The Estée Lauder Cos. Inc. has switched up its game — and it’s working.
The 70-year-old beauty company’s net sales were up 5 percent for the fiscal year, bolstered by increased e-commerce sales (both from its own sites and those of retail partners), greater penetration of the special retail channel and an overall focus on digital. Shares in the company spiked following results Friday, closing up 7.6 percent to $105.92, its highest point ever.
“Fiscal-year 2017 has been a very important year because it’s a year where we have pivoted our business significantly in areas like digital and distribution in high-growth channels, or in areas like talent,” said Lauder chief executive officer Fabrizio Freda. “We have at the same time made some challenging choices on innovation, on investments in new markets around the world, investment in China, etc., and we have executed this change with excellence.”
“[Estée Lauder] continues to pivot exposure and investment toward areas of higher growth potential — simple in concept, but executed in a backdrop of intensifying competition around trial, macro volatility and still strong category trends,” wrote Jefferies analyst Stephanie Wissink in a note.
Lauder is now “digital first,” Freda proclaimed on the company’s earnings call. He called the company’s shifts “the most important pivot of the company since the financial crisis.”
“E-commerce and the consumer online will be a very important part of our business for many years to come and will be a big part of our growth,” Freda noted, adding that he believes the company has the right technology, talent, distribution systems, relationships with retailers and brands to attract traffic to its online operations and continue to grow sales. The digital ecosystem is something Lauder has been building for 10 years, he said, and is “now scalable.”
For fiscal-year 2017, Lauder did 11 percent of its overall business online, according to Dennis McEniry, president of Estée Lauder Cos. online. Lauder’s brand sites account for about 60 percent of e-commerce sales, while retailer sites bring in about 40 percent, Freda said. As it stands now, department stores make up about 40 percent of sales, with 17 percent of that coming from U.S. department stores; the specialty-multibrand retailers make up about 11 percent of sales, and travel retail makes up about 14 percent, according to Lauder executives.
“[Digital is] our fastest-growing channel,” said McEniry. “Along with social media, it’s the number-one place people find out about products and trends and makeup tips and skin-care advice.”
It also provides data, which in turn provides consumer insights, he noted. That information is used to help “really understand what is going on,” McEniry said, and has impacted product development. “Understanding trends now happens in a completely different way, in a very fast way — it really allows us to be more consumer-oriented.”
McEniry, who has been with Lauder for 17 years, runs his mostly Millennial women team from a modern office on 23rd Street in Manhattan, complete with its own corporate culture. “We’re going to at some point approach $2 billion in sales, easily, and at the same time we act like this little start-up, dot-com, digital team — we don’t wear the same clothes, we don’t have the same rules,” McEniry said.
“I walk in in jeans,” added Jennie Tse Wang, vice president of online.
“There’s no doubt we’re a key engine of growth for this company from a finance perspective,” said Tse Wang. “We certainly have increased investment in not just people and resources…but accelerated further investment in technology and marketing and omnichannel and mobile.”
The unit has also ramped up Lauder’s social media operations. “We’re shifting more of our dollars into paid social, so we are seeing growth there overall,” Tse Wang said. “Versus the entire marketing mix, social is still a relatively small percent of…sales, but we’re seeing a positive trend there.”
E-commerce is expected to play a key role in the U.S.-market turnarounds of MAC Cosmetics and Clinique, which have struggled as foot traffic in midtier department stores has slowed. MAC’s online business grew 29 percent in the fiscal year, and Clinique’s was up 23 percent, according to Lauder executives.
U.S. midtier department store sales are the reason Clinique didn’t post gains in fiscal 2017, Freda said. “The plan forward is to continue building Clinique in all these successful areas where the brand is growing,” he said, ticking off Asia, Europe, Latin America, online and the specialty multichannels as growing segments.
Innovation is also expected to boost the brand’s sales. The brand is planning to build its Fresh Pressed product franchise, which started with Fresh Pressed Vitamin C in 2017, and has a new foundation called Even Better Glow. Each Lauder brand can be expected to launch between three and five innovations for the coming fiscal year, Freda said on the call, building out their most successful franchises. For Too Faced, that means more in its Peach or Better Than Sex lineups, he offered as an example.
At MAC, improvements can be seen in certain segments of the U.S. numbers, but similar to Clinique, Stateside results were dragged down by low-traffic midtier department stores. MAC is growing in international markets, Freda, noted, and its May launch on T-Mall was the e-tailer’s largest ever in prestige beauty.
Asked about Amazon by Wall Street analysts and WWD, Freda said it was still not in the cards. Pressed on whether a Violet Grey-Amazon partnership could result in Lauder brands being sold on Amazon, Freda responded: “No, we are not distributed on Amazon and all the people…that have our products have clear agreements that they cannot put these products anywhere else without our express authorization and that’s true everywhere in the world, so as I said, there is simply no way. That’s our final decision.”
“We are only in brand-building retailers,” Freda continued. “In today’s presentation of online we’re just making the point that we are a destination ourselves, so we don’t need any specific retailer to be successful — we are successful online. So we will add online distribution over time when it is consistent with our luxury principles.”
The company counts T-Mall as a brand-building retailer. “T-Mall has already a lion’s share of our business in China, and is growing,” Freda said. “Being sold on T-Mall is brand-building and the consumer believes that’s the role of the channel, and second, we are in complete control — we operate the retail, and we make all the decisions. It’s like a freestanding store in a mall…T-Mall is our freestanding store online.” In China, Lauder does 20 percent of its business online through a combination of its own sites, T-Mall and a few smaller sites, Freda said.
“We control the presentation, every piece of content on every page on T-Mall, we make every decision,” McEniry said, including photography, wording and fulfillment. Lauder has plans to launch two more brands on T-Mall this fiscal year, he noted.
In addition to growth in online sales, Lauder spent the year honing its focus on specialty retail. The business not only spent close to $1.5 billion to buy makeup brands Becca and Too Faced, which are distributed in Sephora and Ulta Beauty, but also worked to ramp up the presence of existing brands in those channels. Estée Lauder is now distributed in Ulta doors, and MAC is in the midst of a gradual rollout there that includes its makeup artistry services. At Sephora, La Mer, Jo Malone and Tom Ford have built up a presence.
For the full year, Lauder brought in $11.82 billion in net sales, up from $11.26 billion in the prior-year period. Net earnings were $1.25 billion, up 12 percent, compared with $1.11 billion in the prior year. Too Faced and Becca, which Lauder acquired in 2016, contributed 2 percent to sales growth. For the fourth quarter, ended June 30, Lauder posted a 9 percent net sales increase to $2.89 billion. Too Faced and Becca contributed 3.5 percent of that growth. Net earnings for the quarter were $229 million, up from $94 million in the prior-year period.
For the year, skin care posted a 2 percent sales increase with $4.5 billion, compared with $4.4 billion in 2016. Makeup had a 7 percent increase in sales, up to $5.1 billion, from $4.7 billion in 2016. Fragrance sales increased 10 percent, to $1.6 billion from almost $1.5 billion. Hair-care sales dipped 3 percent, to $539 million from $554 million in 2016.
Skin-care gains were driven by La Mer and the Estée Lauder brand, plus launches from Glamglow. Bobbi Brown, Origins and Aveda also posted skin-care gains, offset by lower sales from Clinique.
Too Faced and Becca drove sales in makeup, which also saw double-digit gains from Tom Ford in every region, plus double-digit increases from Smashbox, La Mer and Estée Lauder. Tom Ford’s makeup sales were driven by its lip colors, including the Tom Ford Soleil Color Collection. La Mer’s sales were driven by the SkinColor Collection, and Estée Lauder’s sales were boosted by the Double Wear and Pure Color lines.
In fragrance, Jo Malone London, Tom Ford and Le Labo posted double-digit sales gains. Hair-care figures faced a difficult prior-year comparison, Lauder said, noting 2016 launches.
The group is projecting sales growth of between 8 and 9 percent for fiscal 2018, with Too Faced and Becca expected to bring in about 2 percent of that growth.