By and  on August 17, 2007

The Estée Lauder Cos. Inc. is flexing its muscle abroad.

The beauty firm, which on Thursday reported a 99 percent surge in fourth-quarter profits, outlined plans to strengthen its international business in an attempt to buffer the company from softness in U.S. department stores.

Despite the company's bullishness about its international business, the Estée Lauder Cos. fourth-quarter earnings and full-year guidance were lower than analyst expectations, and shares fell 6.6 percent to close at $40.30 on the New York Stock Exchange Thursday. The company said it expects fiscal 2008 net sales to grow between 7 and 9 percent in constant currency.

Citing a tough retail climate in U.S. department stores, company president and chief executive officer William P. Lauder emphasized the firm will continue to grow its international business, telling analysts that international sales accounted for 54 percent of total revenues in fiscal 2007, up from 51 percent in the prior year.

"This is a trend we expect to continue," said Lauder, later adding: "We are not a domestic company with a small international presence. We're a global enterprise with more than half of our sales generated outside the United States. Going forward, we believe the international business will provide even greater growth."

Lifted by international sales and a favorable comparison with last year when the company implemented its cost-cutting program, the beauty firm's net earnings for the quarter ended June 30 rose to $88.6 million, or 45 cents a diluted share, from $44.5 million, or 21 cents a share, in the prior year. Analysts polled by Thomson Financial were expecting a profit of 50 cents a share. Quarterly sales gained 9.8 percent to $1.76 billion from $1.6 billion in the year-earlier period.

The company said the profit increase was due in part to a special charge in fiscal 2006 of $92.1 million, or $58 million after tax, related to its cost-cutting initiative, which was implemented in fiscal 2006, and a onetime tax charge related to a settlement with the Internal Revenue Service.

For the year, net earnings gained 83.9 percent to $449.2 million, or $2.16 a diluted share, from $244.2 million, or $1.12 a share, from the prior year on sales that rose 8.9 percent to $7.04 billion from $6.46 billion.The company continued to shed underperforming brands, and last week sold Rodan + Fields to the Stanford University-trained dermatologists who created it, namely Drs. Katie Rodan and Kathy Fields. The Estée Lauder Cos. purchased the then-one-year-old brand in 2003, keeping the dermatologist founders deeply involved with the line's product development. A decade earlier, in 1992, the doctors had founded Proactiv Solution, an acne line they eventually sold to Guthy-Renker Corp.

Rodan + Fields, which had been sold for several years in department and specialty stores such as Bloomingdale's and Nordstrom, plans to institute a national direct-selling model in spring 2008. The line generated sales of $3.7 million in department stores last year, according to The NPD Group. Currently, the products are sold on QVC and rodanandfields.com.

"Our passion is treating skin concerns, and we believe that a direct-selling business model will enable us to reach a wider consumer base and also provide those who believe in the product a viable income opportunity," said Fields in a statement. The Estée Lauder Cos. is expected to provide certain transitional services for the brand until yearend.

Lauder stressed the company is still interested in professional skin care and may continue to look for other options in that segment. In June, talk surfaced that the Estée Lauder Cos. is considering an acquisition of Murad Inc., the eponymous skin care brand founded in 1989 by El Segundo, Calif.-based dermatologist Howard Murad. An Estée Lauder spokeswoman on Thursday declined to comment on the transaction, but at least one industry source believes a letter of intent might have already been signed. While it did not disclose details, the company also announced it has made changes to the management team and distribution strategy for Darphin Paris, a French skin care brand that it acquired in 2004.

The beauty firm's continued globe-trotting and interest in emerging retail channels are intended to lessen its reliance on U.S. department stores, which Lauder said account for 34 percent of company sales, down from 46 percent five years ago.

He reported the firm's department store business is essentially flat, and the channel is expected to be soft throughout the second half of the year. That said, the company continued to pursue alternative distribution channels, including the Internet, QVC, beauty boutiques such as Blue Mercury, European pharmacies and Canada's upscale drugstore Shoppers Drug Mart, as well as its own stand-alone branded stores.Even as the Estée Lauder Cos. expands its presence outside department store doors, several analysts expressed concern about the health of its flagship Estée Lauder brand and Clinique.

A.G. Edwards & Sons analyst Jason Gere applauded the company's international push, but said he remained concerned about how it would reach its 2008 sales growth target of 7 to 9 percent given that department stores account for more than 30 percent of company sales. Gere estimated the firm's full-year sales growth at 6.5 percent.

When asked if he expects the firm to pursue acquisitions this year, Bear Stearns analyst Justin Hott said: "When your core brands are in decline, you need to acquire new brands. You need fresh ideas and fresh channels."

Last month, the Estée Lauder Cos. completed the acquisition of the Ojon hair care brand, which industry sources estimate generates about $40 million in wholesale sales yearly. Hott nodded to the beauty firm's emphasis on international markets and nontraditional channels, but added: "Everyone is waiting for the 'S' word," referring to Sephora, where the Estée Lauder Cos. has yet to build a strong presence.

For the year-end period, sales in local currency by region were strongest in Asia-Pacific, gaining 11 percent to $983.2 million, followed by Europe, the Middle East and Africa, which gained 10.4 percent to $2.49 billion. Lauder noted the makeup artist brand Bobbi Brown is slated to launch in Russia later this year. Sales in the Americas rose 3.2 percent to $3.56 billion. The firm's Beauty Bank division, which sells its brands at Kohl's stores, also will begin to enter international markets. Lauder said a treatment product from Beauty Bank's Good Skin line is slated to enter Sephora stores in Europe and about 800 Shoppers Drug Mart doors in Canada.

The Estée Lauder Cos. reported growth across all categories during the year. Makeup sales in local currency rose 6.5 percent to $2.71 billion; hair care gained 17.3 percent to $377.1 million; skin care sales gained 5.8 percent to $2.6 billion, and fragrance sales, bolstered by growth in travel retail, were up 5.1 percent to $1.31 billion.

In related news, Olivier Bottrie assumed the role of president of travel retailing worldwide on July 1. Bottrie — who previously held the post of senior vice president and general manager of the travel retailing division since 2004 — will continue to report to Cedric Prouvé, group president, international.

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