While the coronavirus has exacted a heavy toll short-term, Fabrizio Freda, president and chief executive officer of the Estée Lauder Cos. Inc., sees some hope in the recovery that has started in China.
“The recovery is happening in a disciplined, pretty fast way,” he said during an exclusive interview with WWD after the company’s earnings call Friday. “What is evident in this moment is that it starts with a strong acceleration of online sales. We’re seeing that the first thing consumers do is to go back to their core habits and give priority to replenishing the products they are loyal to,” he continued, noting that such behavior benefits hero product franchises like Estée Lauder’s Advanced Night Repair or Crème de la Mer’s Treatment Lotion.
While that presages well for the accelerated growth of digital commerce, post-COVID-19, consumers will need to ease back into shopping IRL. “We believe the comeback [in] brick-and-mortar will be gradual,” Freda said. “Brick-and-mortar acceleration takes much more time because it takes not only the technical reopening, but takes the consumer confidence to buy in brick-and-mortar…this will only come back more gradually.”
That being said, Freda reiterated his support of the department store channel, noting that the crisis has not changed his thinking when it comes to platforms like Amazon for prestige beauty. “We don’t make distribution decisions based on crisis moments,” he said. “We make them based on long-term considerations.”
Still, he noted that it won’t be business as usual for department stores, noting that Lauder is committed to supporting both the door count rationalization process that retailers like Macy’s Inc. are implementing, as well as their efforts to build more significant e-commerce businesses. “We will come out with a better, more sustainable channel — more productive and more modern,” said Freda. “We’re positive about the long term, although the short term is very painful.”
As for specialty retailers like Neiman Marcus, which is exploring a possible bankruptcy, Freda believes that consumer demand for high-end luxury in America will endure, noting, “There is space for finding the right solutions for high-end retailers and organizing the channel in a way that becomes more sustainable.”
“There will be a reduction of brick-and-mortar stores overall and this will make the brick-and-mortar stores more productive,” said Lauder’s chief financial officer, Tracey Travis, on the company’s earnings call.
Lauder posted an 11 percent year-over-year sales decline for the quarter ended March 31, with $3.35 billion in net sales and a net loss of $6 million. For the prior year, Lauder posted $555 million in net earnings in the quarter.
Globally, the Americas posted the largest dip in the quarter, with sales down 23 percent, to $892 million. Europe, the Middle East and Africa posted a 6 percent sales dip, to $1.5 billion, and Asia Pacific posted a 4 percent drop, to $928 million, for the quarter.
Lauder’s numbers were affected by the spread of COVID-19, which caused retail channels and big growth drivers, like China and travel retail, to close down. Lauder also recorded a $346 million impairment charge across Too Faced, Glamglow, Becca, Smashbox, and certain freestanding stores from impacts from COVID-19.
“The impact of COVID-19 has not been a normal downturn,” said Travis.
Travis estimated that in the second half of the fiscal year, global prestige beauty would see a double-digit downturn.
But the news is not all bad. Lauder is starting to see a resurgence in Asia, where in travel retail, the business has centered on conversion, Freda said.
“It’s a world of two tales,” he said. “But the travel retail recovery will start happening in fiscal-year 2021 with a gradual reopening of travel, and will probably be one of the most gradual reopenings in the recovery from our expectation and our data.”
In the U.S., executives said the business had been stabilizing before COVID-19 hit, and that the pandemic is likely to alter the retail landscape.
“Our stabilization plan in the U.S. has been postponed by the COVID issue that emerged,” Freda said, noting that online sales in the U.S. have been strong, and that Millennials have been joined by the “ageless generation,” those 50 and over, in shopping online.
“It’s actually very reassuring to us that the percent of the business online will dramatically increase,” Freda said.
“Online is thriving around the world,” Freda added, noting that Lauder saw double-digit increases there in the quarter. The company has expanded online efforts to include social selling on Instagram, centered around self care.
Those self-care moments are turning into skin-care sales — the category proved to be Lauder’s more resilient one in the quarter, with sales down 1 percent year-over-year to $1.72 billion, from $1.74 billion. Dr. Jart+ contributed 2 percentage points to sales, as did a net sales gain at the Estée Lauder brand. La Mer and Clinique posted lower net sales.
“Taking care of one’s skin has become an expression of self-care, which has risen in importance,” Freda said. “Consumers are actively exploring subcategories and expanding their regimens, finding peace of mind in the ritual of the routine.”
Makeup sales were down 22 percent, to $1.14 billion, driven by decreases from MAC Cosmetics, Clinique, Bobbi Brown, Tom Ford Beauty and Too Faced. Tom Ford Beauty grew in Asia, as the brand continued to see success on Tmall. MAC’s second Selena collection — which sold out in two days — was a bright spot, and was the highest-selling collection ever on maccosmetics.com, Freda said.
Fragrance sales dipped 11 percent, netting $349 million, from declines at Jo Malone London and certain designer fragrances. The Tory Burch license agreement also expired — it was acquired by Shiseido as of Jan. 1.
Hair-care sales dipped 13 percent, to $119 million. Both Aveda and Bumble and bumble were impacted by COVID-19 related salon closures.
For the nine-month period ended March 31, Lauder posted net sales of $11.86 billion — still a 5 percent increase from the prior-year period. Net earnings for the nine months were $1.15, with diluted earnings per share of $3.12.
Lauder has undertaken cost savings initiatives, including furloughing U.S. point-of-sale employees and those higher up on the executive chain to take pay cuts. On top of initiatives the company had already taken to cut advertising spending, travel costs and hiring, Lauder expects to reduce operating expenses by $500 million to $600 million in the fiscal fourth quarter. Capital investments, including spending on retail renovations and office improvements, will be reduced by $250 million to $300 million for the fiscal year. The company has also raised $2.2 billion in cash, part from drawing down a credit facility, and part from issuing $700 million in senior unsecured notes.
Lauder has established a handful of philanthropic initiatives related to COVID-19, including donating hand sanitizers to medical workers and donating funds to Doctors Without Borders. The company also announced a fund for employees called the ELC Cares Employee Relief Fund, which is funded by the company and the Lauder family, for employees whose lives have been impacted by the pandemic.