By and  on February 5, 2009

The world has changed and so has the Estée Lauder Cos. Inc. To deal with an emerging set of economic realities and to align its costs with growth, the venerable beauty firm has implemented new marching orders: resize to the tune of 2,000 jobs, restructure and reexamine its organization.

Underperforming brands will also go under the microscope, along with redundancies and outmoded methods.

In lock step, the firm’s chief executive officer William Lauder and Fabrizio Freda, president and chief operating officer, delivered a clear message targeted to company employees and Wall Street, that change was afloat at the 64-year-old, family-run company.

The pair outlined a multipronged, four-year restructuring effort that is expected to wring out $450 million to $550 million in costs.

The first steps of this effort include plans to reduce its staff by 2,000 employees, or 6 percent of the workforce, over the next two years. The restructuring announcement helped lift shares of Lauder 2.4 percent to close at $26.82 on the New York Stock Exchange Thursday evening.

Its cost-cutting measures also include a continuation of the hiring freeze announced last quarter and an immediate freeze in merit-based pay increases. The plan could result in one-time charges of $350 million to $450 million over the next few years.

“We are cutting costs much deeper than this company has ever done,” Freda told WWD following Lauder’s earnings call.

The company also reported on Thursday that second-quarter net income fell 29.6 percent to $158 million, or 80 cents a diluted share, from $224.4 million, or $1.14, the year-ago period. Sales for the three months ended Dec. 31 fell 11.6 percent to $2.04 billion from $2.31 billion.

Richard Kunes, executive vice president and chief financial officer, referred to the holiday selling season as “one of the worst in decades,” noting that average same-store sales of U.S. prestige department stores fell 12 percent, and beauty sales in that channel dropped 7 percent. As retailers continued efforts to de-stock inventory levels, Lauder’s shipments fell 19 percent, said Kunes.

As part of its restructuring effort, the company will shift away from a heritage that fosters competition among the 29 brands, toward a more synergistic and interdependent one, said Freda.

“The hallmark of this strategy is that we will more actively encourage collaboration among the brands up front and to coordinate among the brands to make sure their messaging is unique and relevant to their particular consumer base,” Lauder told WWD. He emphasized the collaboration will be invisible to consumers, and tailored to behind-the-scenes efforts. “Our focus is scaring out expenses that are not touching the consumer,” he said. Lauder acknowledged the unpleasantness of delivering news of the planned staff cuts, but said, “It’s really about a reorganization of the activities we do, and the elimination of the redundant activities that we can consolidate.” Emphasizing the positive outcomes of the reorganization, Freda said, “This will make us a company where creativity and ideas will be even more well received and passed along to the consumer.”

Candace Corlett, president of WSL Strategic Retail, said Lauder is in a unique position in that many of its brands compete for sales in the same retail environment. Contrasting its portfolio to Procter & Gamble Co.’s she said, “P&G has been smart about not putting its brands chest to chest.”

To court the shoppers’ practical mind-set, which has been further emboldened by their pride in saving dollars and trading down, Corlett suggested beauty firms, like Lauder, leverage the strength of their brand portfolio or the different tiers within a particular brand. Referring to Lauder’s plan to trim its workforce she said, “Actions like these are necessary to survive.”

The job cuts will affect mostly manufacturing and distribution workers, white collar positions and back-office operations, said Lauder. It will not affect employees at the store level, who account for an approximate one-third of the firm’s 32,000-person workforce.

For the first half of this fiscal year, the company reduced planned operating expenses by approximately $120 million from existing cost containment efforts and belt-tightening. This equates to about $250 million in expected spending reductions for the full fiscal year.

Immediate belt-tightening plans also include slashing discretionary capital expenditure by 25 percent this year, up from its previously announced target of 10 percent.

“We realize we must also excel at cost containment to remain competitive with companies that are more productive and efficient,” said Lauder. “The current economic climate makes it even more critical to resize our cost structure.”

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