By  on October 26, 2007

The Estée Lauder Cos. is thinking globally.

With troubles mounting in the U.S. — mortgage-induced headaches, rising oil prices and a credit crunch — the beauty firm, which Thursday reported a 32.9 percent decline in first-quarter profits, has trained its eye on developed and emerging markets abroad.

Estée Lauder president and chief executive officer William P. Lauder told analysts, "We have numerous opportunities to place our products in untapped markets, find alternative distribution and spread the word about technology and excitement in our diverse portfolio of brands." He later told WWD, "International is becoming a larger portion of our business that offers a more meaningful return on investment."

During the earnings call, Lauder reiterated that the company's international business continued to fuel performance, which was offset by an increased investment behind sales associates and a change in department stores' buying calendar for holiday, which has shifted $40 million into the second quarter.

That said, for the quarter ended Sept. 30, the beauty firm's net earnings slid to $39.1 million, or 20 cents a diluted share, from $58.3 million, or 27 cents, in the prior-year period. Sales gained 7.3 percent to $1.71 billion from $1.59 billion a year earlier.

Department stores — Estée Lauder's largest allies — are bracing for a tough holiday season. The National Retail Federation has forecast that holiday sales will increase 4 percent to $474.5 billion this year — falling below the 10-year average of 4.8 percent and signaling the worst performance in five years.

Lauder said he is "cautiously optimistic" about the upcoming holiday season. Dan Brestle, the firm's chief operating officer, echoed Lauder's take, saying, "We're prepared for a pretty good season. Not a great season, but a pretty good one." He added that the company's brands have stepped up the value proposition of their gift sets.

Lauder said the company continues to explore alternative retail channels. For instance, its star makeup artist, Bobbi Brown, has appeared on QVC three times, and will now host a segment on the shopping network every other month. In September, its BeautyBank division rolled out Good Skin Tri-Aktiline Instant Deep Wrinkle Filler — the best-selling beauty product at Kohl's department stores — to more than 520 Sephora doors in Europe. BeautyBank also intends to expand its relationship with Coach beyond fragrance to additional beauty items, said Lauder. Commenting on Ulta Salon, Cosmetics & Fragrance Inc., the beauty retailer that went public on Thursday, Brestle said, "Ulta is on our radar." Estée Lauder currently distributes fragrances to Ulta.Lauder said the firm will keep growing international sales with strategic initiatives, which in the first quarter included a continued investment in travel retail, where it allocated an additional $6 million to increase the visibility and assortment of its brands, and the opening of 34 stand-alone MAC Cosmetics doors, two-thirds of which are located in international markets. The company plans to open 20 more MAC Cosmetics stores in the second quarter. Lauder noted that travel retail sales gained 20 percent in the quarter.

"We strongly believe that the investments we've made in the last six months will start to pay off in the second-quarter results," said Lauder.

By region, first-quarter sales in the Americas dipped 0.5 percent to $898.9 million, while sales gained in Asia-Pacific, increasing 13.5 percent to $260 million, and in Europe, the Middle East and Africa, with sales rising 11.2 percent to $551.2 million.

Bear Stearns analyst Justin Hott said the firm's emphasis on its international business marks a step in the right direction. "You could argue that, like Avon and Procter & Gamble, the Estée Lauder Cos. could become an international story."

By category, makeup sales were essentially flat, dipping 0.4 percent to $663.1 million, dragged down by the shift in the U.S. retail calendar. Skin care sales gained 6.4 percent to $619.5 million, fragrance sales rose 5.5 percent to $313 million, and hair care increased 23.2 percent to $102.6 million, boosted by the acquisition of the Ojon brand.

The company forecast second-quarter sales growth of 10 to 12 percent. Lauder, responding to several analysts' bewilderment over his optimism given increasing economic challenges in the U.S., said, "Business outside North America is very strong and growing in high-single digits....Some analysts can't see beyond the U.S. They only look at NPD data."

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