Sales at the Estée Lauder Cos. Inc. keep going up and up, and up.
For the second fiscal quarter, the company posted a 17 percent year-over-year gain in net sales, up from a 14 percent year-over-year net sales jump in the quarter before that, and a 9 percent year-over-year increase the quarter before that.
“This has been an extraordinary quarter,” Lauder’s president and chief executive officer Fabrizio Freda told WWD. “Growing at 17 percent globally for a company of our size means…an enormous amount of extra sales.…It’s not the result of short-term trends or ideas; it’s the result of the long-term compass strategy of building multiple engines of growth.”
Those engines include acquisitions, which contributed about 2 percent, not the anticipated 3 percent, for the quarter; e-commerce expansion both on brand sites and retail partner sites; travel retail, and a focus on emerging markets. Beauty was also a popular holiday gift, and Lauder’s sales grew across skin care, makeup and hair.
In line with larger trends — skin-care growth outpaced makeup for the first time in years in 2017, according to the NPD Group — skin care made the biggest sales gain at Lauder for the second fiscal quarter.
With a 20 percent year-over-year sales increase, the segment’s $1.49 billion in sales represent skyrocketing growth compared to a year ago. Then, skin care had inched up just 1 percent to $1.25 billion in sales.
“We always knew skin care would accelerate again, and we prepared very much for that,” Freda said.
Lauder upped its research and development efforts in recent years, Freda said, and started focusing the skin-care portfolio on products with “instant benefits and benefits that attract Millennials” like masks, glow products, skin-tone evening products and acne-elimination products.
“There’s also a lot of skin care that is doing super well that is for prepping the skin and making the skin beautiful instantly and fast,” Freda said. “This is what is driving Millennials, and we have developed great technologies for that…we have invested a lot in our R&D for years to develop…ingredients and formulas that would achieve fantastic results and make sure our formulas and ingredients are clean and we can achieve these results with the right ingredients — most of them natural.”
Lauder is also employing information technology and predictive analytics to identify more effective formulations and move faster to meet consumer demand, Freda said. “This really brings together the consumer demand and our ability to serve that demand much more surgically than we could in the past,” he said.
“The ageless consumer” — older than the Millennial consumer — is also driving sales of antiaging products, Freda noted. Growth in the Asian markets is also boosting the category.
“Asia is back growing in a strong way and Hong Kong is back growing in general, and in Asia the percentage of skin care [use] is still the highest in the world, so when Asia starts growing more, skin care gets a positive push,” Freda said.
In total, Lauder’s 17 percent net sales gain equated to $3.74 billion in sales for the quarter. Earnings were $123 million, down from the prior year’s $428 million, reflecting a one-time charge of $394 million related to the U.S. Tax Cuts and Jobs Act that was signed in December. Diluted earnings per share were 33 cents.
In hair, Freda said the company would focus on growing existing brands Bumble and bumble and Aveda rather than acquiring new ones. Directly asked if he would consider hair acquisitions, Freda said, “No.”
The plan for the hair business includes rolling out a marketing strategy akin to what Lauder has been doing in makeup and skin care. It will include a heightened focus on influencer marketing, Freda said. “Both Aveda and Bumble are becoming much more social media active,” he said. The other part of Lauder’s hair strategy includes “creating a high level of loyalty” to the products in its brands’ portfolios with superior product quality, Freda said.
In 2017, hair was the fastest-growing beauty segment tracked by influencer analytics firm Tribe Dynamics.
While Freda isn’t focused on hair acquisitions at the moment, the company as a whole is open to doing more deals, chief financial officer Tracey Travis said on Lauder’s call with Wall Street analysts Friday morning. “We have identified some white space areas that if the right assets become available, given our strong balance sheet and strong cash flow, we’d certainly entertain those acquisitions,” Travis said.
Fragrance brought in $565 million in net sales, a 14 percent year-over-year increase. The category is one where Freda is expecting continued growth.
Makeup sales were also up for the quarter, gaining 16 percent and bringing in $1.5 billion. The category was boosted by sales from Becca, Too Faced, Tom Ford, Esteé Lauder and MAC, which is doing well internationally but continues to struggle in the U.S.
“We are still challenged with the slowdown in U.S. brick-and-mortar department stores, and although our business in them declines, there was improvement from the first quarter,” Freda said on the analysts’ call.
To combat the slowdown in U.S. department stores, Lauder has adjusted its operations through acquisitions such as Too Faced and Becca, which had existing distribution in the specialty beauty retail channel, and by moving other brands, like Estée Lauder, into that channel. The company has also ramped up its focus on e-commerce, which now makes up 13 percent of total sales. Online sales were up 37 percent for the second quarter, and are up 35 percent year-to-date.
Despite demonstrated growth online, Freda remains adamantly anti-Amazon, and said there are no plans to launch brands on the marketplace.
“Our strategy is not changing,” he stressed. “We continue to invest in our brand dot-coms and in our retail dot-coms and in the platforms where we control our assets.”
Lauder’s stock price inched up after the numbers came out, but that was more symptomatic of larger Wall Street trends on Friday, when the market was down, Astrachan said. “It’s outperforming decently, it’s just all relative,” he said.
“Historically, Lauder has been a bit more conservative in their guidance,” said Stifel analyst Mark Astrachan. “A year or two years ago, that period, they tended to be a bit more in line because the category was a bit softer, but certainly, as sales trends have started to accelerate, the company has perhaps been reluctant to embrace how much upside they have.
“I think they also didn’t want to over promise and under deliver,” Astrachan continued. “The worst thing you can do is give guidance that you can’t meet or beat.” Lauder raised its guidance Friday, projecting constant-currency sales growth between 10 percent to 11 percent, and constant-currency earnings per share growth between 19 percent and 20 percent.