Fabrizio Freda, president and chief executive officer of The Estée Lauder Cos. Inc., has an enviable problem.
Third-quarter profits more than doubled, soaring past Wall Street’s expectations, while sales increased 16.4 percent. The stock is near its all-time high, the prestige business in U.S. department stores is coming back and the beauty giant has a $1.1 billion cash horde to solidify its position.
But analysts pushed Freda on a conference call Thursday, trying to get a read on how much upside there was to current guidance.
Lauder raised its adjusted earnings guidance for the year to $3.55 to $3.65 a share — up from the $3.40 to $3.60 projected in March. The guidance envisions fourth-quarter profits of 10 cents to 20 cents a share — less than the 29 cent adjusted profit posted a year earlier.
But analysts weren’t having it.
“I just have trouble believing in a down quarter,” said Sanford C. Bernstein & Co. analyst Ali Dibadj.
Wendy Nicholson, at Citi, had a longer-term gripe: “Is there any reason for us to think that margins aren’t going to be up in 2012 and then again in 2013? Because it just seems crazy that you’re not raising that 2013 margin target at this point.” Another analyst asked if the company could reduce its promotional price cuts and pump that money into advertising.
Such is the plight of Freda, who responded by both playing the part of company cheerleader and offering a measured outlook given the still-uneven economy.
“We give our guidance in just the way we see things, we try to be as balanced and correct as possible,” Freda told WWD. “We are doing well. The economy globally is making some gradual and small improvements from what we can observe, but it’s very mixed and there is high volatility.”
Freda said China and Brazil were doing “very well,” and Germany and France were “fine,” while Spain, Portugal, Greece and Japan were among the countries suffering.
“We are particularly pleased by the increased consumption in the U.S., where the consumer is back probably faster than the economy,” he said. “The consumer search for quality is increasing, and the consumer interest in high-quality service is also increasing.”
Beauty sales in U.S. department stores and Sephora are outpacing those in food, drug and mass stores, Freda said, quoting figures from The NPD Group.
Lauder’s business was up across the board. Third-quarter earnings attributable to the firm shot up to $124.7 million, or 62 cents a share, from $57.5 million, or 28 cents, a year earlier. Adjusted profits of 71 cents came in well ahead of the 57 cents analysts expected. Shares responded by increasing $1.19, or 1.2 percent, to $97, at one point coming within 61 cents of the 52-week high of $97.90 reached on Monday.
For the nine months, profits rose 45.2 percent to $659.7 million, or $3.28 a diluted share, from $454.4 million, or $2.27, a year earlier. Revenues increased 13.3 percent to $6.75 billion from $6 billion.
Freda told analysts the company was doing better because it was focusing on the biggest opportunities.
“We have chosen to play in areas which are the fastest-growing areas,” he said. “We put our boat in the wind very well, and the wind is coming from China…from the other emerging markets…from multicultural and multiethnic consumers…[and] from high-quality brands.”
And the company is looking to keep adding businesses. In the interview, Freda said Lauder was “actively” looking at further acquisitions, particularly in the global skin care arena and in businesses with a “strong potential in Asia.”
As the company buys businesses, it picks up expertise. Freda said the July purchase of Smashbox is helping to teach the Lauder company how to operate in specialty stores — a skill that is proving to be valuable given the segment’s current growth trend.
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