For a company in the business of offering newness, the Estée Lauder Cos. Inc. ushered in a windfall of change in fiscal 2009, introducing a new management team and a reorganized company structure and culture.
This story first appeared in the August 14, 2009 issue of WWD. Subscribe Today.
The latter two efforts stem from the beauty firm’s four-year restructuring plan designed to jump-start profitable growth and extend its global reach. Charges related to the restructuring contributed to a loss in the fourth quarter, but the company remained profitable for the year.
For the quarter ended June 30, losses totaled $17.9 million, or 9 cents a diluted share, compared with year-ago earnings of $120.2 million, or 61 cents a share. Excluding restructuring charges, earnings per share were on par with the 20 cents Wall Street expected. Sales for the three months fell 16.4 percent to $1.68 billion from $2.01 billion.
For the year, earnings dropped 53.9 percent to $218.4 million, or $1.10 a diluted share, on sales that declined 7.4 percent to $7.32 billion.
Shares of the beauty firm gained 16 cents, an increase of 0.4 percent, to $37.80 in New York Stock Exchange trading Thursday.
The company continued its belt-tightening, squeezing out $250 million in costs this year as it put a freeze on hiring and salary increases and pruned staff. Lauder indicated by December it will have notified about two-thirds of the 2,000 employees expected to be affected by the firm’s plan to trim its workforce by 6 percent.
“We’ve learned to succeed with less,” said executive chairman William Lauder. He was presiding over his last earnings call before ceremonially handing over that baton to Fabrizio Freda, who officially took over the helm as president and chief executive officer from Lauder on July 1.
For the year, by category, sales of skin care — Lauder’s primary area of focus going forward — declined 3.7 percent to $2.89 billion on a reported basis; makeup sales dipped 5.6 percent to $2.83 billion; hair care sales decreased 5.8 percent to $402.4 million, and fragrance sales slid 19.6 percent to $1.15 billion.
By region, the company reported annual sales in the Americas fell 7.8 percent on a reported basis to $3.42 billion. In Europe, the Middle East and Africa, sales declined 13.2 percent to $2.61 billion. Asia-Pacific continued to drive international growth, gaining 9 percent to $1.3 billion.
The firm continues to eye international expansion, noting that MAC Cosmetics is slated to open some 50 doors globally and Origins will enter China in March. Bobbi Brown is gearing up to launch in Poland next year. International sales reached 59 percent of revenue in the quarter, boosted by softness in the U.S. market.
Freda reiterated that Lauder will focus on “fewer, bigger ideas in high-priority areas,” adding the company has expanded its research-and-development efforts in its Paris-based “innovation center,” and plans to do the same in Asia.
The beauty firm also is fine-tuning its consumer research, which Freda said will help direct R&D and marketing decisions.
At the same time, Lauder has begun to do the heavy lifting to improve underperforming segments of the business. For instance, Freda said the company has cut Aramis and Designer Fragrances’ number of stockkeeping units by 50 percent from fiscal 2007 levels. It also plans to reemphasize classic scents and focus on “fewer, bigger” launches. In a similar move, Lauder is refocusing Darphin on skin care as it pulls the brand out of the makeup and fragrance categories. Freda said the actions Lauder is taking to address underperforming brands and segments include aggressive cost cutting, exiting certain categories or countries — as in the case of Darphin — and, in some cases, relaunching the brand. The company maintains it may ultimately decide to shed underperformers.
Turning to the upcoming holiday selling season, the company said it anticipates sales to be flat in comparison with last year.
Lauder will continue to attempt to cater to the shopper’s preoccupation with value. “The consumer is actively responding to value messages,” said William Lauder. “Is there one magic price point? No. But, there are magical price levels, which we are continuing to focus on and making sure consumers have access to price points under $30, under $50, under $75.
“We are seeing some caution from the consumer, but certainly not the reticence she had from the late fall through the early spring 2009,” he added. “She is coming back, but she is responding to stronger value propositions.”
Freda said the company is working to reframe the concept of value. He told WWD, “Today, the consumer is seeing value in a simple way: promotions or price cuts. Our challenge is to communicate it in other ways.” He pointed to mini facials at the Origins’ counter and signage displaying price as examples.
Looking forward, the company expects first-quarter net sales to decrease by 2 to 5 percent in constant currency. For fiscal 2010, Lauder forecasts net sales growth of flat to 2 percent.
Referring to Lauder’s strategic moves over the last year, Freda said: “The level of activity that is going on strategically — in terms of restructuring, resizing the organization, eliminating all this cost, taking inventories down in a dramatic way, refocusing the portfolio in the long term — those are activities that require a lot of cultural change.”