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Estée Lauder Boosts Guidance for 2014

Company cites growth in prestige beauty, new product launches and stabilizing international markets.

The Estée Lauder Cos. Inc. raised full-year earnings-per-share guidance for 2014 based on growth in prestige beauty, new product launches and stabilizing international markets.

That was disclosed on Friday following the beauty firm’s posting of double-digit percentage gains in both profits and sales in the third quarter.

Fabrizio Freda, president and chief executive officer, told WWD, “We had a terrific quarter, with all engines of growth working well. The peculiarity of this quarter was that we are growing in every single region, in every single brand, in every single category…despite [softer markets in the] U.S. and China.”

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Freda emphasized that the company’s portfolio of brands and geographic reach reflect a company that is “super well-diversified. We can handle the different volatilities around the world like never before.”

For the three months ended March 31, net income rose 19.2 percent to $213.2 million, or 54 cents a diluted share, from $178.8 million, or 45 cents, a year ago. Excluding charges connected with a remeasurement of the exchange rate in Venezuela due to changes enacted by the Venezuelan government, net income for the current quarter was $251.7 million, or 64 cents.

Net sales in the period rose 11.3 percent to $2.55 billion from $2.29 billion. Comparison of sales between the current and prior year quarters were impacted by the firm’s Strategic Modernization Initiative, which shifted some sales from the second quarter to the third. Excluding the shift of $94 million in sales from one quarter to the next, the sales gain in the current quarter was still 8 percent compared with a 3 to 4 percent growth rate in the prestige industry, according to Freda.

For the nine months, net income rose 2.2 percent to $946.4 million, or $2.40 a diluted share, on a net sales gain of 6 percent to $8.24 billion.

For the balance of the year, the ceo said the company continues to forecast local currency sales growth of 6 to 7 percent. Lauder also raised its full-year EPS guidance to between $2.86 to $2.90, before charges and the effect of potential accelerated sales orders in connection with its modernization initiative.

The quarter’s results and upping of EPS guidance sent shares of Lauder up 4.8 percent to close Friday at $75.62 in Big Board trading.

In terms of product innovations, Freda noted that a growing trend in Asia is the use of watery lotions, a region where many Asians use the water-based product as their first step in their skin-care regimen. Clinique’s Even Better Essence Lotion in the category has been the brand’s biggest launch in Japan in more than a decade, and is set to launch in China during the current fourth quarter, he said. Estée Lauder also introduced a higher performance essence in lotion product called Micro Essence Skin Activating Treatment Lotion that is performing well in the region. The ceo noted that La Mer introduced its own watery lotion a few months ago and continues to “exceed our expectations.”

While the category is a major one in Asia, Freda said it reflects a growing trend in other markets as well, particularly in the U.S. with its base of Asian-American consumers and elsewhere by consumers of Asian heritage.

Also boosting growth is a new sonic device that will be part of Clinique’s cleansing system. Freda said, “There are more than 15,000 Clinique consultants who are looking forward to selling this new cleansing system and to educating the global consumer.” The ceo declined to provide further details other than that it will be introduced in the first quarter of fiscal year 2015, or sometime between July and September of this year.

The makeup category is another strong one, particularly for MAC Cosmetics, which Freda said “introduces something new just about every week, such as a product, color story, collaboration or locally relevant collection.”

While skin care remains a growing category within prestige beauty, Freda said “this year we see a special acceleration globally of the makeup category” and that it is becoming more important as a promising sector within prestige beauty. Freda noted gains in the quarter in lipstick sales, particularly in MAC, where sales at retail rose 25 percent in the U.S. prestige department store channel.

Separately, some market sources have been talking lately about a possible shift away from lip gloss and back to lipsticks.

On the more macro issues that could impact sales, Freda said he expects the dollar to become stronger over the next 12 months, and that the company will see stronger growth in the emerging markets, of which a big block for Lauder is grouped around Turkey, South Africa, Mexico, Brazil and the Middle East.

In the conference call to Wall Street, Cedric Prouvé, group president for international operations, noted some highlights from the international businesses.

According to Prouvé, “International comprises over 60 percent of global sales and profits for the company.”

Prouvé noted that the developed markets, such as Western Europe and Japan, are improving and that the turnaround markets are stabilizing. Growth in the developed markets has been due to diversification of channel mix, as well as market share in the prestige beauty category.

Prouvé noted that the Russian market is more diversified by brands and distribution than before, and the company has been expanding its freestanding stores and online businesses. He also noted that the company continues to monitor the crisis in the Ukraine, although the market is not a large component of its Russia business and “we have seen very little in the way of impact. The potential risk stems more from the possible escalation of sanctions between the U.S. and Russia.”

While Korea remains challenging, Prouvé said the “decline experienced in the past couple of years has slowed dramatically and prestige beauty is stabilizing with retail growth inching upwards.” Another area of recovery is Australia, with retail performance indicating a turnaround that also shows growth in each quarter, Prouvé said. He added that Australian consumers with affinity with makeup have helped grow the MAC brand, which Prouvé said the company expects to “finish the year as the leading prestige brand in the country.”

As for China, which remains a key strategic priority, Prouvé said that there was a slowdown in January and February due to competitive discounting for the Chinese New Year holiday, but that sales recovered in March and are now “up 11 percent year-to-date without playing the promotional game.”