By  on October 26, 2006

NEW YORK — Despite the challenges of department store consolidation, the Estée Lauder Cos. delivered solid first-quarter results Wednesday as the beauty giant continues to expand its global distribution.

In the wake of Federated Department Stores' string of store closures and the new national gift-with-purchase program implemented this fall at Macy's, the company's net earnings from continuing operations for the quarter ended Sept. 30 fell 6.1 percent to $58 million, or 27 cents a diluted share, from $61.8 million, or 28 cents a share, in the prior year on sales that gained 6.4 percent to $1.6 billion.

Lauder's results beat its own estimates, and Wall Street applauded by sending the company's stock price up more than 8 percent in morning trading to $43.60. Shares later closed up 4.9 percent to 41.81, on the New York Stock Exchange.

William P. Lauder, president and chief executive officer of the Estée Lauder Cos., declared that fiscal 2007 "started on a firm footing" as the company continues to widen its international scope and tap into new distribution channels.

Referring to the balancing act of blazing new distribution paths and maintaining established ones, Lauder acknowledged, "Fundamentally, it comes down to a balance of power between ourselves and our retailers. We have to make sure that we have something that they want and they have something that we want." He continued, "What we have is great brands and a great connection to our consumers; they've got a great retail brand name and great real estate presence in the right place."

Making good on the beauty firm's plan to venture beyond department stores, during the quarter the Estée Lauder Cos.' Clinique brand entered into a long-term agreement to roll out to Canada's largest drugstore chain, Shoppers Drug Mart, which is a purveyor of prestige and mass market beauty products. The brand isn't sold in U.S. drugstore chains.

"Shoppers Drug Mart in Canada is a baby toe in the water," Lauder told analysts during a conference call Wednesday morning, adding the company will continue to look for similar avenues where the prestige customer is shopping and where the company sees a financial impact that will not jeopardize its brand equity.Over the next several years, the firm will roll out Clinique to all freestanding Sephora stores, but decided to forgo participation in the specialty store's boutiques within J.C. Penney. But Estée Lauder Cos. is taking part in the Sephora boutiques in Penney's with its Aramis brand.

"We chose not to go into the J.C. Penney/Sephora venture [with Clinique] primarily because we could not agree, between us, on the business terms and conditions that would be favorable to the brand," said Lauder.

Dan Brestle, chief operating officer of the Estée Lauder Cos., added, "In our minds, Clinique is arguably one of the top three brands in the world. To enter a new distribution channel without favorable terms was just not acceptable to us."

During the quarter, the company's flagship, Estée Lauder, weathered its first national gwp event at Macy's, running a print advertisement for the promotion in People Magazine for the first time. The company said it is looking at more ways to retool its gwp program to take advantage of the newly implemented national date. Brestle said Clinique is working on a joint venture with consumer magazines, such as Glamour, Vogue and Allure, where the beauty editors would select the items featured in the promotions.

In the first quarter, all the Estée Lauder Cos.' beauty categories — save for hair care — were adversely affected by the Federated store closures, said the company. Hair care sales climbed 17 percent to $82.4 million on a reported basis, while skin care sales gained 8.3 percent to $567 million and makeup sales increased 6.9 percent to $646.8 million, driven by makeup artist brands MAC Cosmetics and Bobbi Brown. Fragrance sales dipped 1.3 percent to $289.3 million, despite a boost from a number of recent launches, including DKNY Red Delicious, Pure White Linen by Estée Lauder and Unforgivable by Sean John. The firm is planning to expand Unforgivable to broad distribution with a smaller sized, more modest priced offering, although no time frame was revealed.

"There is a sector challenge in fragrance," said Lauder, adding that because the company's portfolio relies on American brands it is more vulnerable to challenging economics in the U.S. fragrance category.The company said designer brand Tom Ford Beauty will introduce its first offering next week, a fragrance called Black Orchid. Industry sources say Black Orchid could generate $40 million at retail globally its first year.

By region, sales in the Americas gained 2.2 percent to $900.5 million, outpaced by sales growth in Europe, the Middle East and Africa of 13 percent, to $471.9 million. Lauder noted that Asia-Pacific sales increased 11.3 percent to $221.1 million, bolstered by double-digit growth in China, South Korea and Hong Kong. Lauder said international sales currently account for roughly 50 percent of company sales, and he expects them to grow to 60 percent, surpassing North American sales, in the next six to seven years.

The company said that, nearly one month into the second quarter, it is optimistic about the upcoming holiday season, and has a host of "compelling gift sets" in store.

The Estée Lauder Cos. anticipates second-quarter net sales will grow between 6 and 8 percent in constant currency, and that full year sales will increase between 5 and 7 percent.

The company's cost-savings plan, which was put in place last year, is expected to generate approximately $30 million in savings for the current fiscal year ended June 30.

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