Lauder Profits Leap, Cost Cuts Planned

First-quarter profits surge 30.7% on 11.3% sales gain, but outlook pared.

As economic storm clouds gather and consumers’ moods darken, The Estée Lauder Cos. Inc. is drafting cost cuts of $150 million to $200 million, slated to be unveiled early next year.

This story first appeared in the October 29, 2008 issue of WWD.  Subscribe Today.

The luxury beauty firm began its fiscal 2009 year on sure footing, reporting a 30.7 percent surge in first-quarter profits. Net income for the quarter was $51.1 million, or 26 cents a diluted share, compared with $39.1 million, or 20 cents a share, a year earlier. Sales for the three months ended Sept. 30, gained 11.3 percent to $1.9 billion from $1.71 billion. Sales rose 9.8 percent when measured in local currencies.

Despite the robust results, the company has adopted a more austere tone than in recent months. Chief executive officer William P. Lauder acknowledged the slowing global economy will impact the firm’s sales growth for the remainder of the year, and the rebounding dollar will also have a negative impact on results.

“While we are pleased with our first-quarter results, we are taking a very conservative approach to fiscal 2009,” Lauder told WWD.

Stressing the firm’s strengthened financial discipline, Lauder told analysts Tuesday, “With the threat of global recession, we are cautious about the pace of our growth for the remainder of the fiscal year.”

The current global economic climate, as well as the strengthening dollar, prompted the company to lower its fiscal year sales growth estimates in constant currencies to 3 percent to 5 percent and earnings per share to $2.20 to $2.50 from an earlier range of $2.57 to $2.72. The revised guidance includes the planned cost cuts.

To that end, the firm plans to reduce spending by 2 percent to 3 percent in fiscal 2009. A number of the belt-tightening efforts include hiring freezes and reductions in travel, nonessential marketing spending and the cost of goods and distribution.

Lauder said the firm plans to announce details of what he referred to as a “very comprehensive” cost-cutting strategy during the company’s next earnings call in February.

“Since mid-September, we have been experiencing softer sales,” said Lauder. However, he noted that consumers have shown interest in spending when value-laden deals surface. “The consumer has been very responsive to value propositions more than any other method,” said Lauder, citing recent gift-with-purchase programs as an example.

He added that the company’s retail partners plan to take a more aggressive promotional approach for the upcoming holiday season. “Now is not the time to be subtle,” said Lauder of heightened promotional efforts.

Speaking to analysts from France where he was attending the global duty free travel conference, Fabrizio Freda, president and chief operating officer, said, “During the last quarter, in addition to delivering strong results given the market conditions, we also began to lay the critical groundwork needed to achieve our new strategic plan.”

Referring to the pullback in consumer spending as a “consumption crisis,” Freda said, “In this unprecedented environment, we can control our business plans and cost structure but what we cannot control is consumer reactions to the constant bombardment of negative news and uncertain conditions.”

He continued, “As our industry faces great challenges, we expect to use our financial strengths to take advantage opportunities to grow, positioning ourselves to fully achieve our strategic plan. When consumer spending returns to normal, we expect to be in an even stronger place with lower costs, higher market share and improved return on investment capital.”

During the quarter, international sales accounted for nearly 60 percent of the business, said Lauder, acknowledging the firm is forecasting slower growth rates in some markets.

By region, sales in the Americas gained 4.2 percent, in local currency, to $939 million, boosted by growth in Latin America and Canada. In Europe, the Middle East and Africa, sales rose 13.5 percent to $641.5 million, led by the U.K., Italy and the travel retail business. In Asia-Pacific, sales climbed 21.1 percent to $323 million, driven by strength in Japan and China.

By product category, sales in local currencies rose 13.9 percent for skin care, 10.6 percent for makeup and 3.3 percent for fragrances, but were down 4.4 percent in the hair care area.

Caris & Co. analyst Linda Bolton Weiser said there were zero signs of weakness in the quarter, despite the sales slowdown in mid-September.

Referring to the firm’s yet-to-be-unveiled cost-cutting strategy, she said, “The macro situation is forcing the company to do this,” adding that beleaguered state of the economy may make it easier for Freda to implement cost discipline. “The company is trying to be ahead of the curve. For Estée Lauder, that’s fairly proactive.”