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Cautious Outlook Hits Estée Lauder Shares

Beauty firm reported that profits leaped 72 percent in the fourth quarter, but shares fell after it issued lower-than-expected guidance for fiscal 2012.

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As stock markets gyrate and consumers grow antsy, Wall Street is clearly looking ahead — just ask the Estée Lauder Cos. Inc.

The beauty firm Monday reported that profits leaped 72 percent in the fourth quarter, but its shares fell a punishing 6.5 percent after it issued lower-than-expected guidance for fiscal 2012.

Lauder’s shares fell $6.58 to close at $94.27 on the New York Stock Exchange on a day when global stock markets were up overall. For fiscal 2012, the company forecasted a net sales gain of between 6 and 8 percent in constant currency, and diluted earnings per share of between $3.84 and $4.12. Fabrizio Freda, the firm’s president and chief executive officer, said the low end of guidance takes into account a reduction in overall global market growth due to economic turmoil, but he emphasized, “For the moment, we don’t see any signs of consumption reduction” in the U.S. market in particular.

Citi analyst Wendy Nicholson wrote in a research note Monday, “While [Lauder’s] preliminary and, in our view, clearly conservative outlook for 2012 suggests a deceleration in terms of sales, operating income and EPS growth, we still consider [Lauder’s] growth prospects to be best in class.”

The caution came on top of a fourth quarter and fiscal 2011 that were stellar on most accounts. Lauder’s biggest brands — namely Estée Lauder, Clinique and MAC Cosmetics — led a 12 percent sales gain in the quarter, putting a halt to long-held criticism by Wall Street that these brands had lost their mojo. Together, the three brands account for 70 percent of Lauder’s total sales. “[Fiscal] 2011 has been a terrific year,” said Freda, adding the company was two years into its restructuring program and in many cases ahead of schedule. “These results confirm that our strategy is working and has allowed us to reach our original 13 percent operating margin target two years earlier than anticipated,” Freda said, noting that the margin goal had originally been set for fiscal 2013. During the company’s earnings call on Monday, Freda introduced a new operating margin target of 14.5 to 15 percent by fiscal 2014.

Lauder’s newly minted strategy of developing “fewer, better” launches, particularly in skin care, and then throwing its weight behind them with a combination of print, TV and digital advertising (or “pull marketing”) backed by stepped-up retail service has changed the company’s course over the last two years. Now, the firm plans to employ that same strategy in its cosmetics business.

“All of our makeup brands will have increased activity in pull marketing,” Freda told WWD on Monday. Lauder’s increased emphasis on advertising comes as the firm rethinks its promotional strategy at retail. Freda clarified, “We are not moving away from promotions. [Rather] there’s been a gradual, measured reduction of activities, which is then balanced by increased pull marketing support.”

Jane Hudis, global brand president for Estée Lauder, added, “In North America, it’s been gradual and requires a refunneling of media resources,” which now support major launches. Those efforts, she said, have brought new customers into the store. “Retailers have been delighted,” said Hudis.

During the earnings call, Hudis said the flagship Estée Lauder brand generates $2 billion in annual sales, and does nearly 75 percent of its business outside North America. In fiscal 2011, Asia-Pacific surpassed North America as the Estée Lauder brand’s largest region.

Lauder continues to set its sights overseas, particularly in Asia. The company estimates that in 2011 roughly $1 billion of its sales were generated from Chinese consumers from around the world. Other international plans call for the opening of more stand-alone retail concepts, particularly in emerging markets. “We are a powerful retail store operator,” said Freda, noting that the company currently operates 750 stores. He added retail brand concepts well suited for emerging markets include MAC Cosmetics and Jo Malone. He also said the company is considering stand-alone formats for Estée Lauder and Clinique, the latter of which has two stores in Brazil. In Buenos Aires, the company has opened a split store concept with Bobbi Brown on one side and La Mer on the other. More new concepts are likely, said Freda.

For the three months ended June 30, net earnings attributable to the beauty firm were $41.1 million, or 20 cents a diluted share, up from $23.9 million, or 12 cents, in the year-earlier period. Net sales in the quarter gained 12 percent to $2.06 billion, from $1.84 billion, or up 7 percent excluding the impact of foreign currency translation.

By category, skin care sales increased the most, or 11 percent in local currency, followed by a 7 percent gain in makeup. Hair care sales rose 4 percent, while fragrance sales declined 5 percent.

For the year, profits rose 46.5 percent to $700.8 million, or $3.48 a diluted share, from $478.3 million, or $2.38, a year earlier. Sales gained 13 percent to $8.81 billion from $7.80 billion, or 12 percent excluding the impact of foreign currency translation.

The company continues to take charges associated with its restructuring program, both for the quarter and for the year, with the amounts decreasing year-over-year in the fourth quarter and fiscal 2011.

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