The Estée Lauder Cos. Inc. is stepping up its innovation game even as it is growing more cautious about the fiscal year ahead.
This story first appeared in the November 5, 2014 issue of WWD. Subscribe Today.
The firm is battling everything from the weakening European economy to the demonstrations in Hong Kong, not to mention slower spending in China and Russia. While president and chief executive officer Fabrizio Freda claimed most of the brands in the Lauder portfolio are growing at double digits, the beauty company’s first-quarter profits still plunged 24.1 percent and Lauder cut its earnings outlook for the full fiscal year, only four months into it.
As a result, the firm’s shares dropped 5.2 percent to close at $72 in Big Board trading.
For the quarter ended Sept. 30, net income was $228.1 million, or 59 cents a diluted share, from $300.7 million, or 76 cents, a year ago. Revenues fell 1.6 percent to $2.63 billion from $2.68 billion. Analysts’ consensus estimate for the quarter was 55 cents on revenues of $2.62 billion.
The company cut its outlook for adjusted earnings for the year to $3.03 to $3.11 a share from prior guidance of $3.10 to $3.20.
During a conference call with analysts, Freda put an upbeat spin on the numbers, explaining that, “Like many companies, we operated against several macroeconomic and geopolitical issues ranging from the foreign currency headwinds and slower growth in some of our markets to unrest in Hong Kong, the Middle East and Ukraine. We weren’t immune to the challenges, but many of our brands, countries and channels were resilient and even vibrant.”
He told analysts: “We expect to generate sales growth of 5 percent to 6 percent this fiscal year, with a significant contribution coming from MAC and our midsize brands. To maintain our steady annual growth, we are driving our portfolio on two main fronts. We are strengthening and expanding our existing brands to keep them relevant in our all regions, and at the same time, we are actively seeking and nurturing the next generation with an eye to creating the next big brands of the future.”
The company acquired two small brands it believes have long-term potential for growth in the ultraprestige market, an area Freda said is “core to our strategy”: fragrance and sensory brand Le Labo and Rodin Olio Lusso, a luxury oil-based skin-care collection.
During the company’s conference call, Freda homed in on the company’s focus on accelerating top-line growth and profits for the second quarter, as well as where the group remains strong: prestige beauty on a global basis, particularly in makeup; powerhouse brands such as MAC, Estée Lauder and Clinique; smaller brands such as Jo Malone and Bobbi Brown that are gaining market share, and in travel retail.
All that is against the backdrop of a slowdown in China’s tier-one cities and in Chinese tourists heading to Hong Kong; a drop in spending from Russian consumers and increased competition from South Korea.
“There is no slowdown in travel retail globally, only in the Asia Pacific region around Chinese travelers to Hong Kong. The rest of the world is seeing increases,” Freda said. He said total travel retail volume is expected to grow 5.2 percent. While the travel retail category is a growth engine for Lauder, geopolitical issues can make the category a little more volatile. In China, there were fewer Chinese Mainland visitors to Hong Kong due to a change that restricted group visas. A year ago, more than half of domestic sales were from Chinese tourists. The recent protests in Hong Kong also contributed to fewer individual tourist visas that were issued. While sales in the quarter for Hong Kong were flat, there is an expectation that the ongoing situation there will “sharply impact our business in Hong Kong” in the second quarter, Freda said.
China remains Lauder’s largest single emerging market. While Freda acknowledged that sales from tier-one cities such as Shanghai and Beijing have slowed, business in tier-two cities also is beginning to wane, with sales from both tiers offset by demand and growth in tier-three and tier-four cities. Freda, who was in China last month, also noted that online sales are seeing continued increases for tier-three and tier-four cities given that retail distribution for Lauder’s brands is nonexistent. He said wealth creation continues to rise among the growing middle class, and that they aspire to prestige beauty brands.
In Europe, Russia remains the company’s key emerging country. “In this moment, we are doing well in Russia, but the Russian economy is slowing and the market in Russia is growing less. Russian tourists are traveling significantly less than in the past,” Freda said, noting that the slowdown is a “consequence” of the economic backdrop there. Last month the Russian ruble declined in value by 20 percent, and earlier this year, MasterCard and Visa for a short time blocked card usage for Russian customers associated with banks that were sanctioned by the U.S.
Freda said the company is also seeing competition from South Korean brands entering the masstige category, although he emphasized that Lauder has been among the first to pick up on Korean trends — such as BB and CC creams and facial masks in skin care and the brow category in makeup — that have enabled the company’s brands to remain competitive. “Hybrids, the mix of makeup and skin care, is a trend happening that [we are] leveraging very well with our brands,” he said.
Still, perhaps the main growth down the road could be acquisitions and how Lauder plans to nurture the next generation of growing brands. “We definitely are always scanning the market for future high-potential brands. We do this regularly….We look at every single category,” Freda said, adding that when there is a “significant brand with meaningful ideas, we are interested.”