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On a Roll: Estee Lauder Cos. Aims to Build on Strong Growth

William Lauder wrapped up his first year as ceo of The Estee Lauder Cos. on a high note, as annual net income rose 26.7 percent to $433.6 million.

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NEW YORK — William Lauder wrapped up his first year as chief executive officer of the Estée Lauder Cos. Inc. on a high note.

Product launches, along with robust sales in all of its product segments, drove top-line growth in the beauty giant’s fourth quarter and fiscal year-end period.

But the new ceo isn’t stopping there. Lauder on Tuesday outlined a strategic plan for the group designed to bolster earnings and sales. The plan includes: optimizing the Estée Lauder Cos.’s brand portfolio; strengthening its product categories; bolstering and expanding its geographic presence; diversifying its distribution lines, and achieving operational and cost excellence.

“We have to fight a multifront war simultaneously,” Lauder told WWD. “We can’t just go at this serially. We’ve got lots of incredibly talented people and we have to focus everybody on the key initiatives that are important for them. The challenge for me is to keep everyone focused.”

The plan is aimed at building on the momentum the Estée Lauder Cos. has seen in the last year. Excluding a special tax charge, for the fourth quarter ended June 30, net income rose 32.3 percent to $94.1 million, or 42 cents a diluted share, from $71.1 million, or 31 cents, in the same period last year on sales that gained 10 percent to $1.54 billion from $1.4 billion. For the year, net income rose 26.7 percent to $433.6 million, or $1.90, from $342.1 million, or $1.48, in the prior year on sales that increased 9.4 percent to $6.34 billion from $5.79 billion.

Excluding the charge, the Estée Lauder Cos.’s 42 cent EPS was a penny ahead of analysts’ consensus estimate. Shares of the company closed the day up 9.1 percent to $40.80.

The special tax charge the company took during the fourth quarter totals $27.5 million, or 12 cents a share. The charge relates to its intention to repatriate $500 million worth of intercompany dividends in fiscal year 2006 under The American Jobs Creation Act of 2004. Including the charge, fourth-quarter net income decreased 6.3 percent to $66.6 million, or 30 cents. Including the charge for the year, net income showed a gain of 18.7 percent to $406.1 million, or $1.78.

During the quarter, on a reported basis and not in local currencies, fragrance sales gained 9 percent while skin care rose 10 percent and makeup climbed 11 percent. Sales of hair care products increased 2 percent. By region, sales in Europe, the Middle East and Africa experienced a 13 percent increase, while Asia-Pacific jumped 6 percent. Sales in the Americas climbed 9 percent.

For the year, net sales of skin care increased 10 percent to $2.35 billion on a reported basis while makeup sales gained 13 percent to $2.42 billion. Fragrance sales climbed 3 percent for the year to $1.26 billion.

“First, foremost and most importantly, we grew sales in each major product category and in each region,” said ceo Lauder on a company conference call. “Fiscal 2005 sales growth in constant currency was led by strength in makeup, hair care and skin care, followed by less buoyant growth in fragrance.”

The robust sales results rounded out a year of initiatives designed to excite the company’s brand loyalists and woo new customers. The firm planted a stake in a new retail channel, launching three brands from its BeautyBank division — namely American Beauty, Flirt and Good Skin — in Kohl’s department stores. The deal with Kohl’s includes 550 products across 1,800 gondolas and 600 doors. the Estée Lauder Cos. also has trained some 2,500 beauty advisers, and this month began rolling out a fourth brand at Kohl’s, called Grassroots.

“This project was the biggest launch in the history of our company,” declared the ceo.

He noted the BeautyBank division currently accounts for less than 1 percent of company sales.

The company also expanded its portfolio with two new designer brands, Missoni and Tom Ford. The addition of the Missoni license is intended to strengthen the firm’s European fragrance portfolio and its travel retail business. Its alliance with Tom Ford initially will include a collection, due to launch in November, tailored for high-end department stores, such as Neiman Marcus, Saks Fifth Avenue and Bloomingdale’s. The company said it will continue to leverage popular celebrities to trumpet its brands. A month after announcing its partnership with Ford, Lauder signed Gwyneth Paltrow as a spokeswoman for the Estée Lauder brand. William Lauder commented that both Ford and Paltrow will enhance the image and the beauty authority of the Estée Lauder brand.

The company’s new strategic initiatives, which the ceo emphasized have been developed intensively for the past four months, comprise an aggressive five-pronged look at the business.

To optimize its brand portfolio, the company intends to increase R&D, distribution expansion and advertising and promotion investment behind high-growth, high-profit brands, such as MAC Cosmetics, while examining the possible sale of low-performing ones. In the conference call, Lauder cited as examples the sale of cosmetics brand Jane and the return of the Kate Spade fragrance license.

On the product front, the company plans to develop more local R&D in select countries to drive innovation based on local consumer needs. The ceo cited the new R&D center in China as an example.

To expand its geographic footprint, the company will put more muscle behind its established brands in developed markets, such as France and Japan, while also looking closely at opportunities in long-term strategic markets, including China, India, Russia, Brazil, Turkey and Vietnam. It also is exploring a pilot program for BeautyBank in Mexico.

While Federated Department Stores remains the company’s biggest customer, the Estée Lauder Cos. is investing further in the worldwide travel retail and European independent pharmacy channels to diversify its distribution. It recently has begun distributing Origins’ products this way in France.

Finally, the company will continue to enforce a strong cost-containment policy to improve its operational and cost structures.

Regarding the Estée Lauder Cos.’s outlook for the first half of its fiscal year 2006, it expects sales to increase between 7 and 8 percent. Due to the merger of Federated and May Department Stores Co., as well as the impact of expensing stock options, diluted EPS is expected to be flat year-over-year.

In makeup, Clinique will kick off fiscal 2006 with product launches such as Colour Surge Butter Shine lipstick and Repairwear Anti-Aging Makeup SPF 15, a foundation designed to meld skin care technology with cosmetics. For its part, the Estée Lauder brand will introduce Individualist Natural Finish Makeup designed to adapt to the wearer’s skin tones. On the fragrance front, the company plans to selectively expand the Tommy Hilfiger franchise and introduce new fragrances from its newest licenses, Sean John and Missoni.

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