Company recorded $17.7 million of charges for the impairment of the remaining goodwill and other intangible assets related to the Darphin brand. In fiscal 2012, the Company recorded $21.7 million of charges for the impairment of other intangible assets related to the Ojon brand.

 

Full Year Results by Product Category

 
          Year Ended June 30

(Unaudited; Dollars in millions)

Net Sales     Percent Change       Operating

Income (Loss)

   

Percent Change

2013     2012

Reported Basis

     

Local Currency

2013     2012

Reported Basis

 
Skin Care $ 4,465.3 $ 4,225.2 6 % 7 % $ 830.1 $ 746.7 11 %
Makeup 3,876.9 3,696.8 5 6 580.4 538.0 8
Fragrance 1,310.8 1,271.0 3 4 120.3 100.1 20
Hair Care 488.9 462.4 6 6 26.7 12.2 100 +
Other 41.3 60.3 (32 ) (31 ) (13.7 ) (22.1 ) 38
Subtotal 10,183.2 9,715.7 5 6 1,543.8 1,374.9 12

Returns and charges associated

  with restructuring activities

(1.5 ) (2.1 ) (17.8 ) (63.2 )
Total $ 10,181.7 $ 9,713.6 5 % 6 % $ 1,526.0 $ 1,311.7 16 %
 
 

Skin Care

  • The skin care category is a strategic priority for the Company. The Company gained share in this category in certain countries where its products are sold.
  • Sales gains reflect the recent launches of Perfectionist CP+R, Advanced Time Zone, Advanced Night Repair Eye Serum Infusion and the Optimizer line of products from Estée Lauder.
  • Recent successful product introductions such as The Moisturizing Soft Cream from La Mer and Even Better Eyes Dark Circle Corrector from Clinique also contributed to sales growth.
  • Operating income increased on both sales growth, and the impact of higher-margin product launches, partially offset by goodwill and other intangible asset impairment charges of $17.7 million.

Makeup

  • Higher makeup sales primarily reflected strong growth from the Company’s makeup artist brands.
  • New product introductions, such as High Impact Extreme Volume Mascara and Chubby Stick Intense from Clinique and Pure Color Vivid Shine Lipstick from Estée Lauder, as well as increased sales of 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 and an increase in investment spending.

Fragrance

  • In fragrance, sales increases were generated from the recent launches of Zegna Uomo, DKNY Be Delicious So Intense, Tommy Hilfiger Freedom Men and Coach Love. Higher fragrance sales were also generated from luxury brands Jo Malone and Tom Ford.
  • Fragrance operating income increased, primarily reflecting the success of certain luxury and heritage brand products, partially offset by certain of the Company’s designer fragrances.

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 specialty-multi retailers for Bumble and bumble and to salons for Aveda.
  • Sales of Bumble and bumble brand products to salons were lower, and sales declined at Ojon due, in part, to a reduction of its business in the direct response television channel.
  • Hair care operating results increased over 100%, primarily reflecting a favorable comparison to the prior year, which was impacted by other intangible asset impairment charges of $21.7 million.
 
 

Full Year Results by Geographic Region

 
          Year Ended June 30
(Unaudited; Dollars in millions) Net Sales     Percent Change       Operating

Income (Loss)

   

Percent Change

2013     2012

Reported Basis

     

Local Currency

2013     2012

Reported Basis

 
The Americas $ 4,302.9 $ 4,101.1 5 % 5 % $ 423.2 $ 288.4 47 %
Europe, the Middle East & Africa. 3,758.7 3,603.2 4 6 813.4 746.3 9
Asia/Pacific 2,121.6 2,011.4 5 6 307.2 340.2 (10 )
Subtotal 10,183.2 9,715.7 5 6 1,543.8 1,374.9 12

Returns and charges associated

  with restructuring activities

(1.5 ) (2.1 ) (17.8 ) (63.2 )
Total $ 10,181.7 $ 9,713.6 5 % 6 % $ 1,526.0 $ 1,311.7 16 %
 

The Americas

  • The net sales increase in the region reflects growth from most of the Company’s brands, particularly its makeup artist and heritage brands.
  • The increase was primarily attributable to growth in the United States, while double-digit sales growth was recorded in Latin America. Net sales in Canada also increased, reflecting, in part, expanded distribution.
  • Sales to department and specialty-multi stores were solid, and the Company’s online business grew double-digits.
  • During the fourth quarter of fiscal 2013 the U.S. retail environment began to experience slower growth.
  • Operating income in the Americas increased sharply, reflecting improved results from the Company’s makeup artist and luxury brands, as well as certain hair care and heritage brands, driven by a favorable category mix, partially offset by increased marketing spending.

Europe, the Middle East & Africa

  • In constant currency, net sales increased in the majority of countries in the region. Economic difficulties in certain Southern European countries impacted beauty consumption, but the Company 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 the United Kingdom and double-digit growth in the Middle East.
  • The Company’s net sales in the travel channel grew double-digits at retail, which was more than triple the increase in airline passenger traffic. Sales gains in the United Kingdom and the Middle East each benefited, in part, from strength in the Company’s makeup artist brands.
  • In constant currency, double-digit net sales growth was recorded in a number of areas, including South Africa, the Nordic countries and Turkey.
  • These increases were partially offset by lower net sales, primarily in Russia, Spain and the Balkans.
  • The Company estimates that it gained share in certain countries within its distribution in this region during the year.
  • Operating income in the region increased, led by travel retail, the Middle East and the United Kingdom, which was partially offset by lower results in Germany and Spain, as well as goodwill and other intangible asset impairment charges.

Asia/Pacific

  • In the region, the Company’s strongest local currency double-digit sales growth was generated in China, Hong Kong and Thailand, primarily reflecting strong sales of skin care products.
  • Results in China included sales to new consumers in expanded distribution in tier two and three cities. Sales at retail also continued to grow strong double-digits.
  • Lower sales were experienced primarily in Korea reflecting difficult economic conditions and competitive pressures. The Company expects to see continued weakness in prestige beauty in Korea.
  • The Company estimates that for the year it gained share in certain countries, including China, within its points of distribution.
  • In Asia/Pacific, operating income decreased, with higher results from China and Thailand being more than offset by lower operating results in Korea and Japan. The lower results in Japan reflect, in part, the effect of unfavorable foreign exchange rates.

Full-Year Cash Flows

  • For the 12 months ended June 30, 2013, net cash flows provided by operating activities increased 9% to $1.23 billion, compared with $1.13 billion in the prior year.
  • The increase primarily reflected the higher net earnings and a favorable change in pension and postretirement benefit contributions, partially offset by a net decrease in cash from certain working capital components.
  • Days of inventory at June 30, 2013 were 19 days higher compared to a year ago. This increase primarily reflects the building of inventory to support expected near-term sales growth, as well as for remaining safety stock related to the Company’s implementation of its Strategic Modernization Initiative (SMI) at certain locations.

Fourth Quarter Results

  • For the three months ended June 30, 2013, the Company reported net sales of $2.41 billion, a 7% increase from $2.25 billion in the comparable prior-year period. Excluding the impact of foreign currency translation, net sales increased 8%.
  • As planned, the Company’s fourth quarter sales accelerated from the first nine months of the fiscal year, driven, in part, by greater benefits from its innovation pipeline, a sequential improvement in travel retail and more comparable period-over-period results from certain challenged markets.
  • On a reported basis, as well as in constant currency, net sales grew in each of the Company’s geographic regions and most product categories. Sales increased in each product category within each region, except hair care in the Americas.
  • The Company’s fourth quarter sales growth reflects mid-single-digit gains in the U.S. and double-digit local currency increases in many European countries, as well as in travel retail. In Asia/Pacific, local currency growth was led by strong increases in Australia, Hong Kong, China and Japan.
  • The overall increase in net sales and operating income reflected an unfavorable comparison to the prior-year period, which included the reversal of a provision recorded in the fiscal 2012 third quarter for then-anticipated returns of approximately $16 million, related to sunscreen regulations.
  • The Company reported net earnings of $94.0 million, an 84% increase from the $51.2 million last year. Diluted net earnings per common share increased 84% to $.24, compared with $.13 reported in the same prior-year period.
  • The fiscal 2013 fourth-quarter results included returns and charges associated with restructuring activities of $4.5 million ($2.8 million after tax), equal to $.01 per diluted common share.
  • The fiscal 2012 fourth-quarter results included returns and charges associated with restructuring activities of $24.2 million ($18.0 million after tax), equal to $.04 per diluted common share.
  • Excluding these returns and charges in both years, net earnings rose 40% to $96.8 million and diluted net earnings per common share rose 41% to $.24, versus a comparable $.17 in the prior-year period.

Outlook for Fiscal 2014 First Quarter and Full Year

In fiscal 2014, the Company expects global prestige beauty to rise approximately three to four percent, reflecting 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’s goal remains to grow at least one percentage point faster than the industry by focusing on skin care and makeup and reigniting fragrance, bringing highly innovative products to market, capitalizing on regional opportunities and serving emerging market consumers. 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.

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