NEW YORK — Recouping from a rocky 2002, Estée Lauder Cos. laid out a five-year plan with more modest growth expectations.

While cost controls are becoming more important, Lauder is looking toward a future with continuing international expansion and product development.

Lauder is now looking for average annual top-line growth, in local currencies and excluding acquisitions, of 6 to 7 percent through 2007. Operating margins are slated to advance to 13 to 13.5 percent. Previous expectations had the firm set for 8 to 9 percent sales growth and a 15 percent uptick in operating margins.

The beauty company’s top executives gave Wall Street its forecasts and strategies at an analyst meeting at The Pierre Hotel Tuesday.

Fred Langhammer, president and chief executive, asserted Lauder "has not strayed away from any of our key strategies." To drive growth the firm will focus on new product innovation, diversifying its distribution, driving all of its product categories and expanding its global reach.

Lauder will also target key areas for profit improvement, including its supply chain, with greater efficiencies, a standardization initiative in information technologies and productivity improvements by business units.

Key to improving profitability will be cutting back on operating expenses. The firm expects overall operating expenses to go to 61.5 percent of sales in 2007 from 63.5 percent last year. Administrative and other expenses are set to be slashed 90 basis points over the period to 14.1 percent of sales, while selling and distribution expenses should be reduced by 120 basis points to 23.7 percent of sales. Advertising and promotion expenses, vital for the brand building which is a focus for Lauder, are expected to inch up 10 basis points over a five-year period to 23.7 percent of sales.

On the theory that what’s good for the Estée Lauder name is good for the company at large, Patrick Bousquet-Chavanne, group president, laid out a four-point strategy for growth in the flagship brand.

First, he wants to modernize the Lauder brand image creating "a stronger emotional connection for our customer base." Part of the modernization will be improved communication with a new ad campaign, in-store image and packaging.

Bousquet-Chavanne also wants to drive new product innovation. New products accounted for 18.2 percent of the Lauder brand sales in 2002, a measure he wants to boost to 20 percent for 2003.The company expects to develop new customers through increased share of voice and brand awareness globally and accelerated public relations activity, including more special events.

Turning to the financial side, the final leg of Bousquet-Chavanne’s growth strategy for the Lauder brand is to strengthen operating margins. Accordingly, he said, selling costs, as a percent of net sales, should inch down from 20 percent last year to 19 percent in 2007. Likewise, promotional spending will shrink from 13.5 percent last year to 13 percent five years down the road. Reflecting the increased brand support, advertising will rise to 14 percent of sales in 2007 from 11.9 percent in 2002.

Salomon Smith Barney analyst Wendy Nicholson, who attended the meeting, described it as "pretty impressive. It was a big relief, frankly, to hear Fred Langhammer bring down the sales growth target for the company. He seems to have adopted a more realistic view. It seems like fiscal 2002 kind of knocked the company into accepting the new reality which is that this is a very competitive and lower growth market than maybe what the company had thought it had been."

Nicholson said Lauder faces a challenging road with its flagship brand. "You’re taking a brand that has skewed to an older and more traditional customer and you’re trying to reinvent it," she said. This risks alienating the brand’s base and perhaps cannibalizing some other brands.

"The critical thing I’m watching is execution," she said. "Can the company deliver on its cost-savings objectives? Without those cost savings, they wouldn’t have the money they need to reinvest in the top line."

Standard & Poor’s fixed-income analyst Lori Harris noted of the meeting, "They said all the right things. They’re focused on growth, cost control. They’ve identified where they want to grow and how they’re going to achieve that. We’re pleased to see that they could maintain their trend of 50-plus years of sales growth. They will do what they need in order to maintain this record."

While the firm’s top line is set for continued expansion, it expects the reach of its distribution to mushroom slightly beyond department stores. However, Langhammer asserted strongly that the firm remains "committed to the department stores." North American department stores in fiscal 2002 accounted for 46 percent of the firm’s business. This ratio is expected to migrate down to 40 percent by 2007. International department stores over this time frame gain a percentage point to 22 percent of the overall pie. Perfumeries, retail stores and travel retail are each projected to pick up a percentage point to 13, 8 and 6 percent, respectively. Salons should gain the most, picking up 2 percentage points over the five years to represent 6 percent of total sales by 2007.Over the next five years, Lauder’s sales mix is expected to shift geographically as well. Philip Shearer, group president, international, in his presentation noted sales going forward will be less concentrated in the Americas. Last year, the Americas region brought in 61 percent of Lauder’s $4.74 billion in sales while international produced the remaining 39 percent. By 2007, this ratio is expected to tilt to 54 percent of sales coming from Americas and 46 percent from the international division.

As reported, the firm for fiscal 2002 posted profits after preferred stock dividends of $168.5 million, or 70 cents a diluted share, 40.2 percent below the previous year’s earnings. Without restructuring charges and before an accounting change, earnings slid 16.8 percent to $289.4 million, or $1.10 a diluted share. Sales rose 1.6 percent to the $4.74 billion mark.

In Europe, Lauder hopes to growth with a controlled rollout of developing brands and though an evolution of brands in the perfumery markets.

"The real growth is coming from emerging markets," said Shearer. Eastern Europe, he said, has a promising future while Russia sees potential with new distribution opportunities. In these new markets the emphasis will be first placed on established brands.

Last year, developing brands accounted for 13.6 percent of international sales. By 2007, they’re expected to encompass 25 percent of sales abroad. In 2002, the Lauder and Clinique brands were in 120 and 125 different countries and territories, respectively. The MAC brand, by comparison, was in 43 countries.

While Japan is Asia’s largest market for Lauder, the continent’s emerging markets could prove to be powerhouses in the making. "China is the future," said Shearer. The firm’s products are currently in 17 department stores in China. This number is forecast to grow by 25 to 30 a year, however.

Fragrances, which continue to be a troubling area for Lauder and the rest of the industry, are especially important internationally.

One area slated for growth is the Aramis and designer fragrance business which last year made up 34 percent of overall fragrance sales. Lauder, which already has Tommy Hilfiger and Donna Karan licenses, is looking for additional licensed brands to round off its portfolio with more of a balance between U.S. and European names.Harvey Gedeon, who is on the front lines of Lauder’s new product plans as senior vice president, research and development, noted, "First and foremost, innovation brings excitement and energy to the marketplace. Great products bring consumers to the counter and customer loyalty. Growth and profits will follow."

Gedeon is also working on reducing the time it takes to get a product into the marketplace by 30 percent. This will be aided by collaboration between the research and development, quality and manufacturing divisions, focus on a new product library for quick use of new findings and a global "open door" allowing a flow of new ideas.

At least in the eyes of chairman Leonard Lauder, the new advertising and product development is already giving the Lauder brand a boost. "I’m seeing younger customers coming to the counter. With the new product launches we’ve seen larger increases. Within the next 12 months we may be able to capture the number-one mascara position in the U.S.,” said Lauder.

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