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As Estee Lauder Net Rises 6%, Firm Cuts Outlook for Year

Estee Lauder delivered higher quarterly sales and earnings, but results were below forecasts.

NEW YORK — Disappointments in fragrances and seasonal items hit the Estée Lauder Cos. Inc.’s third-quarter results, but the beauty giant remains optimistic, thanks to Tom Ford and China.

For the three months ended March 31, Estée Lauder’s net earnings rose 6 percent to $106.2 million, or 46 cents a diluted share, from $98.3 million, or 42 cents, in the prior year. Sales climbed 8 percent to $1.54 billion from $1.42 billion.

Excluding the benefits of currency exchange, net sales rose 6 percent.

The results were well below analysts’ estimates for earnings of 51 cents a share. The company also revised its full-year earnings per share estimate downward to a range of $1.87 to $1.90 from a range of $1.88 to $1.93. Wall Street reacted negatively to the first-quarter numbers and earnings revision, sending Lauder’s shares down by 8.8 percent to $37.76 on Thursday.

“I am pleased with our continued strong sales performance this quarter, but at the same time, I’m disappointed that our sales growth came in lower than we expected,” said William Lauder, president and chief executive officer of the company, in a conference call to investors.

During the third quarter, makeup was the star. The segment generated $628.2 million in net sales, an increase of 5 percent in local currencies. Product launches included Estée Lauder’s Tender Blush, Pure Pops Brush-on Color, Ideal Matte Refinishing Makeup and AeroMatte Ultralucent Pressed Powder. Clinique’s Superbalanced Compact Makeup SPF 20 and Colour Surge Eye Shadow also contributed to sales growth.

Sales of skin care products rose 6 percent in local currencies to $608.2 million in the quarter. Again, new products drove sales, especially Estée Lauder’s Re-Nutriv and Perfectionist lines.

Fragrance, though it still made significant sales gains, was one of the problem areas of the quarter, the company said. Sales rose 11 percent in local currencies, to $228.7 million. DKNY Be Delicious and Be Delicious Men, True Star from Tommy Hilfiger, Happy To Be from Clinique and Lauder Beyond Paradise Men performed especially well; however, Beyond Paradise did not attract the return customers the company expected.

“There is a weakness in the entire category,” said William Lauder. “There are three primary regions for which the fragrance business is significant: Europe, travel retail and North America. It’s not insignificant to see the channel shift in existing distribution and prestige fragrance in Europe and North America.

This story first appeared in the April 29, 2005 issue of WWD.  Subscribe Today.

“At the end of the day, strong brands will drive growth,” Lauder continued. “Our strategy is to diversify our distribution into new channels, and lessen the overall reliance on department stores and perfumeries…which will certainly help us weather the changes with our core department store and perfumery customers.”

Lauder was referring to the impending merger of the company’s two largest customers, Federated Department Stores and May Department Stores Co.

But the company has a more evolved strategy than just tweaking its distribution. Lauder is expecting its recently announced venture with former Gucci designer Tom Ford to help modernize and invigorate the Estée Lauder brand. 

“Our first and foremost goal is to activate the core passionate beauty consumers, for whom Estée Lauder is one of their key passions and they are very aware of who Tom Ford is,” said Lauder. “The secondary objective is to pull along those who will follow those who are core beauty consumers.”

In other words, the expectation is that Ford will create as much excitement for Estée Lauder with his Tom Ford for Estée Lauder line and his stand-alone beauty collection as he did during his 10 years at Gucci.

“We are confident that a brand of this size, and of this strong a following, and with its authority in leadership in so many different categories, still has significant share and still generates on an industry basis, a relatively outsized return on investment compared to its peer competitors,” said Lauder of the overall Estée Lauder brand. “We still expect this brand to continue to be successful.”

He expects success on other fronts, too. In addition to investing in new design talent, Estée Lauder is focused on emerging markets. It nearly doubled its business in China this quarter, for example, and is “building its infrastructure” there, said Lauder. The company expects India will be a growth market soon, as well. In the Asia Pacific region, net sales grew 2 percent in local currency to $197.4 million.

The Americas, where the company had $844.6 million in net sales, still leads Estée Lauder’s regions in terms of sales volume. In Europe, the Middle East and Africa, net sales rose 6 percent in local currency to $496.2 million.

In the nine months ended March 31, profits climbed 25.3 percent to $339.5 million, or $1.48 a share, from $271 million, or $1.17 a share, in the prior year on sales that increased 9.2 percent to $4.79 billion from $4.38 billion.

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