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Lauder’s Smooth Sailing: Strong Skin Care Sales Propel 44.5% Rise in Net

Estee Lauder Cos. achieved a 44.5 percent rise in second-quarter earnings to $138.3 million.

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NEW YORK — Momentum is on the side of the Estée Lauder Cos., a trend chief executive officer William Lauder doesn’t see changing any time soon.

A mediocre holiday selling season and continued difficulty in the fragrance market did little to hinder second-quarter results for the New York-based beauty giant, with earnings rising 44.5 percent for the company’s fourth consecutive quarter of double-digit earnings gains.

“We want to be reasonable and rational [when] looking at the general direction of our business as a whole,” Lauder told WWD. “We believe our general expectations are achievable, but by no means are they conservative.”WWD. “We believe our general expectations are achievable, but by no means are they conservative.”

For the three months ended Dec. 31, earnings surged 44.5 percent to $138.3 million, or 60 cents a diluted share, comfortably beating analysts’ consensus estimate of 57 cents. Comparatively, the company reported earnings of $95.7 million, or 41 cents, in the same period a year ago.

Sales for the quarter rose 8 percent to $1.75 billion from $1.62 billion. Excluding the benefits of currency exchange, sales rose 5 percent.

While the holiday windfall retailers hoped for failed to materialize, the company’s commitment to the prestige department stores, a strategy that Lauder has repeatedly been forced to defend, continued to pay dividends.

“[This holiday season] was typical of what keeps going on, the consumer keeps coming later and later,” said Lauder. “It becomes a game of chicken between the consumer and retailer. We expected the consumer to come out earlier than she did.”

Skin care products edged out makeup as the company’s top-selling product category, rising 4 percent in local currencies to $617.4 million for the quarter. As an explanation for skin care’s overtaking of makeup, Lauder noted that skin care products sell at higher price points. “Skin care commands a great deal of loyalty,” he added.

According to the company, higher skin care revenues were driven by the launches of Future Perfect Anti-Wrinkle Radiance Creme and Nutritious Vita-Mineral Energy Lotion. Makeup sales weren’t far behind, rising 10 percent in local currencies to $592.4 million. Leading the charge were makeup-artist brands such as MAC, Bobbi Brown and Stila.

This story first appeared in the January 28, 2005 issue of WWD.  Subscribe Today.

As Lauder told analysts during the company’s fourth-quarter conference call in August, the company’s greatest avenue for growth lies in its hair care segment. Its youngest and smallest segment delivered during the second quarter, posting a 12 percent rise in local currencies to $71.6 million, the largest sales percentage gain of all product categories. Among the best-selling lines were Aveda and Bumble and bumble.

Despite its continued growth, it is unlikely that the hair care segment will reach the heights achieved by the skin care and makeup segments, nor is it necessarily expected to, according to Lauder. “We’re very happy where Aveda and Bumble and bumble are positioned. They seem to be going along right where they ought to be,” he said. “Hair care is not an insignificant contributor to a number of our competitors. However, we’re focused on the prestige segment; we have no mass,” he added.

While hair care fulfilled its promise, fragrance sales continued to struggle, slipping 1 percent in local currencies to $458.6 million. The company noted that, on top of competing in a crowded market, the fragrance segment was up against a 16 percent sales gain in the year-ago quarter.

According to Lauder, a shift has occurred in the fragrance market as a whole. “The investment for a new fragrance is still significant. The thinking used to be that you’d lose money in the first year and make it back in years two and three,” said Lauder. “Now, the question is whether some of these new brands can make it to year two, three or four. The life cycle of certain fragrances can be that of a fruit fly if we’re not careful.”

On the conference call, Lauder added of the fragrance market: “The average life span of a new fragrance launch is now barely 18 months to two years, unless it gains significant traction with consumers for any number of reasons. So what you’re seeing now are the very obvious changes in the foundations and the fundamentals of the prestige fragrance business, predominantly in Europe and North America, the two largest — in an absolute value base — fragrance markets in the world. As to celebrities, somebody has been saying, sooner or later, that celebrity following will diminish. I don’t expect to see it happen any time soon. It has only been growing, and growing leaps and bounds.”

Sales by region were led by the Americas, which rose 9 percent to $877.7 million. Sales in Europe, the Middle East and Africa rose 7 percent to $628.9 million. Double-digit sales growth in Asia and the Pacific reported during the first quarter dwindled during the second, rising 4 percent in local currencies. Sales in Taiwan, China and Hong Kong posted double-digit gains for the quarter. However, those gains were offset by poorer sales in Japan and South Korea.

Results were no less impressive for the first half, with the company posting a 35.1 percent rise in earnings to $233.3 million, or $1.01 a share, from $172.7 million, or 75 cents a share.

Sales advanced 9.7 percent, or 7 percent excluding currency gains, to $3.25 billion from $2.97 billion.

During the company conference call, Lauder addressed concerns regarding a potential impact from the Dec. 26 tsunami.

Lauder noted that the company does not have manufacturing operations in any of the countries and therefore doesn’t feel it will be greatly affected by the disaster. However, he noted that any impact on the company’s Asian travel retail business wouldn’t be realized until the end of the third quarter.

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