WWD.com/beauty-industry-news/financial/lauder-posts-profit-3212359/
government-trade
government-trade

Lauder Looks to Ads to Reverse Trading Down

Company moves to profit in fourth quarter.

View Slideshow

Mass beauty firms beware: The Estee Lauder Cos. Inc. aims to use beefed-up advertising to reverse the recession-driven trend of consumers trading down. It’s a bold move intended to recruit new customers, mass market shoppers included.

This story first appeared in the August 13, 2010 issue of WWD.  Subscribe Today.

And Lauder has already gotten started.

In 2010, the bulk of the company’s ad spending occurred in the second half, with the beauty firm increasing fourth-quarter spending by 35 percent. For the year, Lauder’s advertising spending was up 7 percent to $1.8 billion.

The investment is part of what president and chief executive officer Fabrizio Freda referred to as the company’s new advertising model. “It focuses on fewer, bigger, winning initiatives in each of our key brands,” he told WWD, citing the spring launch of Clinique Even Better Clinical Dark Spot Corrector, which was supported by a campaign comprised of print, digital, TV and public relations efforts. “That attracts new consumers to our counters, where they get a high-touch experience and are introduced to more than that one product. That does not happen at mass.”

The company also said it is able to measure the number of new customers buying Lauder’s products. Citing competitive reasons, Freda declined to share specifics but said, “We’ve increased traffic in department stores and specialty stores, and part of this traffic was previously shopping at mass.”

During the company’s earnings call Thursday, Freda told analysts, “We have gained share against prestige competitors in every region for the last two years. However, in some markets and categories, mass brands have grown faster than prestige behind heavy advertising, broad distribution and lower prices. We consider all brands, both mass and prestige, to be our competitors, since many consumers buy beauty product across various channels.”

Freda emphasized advertising is the only area where Lauder — which is one year into a four-year restructuring plan — has increased its spending. He noted that in fiscal 2010, Lauder saved $364 million from various cost-saving initiatives, exceeding its original estimate of $175 million to $200 million.

This year, the company plans to increase spending by “high-single digits” behind advertising, merchandising and sampling for major initiatives.

In the fourth quarter, profits attributable to the company totaled $23.9 million, or 12 cents a diluted share, compared with year-ago losses of $17.9 million, or 9 cents a share. Excluding special items, including restructuring expenses, earnings per share would have been 29 cents, 1 cent lower than analysts’ estimates of 30 cents. Sales for the quarter ended June 30 rose 9.3 percent to $1.84 billion from $1.68 billion.

The company’s shares ended trading Thursday at $58.80, down $1.55, or 2.6 percent.

For the year, profits attributable to the company more than doubled to $478.3 million, or $2.38 a share, from $218.4 million, or $1.10 a share. Sales gained 6.4 percent to $7.8 billion from $7.32 billion.

During the quarter, the company saw sales growth across all geographic regions and in all product categories, with the exception of fragrance.

By category, the company’s skin care sales gained 12.1 percent on a reported basis to $771.2 million; makeup increased 10.3 percent to $733.8 million, and hair care grew 5.2 percent to $109.9 million. Fragrance sales, on the other hand, dipped 0.6 percent to $219.1 million. The company reaffirmed that, by product category, skin care is its principal area of focus, particularly in Asia. It is Lauder’s largest contributor of sales and profits.

By region, Lauder’s sales in the Americas gained 3.9 percent on a reported basis to $803.8 million. In Europe, the Middle East and Africa, sales increased 12.2 percent to $699.9 million, and sales in Asia-Pacific rose 15.7 percent to $338.8 million. International now accounts for 62 percent of the company’s revenues.

The fourth quarter also marked Freda’s first year as ceo. Stifel Nicolaus analyst Mark Astrachan gave him high marks, saying, “It’s been an impressive year. The initiatives that he has implemented, including the cost-savings program, have been well executed.” Referring to Lauder’s accelerated ad spending, Astrachan said, “He’s doing the right thing by reinvesting in brands’ health.”

This year, the firm expects constant currency sales to rise between 6 and 8 percent.

View Slideshow