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Lauder Net Up 50.6%, Firm Sees Hair Growth As Key Tonic for Future

Estée Lauder Cos. saw earnings balloon 50.6 percent to $71.1 million in the fourth quarter, as sales rose 15.1 percent to $1.4 billion.

NEW YORK — Counting on its smallest division to deliver future growth, Estée Lauder is diving headfirst into hair care.

As the New York-based beauty products giant reported a 50.6 percent rise in earnings for the fourth quarter, newly minted president and chief executive officer William Lauder told analysts during the company conference call that management believes its greatest opportunity for future growth lies in the hands of its hair care division, the firm’s youngest and smallest unit.

“We expect hair care and skin care to lead growth, followed by makeup and fragrance,” Lauder told analysts. “While hair care for us is still in its relative infancy, our professional salon brands, Aveda and Bumble and bumble, have made tremendous strides in developing and executing their growth strategies.”

While Lauder realigned the focus for future growth, he made clear that placing faith in the strength of the department store channel — a belief that many analysts have criticized as the company’s greatest risk — directly fueled gains for both its fourth-quarter and the year-end period.

“The recovery of U.S. department stores, particularly the high-end specialty retailers, along with better-than-expected recovery in travel retail, helped us to significantly exceed our plans,” said Lauder.

For the three months ended June 30, the firm saw earnings balloon 50.6 percent to $71.1 million, or 31 cents a diluted share, shy of Wall Street’s consensus estimate of 32 cents. Comparatively, the company reported earnings of $47.2 million, or 20 cents, in the year-ago period.

Sales rose 15.1 percent to $1.4 billion from $1.22 billion. Excluding the benefits of currency exchange sales rose 12 percent.

Skin care, makeup and fragrance paced sales for the quarter, with makeup sales narrowly keeping its spot as the top product category.

According to the company, makeup sales rose 10 percent in local currencies to $2.15 billion, while skin care products rose 8 percent in local currencies to reach $2.14 billion, marking the first time in the company’s history the two categories had exceeded the $2 billion mark.

The launches of Estée Lauder Beyond Paradise, Aramis Life, Clinique Simply and Tommy Jeans helped fragrance sales rise 10 percent in local currencies to $1.22 billion. However, the bulk of this growth was attributable to improved travel retail sales.

“As you know, this category continues to be challenging, with total prestige channel sales in the U.S. declining modestly this fiscal year,” said Lauder. Despite the domestic slowdown, the company holds five of the top 10 fragrances in U.S. department stores, said Lauder.

Still, management is expecting the fragrance market to remain difficult going forward as it has become increasingly overcrowded, suffering from what Lauder characterized “launch mania.”

“Just to give you a perspective: In the period between 1992 and 1994 there were 45 new major fragrance launches,” said Lauder. “In the period between 2002 to 2004 there were 245 fragrance launches. The resulting noise from the increased volume and frequency of launches has required each and every launch to have significant spending behind it.”

Consequently, management is expecting to experience a slight decline in fragrance sales for the first half of fiscal 2005.

Given the already mammoth size of its skin care and makeup divisions, and with fragrance sales already stagnating, management is looking for future growth in hair care products, the company’s smallest and youngest segment. For the quarter, hair care sales rose 7 percent in local currencies to $249.4 million.

Deutsche Bank analyst William Schmitz questioned the move, asking why management was so confident in the category, considering that it has been the company’s weakest performer over the past several years.

“Right now, almost 90 percent of our hair care business comes from North America,” responded Lauder. “We’re really getting to the points of beginning to expand our main hair care brands, Aveda and Bumble and bumble, beyond the shores of North America to Europe and Asia.”

The launch of Estée Lauder’s new BeautyBank Flirt color cosmetics line at Bergdorf Goodman late last week, a line that was thought to be an exclusive for Kohl’s and set to launch in October, also created confusion among analysts.

“I don’t get how having the brand there is going to help its overall awareness,” said Constance Maneaty, an analyst with Prudential Equity Group. “I mean, women who shop at Bergdorf’s probably don’t go to Kohl’s. Are you advertising at Bergdorf’s? Are we going to see it featured in magazines like ‘Flirt at Bergdorf’s’ or something?”

Lauder contended that it was simply a strategy to increase exposure and establish an aspirational image for the product that would ultimately benefit sales at both companies.

“How is it that Kohl’s doesn’t feel gypped?” continued Maneaty. “Here they were going to have an exclusive and now it’s not an exclusive?”

However, Kohl’s confirmed on Monday that it was aware of the Bergdorf rollout. “There’s nothing that Kohl’s would love more than to be able to sell a brand in their store to a consumer that’s also for sale at Bergdorf Goodman’s,” said Lauder.

Following earnings, Maneaty downgraded the company to a “neutral” ranking from “overweight,” focusing on the fact that the company trades at a 31 percent premium to the market, which is in-line with its five-year average premium.

The company finished the year that saw the death of its founder and namesake with a 15.4 percent rise in earnings to $342.1 million, or $1.48 a share, compared with earnings of $296.4 million, or $1.26 a share.

Sales rose 13.6 percent to $5.79 billion from $5.1 billion. Excluding positive effects from currency translation, sales rose 9 percent.

Investors appeared to pay more head to the company missing the consensus estimate. Shares fell 8.1 percent to close at $40 a share in New York Stock Exchange Trading on Tuesday.

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