The Estée Lauder Cos. Inc. is increasingly taking a global view in 2014, and has its eyes trained on emerging markets, particularly China.

This story first appeared in the February 6, 2014 issue of WWD. Subscribe Today.

Lauder president and chief executive officer Fabrizio Freda acknowledged a slowdown across China’s tier-one cities, but said the country’s tier-two, -three and -four cities are gaining at a healthy clip as the middle class grows. And those cities are precisely where Lauder plans to expand its distribution and e-commerce presence. His upbeat outlook contrasted sharply with the recent action of Revlon, which was recently forced to exit the market. In addition, L’Oréal withdrew its Garnier brand.

“We are [adapting] to the new growth model,” Freda told WWD on Wednesday following the company’s second-quarter earnings call. “[In China], the companies that are flexible and adjust their models to evolving opportunities will win. Other companies may be struggling, but we remain very committed to China and Chinese consumers, wherever they shop,” he added, referring to the company’s travel retail business.

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He also emphasized that while China is Lauder’s largest emerging market — with Mainland China accounting for 6 percent of sales — the sum of its remaining emerging markets is larger than China, and grew at a double-digit rate during the quarter.

During the quarter, Lauder said net earnings attributable to the company declined 3.4 percent to $432.5 million, or $1.09 a diluted share, compared with $447.5 million, or $1.13 a share, in the prior-year period.

Net sales gained 3.1 percent to $3.02 billion compared with $2.93 billion in the year-ago period. Excluding the impact of foreign currency exchange, sales gained 4 percent in the quarter.

Excluding restructuring activities in the second quarters of fiscal 2014 and 2013, net earnings for the three months ended Dec. 31 were $430.2 million, or $1.09 a diluted share.

“Our fiscal second-quarter sales growth was in line with our expectations, despite softer than expected markets in some geographies,” said Freda.

During the quarter, the makeup category was the strongest performer, gaining 8 percent to $1.12 billion, driven by MAC’s latest products and geographic expansion into Turkey, Russia, Brazil and South Africa, as well as strong sales of Bobbi Brown and Smashbox. Freda acknowledged that company’s midsize brands are growing faster than Lauder’s largest brands, with the exception of MAC, which he sees as a positive development. “The amount of brands that impact our growth is increasing,” he said.

The company said makeup is expected to outpace the remaining categories for the bulk of the year, particularly in light of upcoming introductions, such as the Estée Lauder brand’s Pure Color Envy Sculpting Lipstick, which is slated to bow next month.

During the quarter, makeup was followed by fragrance, which increased 4 percent to $477.8 million, driven by luxury scents such as Jo Malone and Tom Ford, and also Tory Burch, which launched exclusively at Bloomingdale’s and was the number-one scent there during the holiday.

Hair care was third, growing 2 percent to $135.1 million, boosted by Aveda. Skin care lagged, dipping 1 percent to $1.26 billion. The company said it has a strong new product pipeline for Clinique to restart growth in the category.

Freda emphasized that the category remains a strategic priority for the company. “Much of our global innovation will be centered on skin care,” said Freda.

He named Clinique and Estée Lauder’s entry into the “watery lotions” segment in China as an example. He noted that Lauder will continue to focus on similar opportunities for growth in the Asian market.

By region during the quarter, net sales in the Americas gained 5 percent to $1.19 billion, and increased in Europe, Middle East and Africa by 7 percent to $1.18 billion. However, sales in Asia-Pacific declined 6 percent to $643 million, due to lower local currency sales in China, Taiwan and Korea.

For the first half, net earnings attributable to the company decreased 1.9 percent to $733.2 million, or $1.86 a diluted share, compared with $747 million, or $1.89 a share, in the year-ago period. Net sales gained 3.8 percent to $5.69 billion, compared with $5.48 billion in the year-ago period.

Freda said prestige beauty is expected to grow 3 to 4 percent in fiscal 2014, and Lauder plans to grow at nearly twice that rate with sales growth between 6 and 7 percent.

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