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Following Profitable 2002, Estée Lauder Investing for Growth

NEW YORK — Estée Lauder Cos. may be coming off a challenging 2002, but the company believes it was a transition year that was all about investing for future growth.<br><br>Earnings for the year ended June 30, attributed to common stock,...

NEW YORK — Estée Lauder Cos. may be coming off a challenging 2002, but the company believes it was a transition year that was all about investing for future growth.

Earnings for the year ended June 30, attributed to common stock, declined 40.2 percent to $168.5 million, or 70 cents a diluted share, as reported. Before restructuring charges and an accounting change, the bottom line dipped a milder 16.8 percent to $289.4 million, or $1.10.

A headline on page 1 in Friday’s WWD incorrectly stated the firm had losses for the year.

Sales for the year rose 1.6 percent to $4.74 billion on a 3 percent rise in constant currencies.

Along with the rest of the industry, Lauder faced an avalanche of economic challenges over the last 12 months.

After Sept. 11, and its resulting retail reactions, deflated further a faltering economy, Lauder stayed the course and made some tough decisions for the long-term benefit of its operations, despite short-term repercussions from investors.

Richard Kunes, chief financial officer and senior vice president, told WWD, “We always maintain our policy of supporting and building brands. So even when the economy turned a little bit weaker on us, we continued to advertise and introduce new products.”

While maintaining brands and bringing in new products helps market share, it costs precious expense dollars when a lack of top-line growth makes those dollars all the more precious.

In early July, Lauder warned it would miss fourth quarter expectations, while it pushed up promotional spending in a bid for market share. Wall Street, however, was unforgiving. The beauty giant said it would earn 18 cents a share for the quarter, before restructuring charges, while analysts were looking for 20 cents. Though the firm’s stock the day of the warning dropped nearly 9 percent, Fred Langhammer, president and chief executive officer, maintained: “I can’t run the company based purely on estimates. We’re keenly interested in generating some momentum in the new fiscal year, because nothing good happens without growth.” Lauder ended up beating the fourth-quarter estimates with profits of 19 cents a share, before charges. Wall Street’s reaction after Lauder’s numbers came out Thursday was much more upbeat, with the company’s shares rising 2.6 percent, or 72 cents, to close at $28.37. Friday, the shares picked up $1.01, or 3.6 percent, to end the day at $29.38.

While below historical levels and the firm’s long-term targets, Lauder is still expecting top-line expansion of 5 to 6 percent in fiscal 2003, on a constant currency basis. This should drive EPS growth of $1.28 to $1.33 for the 12 months. In the fiscal year just ended, Lauder posted earnings of $1.10 a diluted share, before restructuring charges and an accounting change.

On a conference call with analysts last week, Langhammer noted of fiscal 2003, “Our focus will not only be on sales, but also productivity gains in all operating units and [to] continue to remove costs from our supply chain which will generate gross margin improvements.

“Our retail store strategy from Aveda, Origins and MAC will continue at a moderate pace. Geographically, we expect each region to contribute to growth and each region to improve profitability,” said the ceo.

Kunes said growth in the coming quarters will also come from the travel business, which is beginning to recover after a blow last year from the Sept. 11 terrorist attacks. The cfo is also seeing “signs of strength in the U.S. economy, and we hope that continues. We anticipate it to be a slow process over the course of the year.”

Whatever the macro environment turns out to be, he noted, “Our advertising and new product introduction and the programs we have in place leave us in good stead.”

In the coming year, Lauder expects gross margins to improve about 30 to 50 basis points, with benefits from ongoing supply chain savings and the return to more normal production levels. Operating expenses are also expected to improve by approximately 40 to 60 basis points reflecting sales growth, expense controls and the impact of the cost savings from a restructuring charge taken in fiscal 2002.

“The competition is also strong, but we think we’re up to the challenge,” said Kunes.

Though the next several quarters are shaping up to be an industry-wide challenge, retailers are particularly supportive of Lauder.

“The Estée Lauder Cos. are obviously working hard with their multiple brand positioning,” said Robert L. Mettler, chairman and chief executive officer of Macy’s West. “Lauder has a lot of different brands competing in a lot of different sectors, so they have brands that are doing exceptionally well. MAC, especially, and Origins is also doing quite well.

“And the whole Stila, Bobbi Brown positioning of artistry brands is interesting and shows long-term opportunity. They are also working hard on core brands, the Estée Lauder brand being the most important of those efforts. I give them a lot of credit. They are updating products, the in-store presence, even what the sales consultants are wearing. They are working hard on every aspect and are open to looking at everything with a fresh set of eyes. Lauder is also examining the gwp aspect of Estée Lauder and Clinique; at one point, gifting was a disproportionate part of the business and they are looking at ways not to have to depend on that.”

Jon Pollack, executive vice president of cosmetics, accessories and shoes for Belk’s, noted, “The reason that Lauder has been able to maintain and grow business in such a challenging economy is due in large part to their strong management team. They develop great business strategies and are dedicated to excellence of execution. They forge great relationships with retailers, and with great relationships and communications, it makes it easier to manage our way through a difficult time. Also, Lauder’s emphasis on newness and innovation continually brings great new products to the marketplace, and that in turn offers positive sales growth and life to the beauty category.”

Leslie Faust, vice president and divisional merchandise manager for cosmetics and fragrances, Neiman Marcus, noted, “The Estée Lauder Cos. have done many terrific things to keep the momentum going this year. They have a relentless level of energy and commitment. They constantly maintain consistent presence in store, with activities, new products and support. They are unwaveringly positive and innovative. What they do right specifically for Neiman Marcus is that they buy, manage and grow brands that are fantastic for specialty stores. Jo Malone, Bobbi Brown, La Mer and Donna Karan are four examples of this.” Faust added her company has been doing business with the Estée Lauder Cos. since 1946.

“Even in a very challenging time for fragrances, the Lauder scents are doing great business for us,” said Micheline Jordaan, vice president and divisional merchandise manager of fragrances for Macy’s East. “Take Cashmere Mist, for example. It is our number-one scent, and it consistently posts double-digit growth for us — and it is not a new scent. To continue to get double-digit growth in an economy like this one speaks to the success of Lauder’s brand strategies.

“We’re just now adding Black Cashmere, which we expect great things from, and there are other Cashmere Mist additions that we’re expecting later this year which will continue to add lots of energy to the Donna Karan Beauty franchise. We’re also just rolling out Tommy Hilfiger’s T Girl, which is doing very well. In men’s, too, we’re seeing great things from Intuition for Men. We have a very mature men’s fragrance business at Macy’s East, so any men’s launch has to be very special to perform well. And this one is.”

An unnamed department store retailer added, “They’re striving to have consistent new product introductions, and they’re good at being focused at every level — particularly with advertising, both national and co-op, and at translating the message in-store. They have a strong, consistent message and they are trying to make the big brands even bigger. I am very confident about their business with us across the board. In particular, we are beginning to see a much healthier Estée Lauder business and I am very confident about how that will be going forward.”

Robin Coe-Hutshing, owner of Fred Segal Essentials, said, “Lauder has been an incredibly strong partner to us for many years.” The firm carries Lauder’s Stila, Origins, Bobbi Brown and Bumble and bumble brands, among others. “We consider that they helped make our business credible to some degree, especially when we were starting out. There is a lot of synergy between what they do and what we do. They’re very supportive about the differences in the way that we do things, and they help us fit their brands into our way of selling. They’re incredibly loyal and great to work with. From our standpoint, they’ve been nothing but incredibly good partners. Within each brand, there is always something wonderful on the horizon, and you can always depend on new product additions that are relevant to what is happening in the market.”

Over at Sephora, Stila is reportedly racking up major numbers with its new scent duo, Bouquet du Jour. The brand’s two fragrances, Creme Bouquet and Jade Blossom, are, well, blooming. Both scents, which have a six-month exclusive at the retailer, entered the chain two weeks ago and according to industry sources, are already 30 percent ahead of plan. Creme Bouquet has reportedly been number-one for the past two weeks, while Jade Blossom has been in the number-two slot. The duo reportedly has averaged upward of $50,000 per week over the last two weeks in Sephora.

Banc of America Securities equity analyst William Steele, noted, “When push comes to shove who has the ability to really deliver and who’s really committed to staying the course through thick and thin? It seems to be clear that Estée Lauder is really committed to supporting their brands.”

Of Langhammer, Steele noted, “I really have to applaud him for stepping up in a difficult time and delivering some not-so-good news for shareholders” in the interest of longer-term returns.

“It was a disappointing year for shareholders and management,” noted Steele. However, “The retail environment has been very difficult and the company had to work down some inventory situations both internally and in the retail channel.”

Inventories at the end of the year stood at $545 million, or 14 percent below a year ago. Langhammer noted, going forward, “We don’t expect to see the inventory squeeze we saw in fiscal 2002, but we don’t expect to see an increase in inventory at store-level either.”

Standard & Poor’s fixed-income analyst Lori Harris noted, “While it’s good they were able to maintain their multi-year track record of improving sales in fiscal 2002, the operating margin declined significantly. The restructuring program should provide a positive impact to the operating margin from cost reductions, but it’s likely that this increased level of marketing spending will be necessary, at least over the near term, to maintain the level of sales the company wants to achieve.

“The difficult competitive environment due to continued economic weakness doesn’t seem to be letting up; therefore expectations for the key holiday sales period have moderated,” she said.

Yet, Harris added, “Estée Lauder’s market position remains solid despite intense competition and the challenging retail environment, particularly at department stores where the company is most represented.”