While sales continue to soar at the Estée Lauder Cos. Inc., the company has found itself in a very un-Lauder-like position, as one Wall Street analyst put it on the company’s earnings call.
On Wednesday the beauty group reported another double-digit leap in sales, but Lauder also said that, after some botched product claims testing, it was in the process of retesting products to make sure they live up to their advertising claims. The company stressed that the advertising language surrounding the products was in question, not their safety.
Fragrance and natural hair care were not affected, according to a Lauder spokeswoman, but many other products will have to go through a round of tests to make sure they live up to their marketing claims.
According to Lauder chief executive officer Fabrizio Freda, the company became aware of the situation toward the end of the third quarter of fiscal 2018 and is quickly working its way through the testing.
Freda told WWD that a small group of people had been intentionally altering some test data used for advertising claims support.
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“As soon as we found it out, we started the review and immediately we started addressing all the issues,” the ceo said. “We are retesting every claim where we do not feel we have sufficient support for the advertising claim, and we are in the middle of that. There will be many products where there will be no change.…There will be a few cases where we will need to make a change, and our plan, as soon as we know, is to immediately make the change and be completely respectful to the consumer and make sure we explain everything. There will be other cases where the change will be one word.
“The commitment we have is to address the issue fast, with speed, and to make the corrections as soon as we know what the corrections will need to be and to maintain continuous communication and an open door with customer care online with the consumers if they want to know any information on this process,” Freda added.
On a call with Wall Street analysts, he said, “We are sorry this occurred and we take full responsibility for this matter.”
For its third fiscal quarter, Lauder reported an 18 percent sales gain, to $3.37 billion. Net earnings were up 25 percent, to $372 million, and diluted earnings per common share were up 24 percent, to 99 cents. The company also issued financial guidance for full-year sales growth of between 11 and 12 percent.
Despite those numbers, Lauder’s stock dipped more than 7 percent in midday trading, to $134.32. That decline was mostly unrelated to the ad claims issues, Wall Street analysts agreed.
“I don’t think the product [claims] issues are a significant driver,” said Stifel analyst Mark Astrachan. “I would argue that maybe there’s a little bit of impact given the uncertainty…but I wouldn’t put the majority of the [stock] move on that.” Astrachan said while Lauder’s numbers looked good, the company’s results are being compared to those of competitors L’Oréal and LVMH Moët Hennessy Louis Vuitton on a reported sales basis, and that, coupled with broad declines in consumer stock prices, could have caused the dip.
“The whole consumer staples group has been selling off for months, and now it’s starting to hit some of the better names where basically nothing is safe. You needed pretty close to a perfect quarter for this thing [Lauder’s shares] to not go down,” Astrachan said. “The guidance wasn’t great, the U.S. decline continued, and that coupled with the valuation of the stock itself is the reason for the decline.”
Barclays analyst Lauren Lieberman speculated in a note that news of “internal review of the validity of advertising claims may well give [Wall] Street pause,” while Citi analyst Wendy Nicholson said the stock sell off was prompted by “tough comps.”
Geographically, sales in North America were flat, with growth from La Mer, Estée Lauder and luxury brands offsetting lower revenues from makeup artist brands. Part of the sales decrease was caused by a decline in traffic in midtier U.S. department stores. Europe, the Middle East and Africa posted a 26 percent sales increase, to $1.4 billion in sales, driven by travel retail. In the Asia-Pacific region, sales were up 30 percent to $773 million, in large part due to China, where many brands saw double-digit sales growth in department stores, online and in specialty multiretailers.
Category wise, skin care posted the biggest gains, with a 31 percent increase and $1.45 billion in sales. That growth is being driven by Millennials and Gen Z, who are both more interested in prepping skin for makeup rather than antiaging, Freda said.
“One of the drivers of the increasing skin-care usage and understanding for the younger generations is social media,” he said. “Social media started aggressively growing in makeup and now started growing as a phenomenon also in skin care, particularly for Gen Z and Millennials.”
Younger consumers are more interested in preparing the “canvas for makeup,” he continued, with products like masks and moisturizers that provide immediate results, especially illuminating benefits. “This is complementary to makeup, it’s not something which is happening instead of makeup,” Freda said.
Skin-care sales were driven by gains from La Mer, Estée Lauder, Origins, Glamglow and Clinique, which Freda said had doubled its sales in the third quarter of the 72-hour Moisture Surge Moisturizer.
Fragrance net sales were up 14 percent, to $382 million, driven by double-digit gains from luxury brands, including Jo Malone London. Tom Ford, Le Labo, By Kilian and Editions de Parfums Frédéric Malle also expanded, but sales from certain Estée Lauder fragrances were lower.
In hair, sales were up 10 percent to $139 million, but both Lauder brands were impacted by softness in the salon channel in North America. There, Aveda will continue to focus on “leveraging the salon channel in new, modern ways, including more online connections,” Freda said, as well as ramp up international distribution. “Aveda is not present in many of the promising international markets where natural hair care is important,” he said. Bumble and bumble’s distribution in Sephora and Ulta Beauty, which it entered in fall 2017, is helping acceleration, Freda said.
Lauder’s makeup sales grew 9 percent for the quarter, to $1.39 billion, driven by increases from Estée Lauder, Tom Ford, MAC and Clinique. Too Faced, which Lauder bought for $1.45 billion in 2016, “had lower results reflecting additional investments” for expanded consumer reach and products, the company said. While sales were up, operating income from the makeup category declined 38 percent, “reflecting increased digital and social media spending to engage new consumers,” the company said.
Freda said the company is moving from “an era where certain brands were advertised and others were not, to an area where every single brand will be leverag[ing] social media, and in a way, advertised.”
The shift to social media is one he expects to stick around and potentially play an ever-larger role in the beauty business.
“Influencers are becoming, more and more, experts of the consumer and experts of understanding and being able to anticipate business trends and product trends and they’re at the pulse of the situation,” Freda said. “Influencers will become more and more interesting people to work with and to design programs with — and not only as a media voice, but also a voice of marketing and a voice of ideation and even a voice of product development.
“I see the expertise of influencers more and more becoming the consumer experts of the new era and as such, they could become very interesting partners,” the ceo said. “That’s another trend that will be different by country and age…but may develop over the next three to five years.”