In an interview, Fabrizio Freda, president and chief executive officer, said that even though there was “slower prestige beauty growth in the U.S. and China,” growth in China is still strong, with sales climbing in the double-digit percent range. “Consumers in second-tier cities are our new consumer. These now are aspirational consumers who are exposed to our brands,” Freda said.
He explained that what has helped is an increased distribution presence online, given that these consumers are located where there aren’t that many stores nearby showcasing Lauder’s brands.
According to the ceo, growth continues as consumers travel because as they get to know a particular brand better, they also buy more products from that brand while they are visiting other countries.
“We also have an interesting phenomenon. We see the mix growing. Before, they were focused on skin care. Recently, makeup is becoming more important and even fragrances,” Freda said.
The company brought the Jo Malone line to China during fiscal 2014 and it is showing “some good results,” Freda said. Further, the Estée Lauder and Clinique brands are available on Tmall, and the Origins brand will become available on the site later this year. And while the group has entered 12 additional Chinese cities in fiscal 2014, the online presence is helping to bring brand awareness to new consumers in tier-three and tier-four cities.
According to Freda, the global prestige beauty sector is expected to grow at a 3 to 4 percent rate for fiscal 2015, with the strongest growth from the company’s online business and emerging markets around the world. And while China and Brazil are classified as emerging markets, so too are Russia, the Middle East and Turkey.
In terms of building brand awareness, MAC Cosmetics was cited as one of the company’s powerhouse brands that has grown geographically outside of North America — it is now available in 94 countries. The color cosmetics brand, which in fiscal 2014 saw four products sold every second, is piloting several new store formats featuring different designs and sizes. In addition to adding nearly 60 freestanding MAC stores last year, the brand has been expanded digitally to include several social-media channels. According to Lauder, MAC is the largest beauty brand on Instagram and has increased its Facebook fans by 25 percent in the past year.
During a conference call to Wall Street, chief financial officer Tracey Travis said that after the annual review of the group’s capital structure, a decision was made to “maintain our current credit ratings” because it gives the company flexibility of borrowing capacity for acquisitions or to manage through an economic downturn. She said later on that “M&A is a high priority for us. We certainly have lots of activity going on in terms of looking at acquisition opportunities.” She noted flexibility to do an acquisition as one reason for not “taking on additional debt at this particular time.”
Freda on the call said the company’s strategy is “about buying brands that we can develop over time.” He cited MAC as the example of its ideal acquisition strategy: “Buying a medium-sized brand and making it huge over the years. That’s our strategy in M&A.”
As for categories, skin-care acquisitions around the world are a possibility, particularly in Asia “where we are studying the market continuously.”
Freda told analysts: “We are scanning the global market continuously for opportunities and we want to keep the flexibility to engage in these activities when the opportunity arises.”
The last time Lauder did a transaction was four years ago when it acquired Smashbox.
In the meantime, the company likely will be making a decision on the future of Osiao over the next six months, according to Freda during the telephone interview. Osiao is a brand formulated for the Asian skin-care market and developed by the company’s IdeaBank division in 2012 as a test to learn about the market and consumer tastes. If Lauder elects to continue production of Osiao, the brand eventually could be marketed in other parts of Asia.
For the three months ended June 30, net income more than doubled to $257.7 million, or 66 cents a diluted share, from $94 million, or 24 cents, in the year-ago quarter. Net sales rose 13.2 percent to $2.73 billion from $2.41 billion.
Gross profit margin rose 10 basis points to 80.4 percent, primarily due to pricing and mix, while operating margin increased 360 basis points to 9.9 percent in the quarter.
Lauder said results included the acceleration of sales orders by some retailers of about $178 million in advance of the firm’s July implementation of its Strategic Modernization Initiative in certain of its largest remaining locations. These orders normally would have occurred in the firm’s first quarter of fiscal 2015.
For the full year, net income was up 18.1 percent to $1.2 billion, or $3.06 a diluted share, from $1.02 billion, or $2.58, in fiscal 2013. Net sales rose 7.7 percent to $10.97 billion from $10.18 billion.
Lauder is forecasting first-quarter diluted earnings per share of between 51 cents and 55 cents, which includes the impact of the accelerated retailer orders that is expected to reduce the quarter’s sales by 7 percent. Excluding the accelerated orders, diluted Earnings per share is guided at between 72 cents and 76 cents.
For fiscal 2015, diluted EPS is expected at between $2.89 and $2.99. Excluding the impact of accelerated orders in the first quarter, the guidance for diluted EPS for the year is between $3.10 and $3.20.
Shares of Lauder rose 0.3 percent to close at $76.16 in Big Board trading on Friday.
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