William Lauder

Grappling with retail consolidation and cost-cutting, Estee Lauder Cos. said third-quarter earnings fell 44 percent, as sales rose 3.5 percent.

NEW YORK — Grappling with retail consolidation and cost-cutting efforts, the Estée Lauder Cos. Inc. reported third-quarter net earnings that fell by 44 percent, despite a 3.5 percent sales gain.

“We are confident that once we get over these hurdles, mainly the Federated May merger, we should be poised to resume stronger sales gains,” said president and chief operating officer William Lauder, during an earnings call with analysts Thursday.

In a move to address the evaporating pool of department store nameplates, the firm said it will restructure its sales force, transitioning from a geographic approach to an account-specific one.

A third-quarter charge of $51.6 million tied, in part, to an employee buyout offer was the primary drag on earnings, which ­— for the quarter ended March 31 — fell 44 percent to $59.5 million, or 28 cents per diluted earnings per common share, from $106.2 million, or 46 cents a share, in the same period last year. Sales rose to $1.58 billion from $1.53 billion.

The company expects its cost-savings initiatives to reap about $75 million in future years. While encouraged by the firm’s belt tightening, Oppenheimer & Co. analyst Linda Bolton Weiser noted that management has work to do in transitioning the organization to a “cost-cutting culture.”

Retail consolidation is a continued challenge with Federated Department Stores planning to shutter 75 doors during Lauder’s fiscal 2006. The beauty firm anticipates the store closures will impact revenues by $70 million due to lost sales and a disruption in business as Federated changes regional nameplates.

Department stores might be the Estée Lauder Cos. core retail channel, but Lauder said the company is less reliant on one sales avenue.

“We’ve also followed our consumers as they have found other places to shop,” said Lauder, naming online ventures, the firm’s own stores, specialty retailers — including Nordstrom where MAC Cosmetics is the largest cosmetics brand — and Kohl’s Department Stores, the exclusive North American retailer of the firm’s BeautyBank brands. Lauder acknowledged the Estée Lauder Cos. has been in talks with Sephora regarding J.C. Pen­ney, but said the company has not yet made any decisions on the venture.

This story first appeared in the May 5, 2006 issue of WWD. Subscribe Today.

BeautyBank reported lower sales due to a difficult comparison to last year, according to the company, when BeautyBank had completed rolling out the brands to Kohl’s stores. Lauder said that the initiative, which began 18 months ago, did generate “store-for-store growth.”

“We are going to be building these brands over the long term,” said Lauder, noting that these are new brands and a new category for Kohl’s shoppers. “It continues to get strong support from Kohl’s management.” Analysts estimate that BeautyBank brands generate $50 million to $55 million in Kohl’s stores, nearly half of many analysts’ initial estimates of $100 million to $150 million.

Despite its move into other channels, the company remains focused on department stores. “The department store model of having dedicated sales associates to sell your brands is a very effective way to do business,” Lauder told WWD.

During the quarter, on a reported basis, skin care sales inched up 0.5 percent to $611.1 million, with makeup, fragrance and hair care sales increasing at a faster clip. Makeup sales increased 3.2 percent to $634.9 million, driven by makeup artist brands MAC Cosmetics and Bobbi Brown. Hair care sales accelerated 19.3 percent to $80.3 million and fragrance sales rose 7.7 percent to $246.3 million, buoyed by Estée Lauder’s Pleasures ads featuring Gwyneth Paltrow and the runaway success of Unforgivable by Sean John. Lauder noted that following its February debut, Unforgivable became the number-one selling men’s fragrance in U.S. department stores and has doubled the company’s sales expectations.

“It could become a multiyear success,” said Lauder, adding the company will soon introduce ancillary items for Unforgivable.

By region, sales in the Ameri­cas gained 3.7 percent to $870.1 million, outpacing sales growth in Europe, the Middle East and Africa of 1.6 percent, to $501.5 million. Asia-Pacific sales increased 6.9 percent to $206.6 million. The company named China, India, the Middle East, Brazil and Russia as key strategic markets.

In April the company sold Stila Cosmetics to an affiliate of Sun Capital Partners Inc., a Boca Raton, Fla.-based investment group, for an undisclosed sum. Industry sources estimate that when the Estée Lauder Cos. purchased Stila in 1999 it paid between $25 million and $30 million for the makeup artist brand.

The company is currently introducing Tom Ford’s spring collection for Estée Lauder, called Azurée. Lauder also commented that its Clinique brand is ripe for catering to emerging markets and ethnic groups, given its strength in foundations.

Lauder expects net sales for fiscal 2006 to grow approximately 3 percent.