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Estee Lauder Profits Up 35.7 Percent

Full year earnings rise 5.5 percent.

The Estée Lauder Cos. capped off a difficult year with a powerful finish, and the company seems to be gearing up for aggressive change to maintain that pace.

Fueled by international sales momentum, the beauty firm’s net income rose 35.7 percent in the fourth quarter ended June 30 to $120.2 million, or 61 cents a diluted share, from $88.6 million, or 45 cents, a year ago. Sales for the quarter gained 14.2 percent to $2.01 billion from $1.76 billion.

For the full year, Lauder’s earnings increased 5.5 percent to $473.8 million, or $2.40 a diluted share, on a 12.4 percent rise in sales to $7.91 billion.

The company’s stock price leaped $6.29, or 14 percent, to close at $51.25 on the New York Stock Exchange, hitting a new 52-week high of $51.50 in midday trading, as executives seemed to hint at a possible restructuring plan to be unveiled later this year, noted one analyst.

The Estée Lauder Cos. will continue to focus on international markets, which accounted for 59 percent of the company’s total revenues during the year, up from 54 percent in fiscal 2007, declared William P. Lauder, chief executive officer, during an earnings call Thursday. “We expect that number to rise steadily in the coming years as our international business remains the focus of our growth story,” he added.

The ceo stressed that the company, which generates about 30 percent of its sales through U.S. department stores, will continue to invest in new distribution opportunities. He noted that the acquisition of Ojon, a hair line with a natural bent, has strengthened the company’s presence in alternative channels, including QVC, Sephora and Ulta. The company also is dabbling in the mineral makeup trend, and in the last year launched mineral products across MAC Cosmetics, Prescriptives, Origins and American Beauty, which is sold in Kohl’s department stores.

Despite the current economic woes, Lauder said beauty continues to be a bright spot for department stores, citing data from The NPD Group that indicate that, in the last quarter, total prestige beauty sales increased 4 percent, with skin care gaining 8 percent and cosmetics up 3 percent.

During the call, as anticipated, president and chief operating officer Fabrizio Freda spoke in broad terms about the company’s long-term strategy. Freda, who was on his second earnings call and is expected to take over the helm as ceo within two years, told analysts, “In fiscal 2009, we’ll put in place the necessary capabilities, skills and operational changes to carry out our strategy and reap the benefits we expect over the next few years.”

He later added, “We need to invest forcefully and confidently behind the global opportunities that will provide the biggest payoff by brand, category, region, channel. We expect to relocate resources to our most promising opportunities.”

He nodded to the company’s 60 years of consecutive growth, but clarified: “Our plan is to still grow, but to grow more strategically and brilliantly, even in today’s challenging and highly competitive environment. However, we can no longer grow at any cost.”

The goal, he said, is sustainable and profitable growth. To that end, he referenced plans to take a more disciplined financial approach, reduce inventories, prune the number of stockkeeping units and better align employee compensation to performance goals.

Freda also said the company will take a hard look at underperforming brands. The focus seems to have shifted from divesting brands, which the Estée Lauder Cos. has done over the last several years, to fixing them.

Following the call, Lauder told WWD, “The strategy is improve first, divest second.”

Referring to Freda’s call for increased cooperation and idea sharing among the company’s 29 brands, Lauder said: “The leadership of our different brands — many of whom have worked across multiple brands — will be encouraged by management to collaborate.”

When asked if the firm will fill key posts left vacant since the departure of two group presidents — Philip Shearer and Patrick Bousquet-Chavanne — within the last year, Lauder said Freda has assumed many of their former responsibilities, with Dan Brestle, vice chairman and president of the Estée Lauder Cos., North America, handling the remainder.

Wachovia Capital Markets analyst Jason Gere said he was encouraged by the firm’s shift to a more balanced focus on sales and margins from simply sales, and its continuing effort to whittle down the percentage of business done through department stores. “I was surprised by the magnitude of the organic sales growth in the quarter of 9 percent,” he admitted.

By region, full-year sales in the Americas gained 4.2 percent, on a reported basis, to $3.71 billion, aided by Internet sales and makeup artist brands.

In Europe, the Middle East and Africa, sales rose 20.6 percent to $3.01 billion, with Russia and Eastern Europe achieving double-digit sales increases. In Asia-Pacific, sales climbed 21.3 percent to $1.92 billion, due to double-digit growth in China, Hong Kong, South Korea and Malaysia.

By category, skin care sales gained 15.2 percent to $3 billion, with growth strongest in the Asia-Pacific region due to new whitening products and higher sales in China; makeup rose 10.6 percent to $3 billion, with double-digit growth in makeup artist brands contributing more than 65 percent of the incremental sales; hair care sales were up 13.3 percent to $427.1 million, boosted by the Ojon acquisition in July 2007, and fragrance sales increased 9.4 percent to $1.43 billion, although the company said it continues to face challenges in the category, particularly in the U.S.

Lauder said the firm plans to pull back the number of fragrance launches to improve profitability, and focus the bulk of its efforts on skin care, followed by makeup. The company expects fiscal 2009 sales to grow between 6 and 8 percent in constant currency.