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Estée Lauder Q3 Earnings Rise 4.6%

The beauty firm’s sales for the quarter rose 3.8 percent, boosted by a 9.2 percent gain in skin care sales.

NEW YORK — For The Estée Lauder Cos. Inc., service and innovation are the key drivers having an impact on the bottom line.

This story first appeared in the May 7, 2012 issue of WWD.  Subscribe Today.

For the third quarter ended March 31, net earnings attributable to Lauder rose 4.6 percent to $130.4 million, or 33 cents a diluted share, from $124.7 million, or 31 cents, a year ago.

Sales for the period rose 3.8 percent to $2.25 billion from $2.17 billion last year. By product category, skin care sales led the charge, rising 9.2 percent to $1.02 billion from $933.4 million in the quarter.

For the nine months, net earnings attributable to Lauder rose 22.1 percent to $805.7 million, or $2.03 a diluted share, from $659.7 million, or $1.64, last year. Net sales grew 10.6 percent to $7.46 billion from $6.75 billion.

Fabrizio Freda, president and chief executive officer, told Wall Street analysts during a conference call that the firm’s performance was driven by product innovations that were supported by an effective advertising strategy and elevated customer service.

In a telephone interview, Freda explained: “Our business model [reflects how the consumer is] more interested in the combination of high-quality products with services,” such as having an expert show them how to use the products.

In the U.S., Freda noted that the prestige cosmetic sector is growing much faster than the mass category, and he attributes the two-year phenomenon to the consumers’ need for individualization — a trend that he foresees continuing and which was a key factor in the planning of its five-year strategic plan that began three years ago.

That trend is also very much alive in China as well, Freda said.

“The middle class [in China] is going directly to prestige.…Women are shopping for themselves, not for their families. It is a moment for ‘me time,’” he said.

In Europe, the markets are mixed. Prestige is growing faster than mass in the U.K., even though the economy there remains sluggish. In Italy, the balance between prestige and mass is more balanced, Freda said. Spain and Greece are softer markets in terms of consumer spending for Lauder, while those of Italy, France, Germany are holding steady.

Brazil is a fast-growing market for Lauder. While the total beauty market in Brazil is growing at 10 percent, Lauder’s sales growth is growing at a 30 percent clip, with MAC the favorite prestige brand in Lauder’s umbrella.

Freda noted that the firm continues to evaluate acquisitions, but there is “nothing specific” at the moment.

It’s no secret that Lauder prefers brands it can grow on a global basis and, similar to the Smashbox acquisition, where the brand is known primarily in the U.S., Freda said the firm could someday acquire a brand known mainly in Asia that it could expand around the world.

So far the company this year is generating record cash flow projected at $1.1 billion, which Freda said can be “used to return money to shareholders, or for an acquisition.”

The company expects fourth-quarter diluted net earnings before restructuring charges to be between 11 cents and 16 cents. For the year, diluted net earnings was forecasted at between $2.21 to $2.26, before restructuring charges.

Shares of Lauder on Friday fell 5.4 percent to close at $60.72 over concerns of a slowdown in China. Freda noted that while growth in China might slow a bit, the growth rate is still fairly robust and a slight dip doesn’t accurately reflect consumption by consumers. He noted that the Chinese consumer is still spending, particularly when one adds data from their spending on their home turf to what they’re buying when they travel.