The U.S. department store climate has taken its toll on MAC Cosmetics.
The Estée Lauder Cos. Inc.’s biggest makeup brand is facing declines in the U.S. because of less foot traffic at midtier department stores and fewer shoppers in areas where the brand has a high concentration of freestanding doors (New York and Florida). To combat those losses, which dragged total company numbers down for Lauder’s fiscal first quarter, MAC will focus on product innovation, new collections, improved services and social media acceleration, according to Lauder chief executive officer Fabrizio Freda.
But Wall Street was focused more on the pain than the solution, and Lauder’s stock price dipped about 5.5 percent to $81.60 at the close of the market.
An indication of the seriousness of the problem is that Lauder is open to introducing the MAC brand to specialty multiretailers like Ulta Beauty or Sephora — something it declined to do in the past.
“MAC could be also having, in the long term, other channels, opportunities, including specialty multi, but it’s not the only solution,” Freda said. “MAC has many freestanding store formats that we could consider for the future, which are very exciting, the evolution of the online still, a lot of great work to be done in further increasing traffic in the department store channel,” Freda said. “MAC is the biggest brand in makeup by far in the United States and there is a lot of leverage and ability to engage consumers, so there are many different opportunities to develop the brand in many different winning channels.”
Freda declined to comment on what services the brand would be adding, citing competition, but did say that there are “innovations in the area of foundations” and other products, as well as the newly launched Liptensity collection and MAC Nutcracker Suite, for holiday, that the company anticipates will drive sales.
On the company’s earnings call Wednesday, Freda noted that MAC’s sales were up for October, and later clarified that that bump was both from the Liptensity launch and the launch of a Selena collection, which sold out and will be restocked in January.
The urgency to fix MAC was evident in Lauder’s fiscal first quarter, with net earnings declining 4.8 percent to $294 million from $309 million in the prior-year period. Net sales were up 1 percent to $2.87 billion from $2.83 billion year-over-year, and diluted earnings per net share were 79 cents, down from 82 cents in the prior-year period. Lauder recorded $31 million in restructuring and other charges related to Leading Beauty Forward, its restructuring program. Adjusted for currency effects, net sales were up 2 percent.
While MAC’s makeup sales in the U.S. dipped, its sales internationally were on par with the rest of the prestige market, Lauder said. The brand makes up an estimated 22 percent of Lauder’s sales, according to a note from Stifel analyst Mark Astrachan. For the quarter, Lauder’s makeup sales were $1.17 billion, up from $1.16 billion in the prior-year quarter. Operating income for the makeup segment dipped to $149 million from $189 million, in part because of lower sales of MAC in North America, Lauder said.
Tom Ford and Smashbox both posted double-digit gains for the quarter, because of lip products and specialty retail sales, respectively. “Their innovation program and their social media program” are the reasons that Smashbox posted gains for the quarter, Freda said, adding their social media program is “accelerating and creating a lot of interest.”
Select Estée Lauder stockkeeping units just made their way into 30 Ulta Beauty doors, plus online, and depending on results may roll out into more doors. “It is a great start of the Estée Lauder brand in these doors, and we are feeling very well because the first data confirms that there are new consumers coming into the Estée Lauder brand,” he said.
Becca Cosmetics, which Lauder expects to close an acquisition for in November, also brings more specialty retail distribution into the equation. Lauder wanted to buy the brand because of its followers and products, Freda said. “It plays well in a growing channel and that growing channel is specialty.…It has great possibilities of reaching new consumers internationally and in other channels like travel retail or international online markets.”
At Sephora specifically, Lauder is working with the retailer to tweak the Estée Edit, which the business launched in March in order to reach the Millennial consumer. “Like in every product launch, particularly in brand franchise launches, we are learning what is working better and what is not yet working the way we want, and we are tweaking, adjusting in collaboration with Sephora,” Freda said. “The adjustments are in the area of which kind of products, so product mix…deciding which categories will be a focus and including the communication of the benefits, including social media activation and the activation in the store.” Freda specified that product formulations were not being adjusted.
In terms of makeup, Estée Lauder and Clinique also did well because of Estée Lauder Double Wear and Pure Color Envy lines and Clinique’s Superbalanced silk makeup broad spectrum SPF 15. Next for those brands is reaccelerating skin care, Freda said.
“We’re going to see more innovation from these brands in the fast-growing area of skin care, which is skin care for instant benefits and in all the areas where makeup and skin care are converging,” Freda said, singling out face masks as an example. “The second thing is about communication. The skin-care products will be better communicated in the world of social media and better activated.…Last is services, there will also be additional service innovation.”
Lauder’s skin-care sales for the quarter were $1.102 billion, down from $1.109 billion for the prior-year period, with an operating income that was up 12 percent. While Clinique and Estée Lauder continue to struggle in the skin-care segment, La Mer made double-digit gains in the quarter due to product innovation like the Moistruizing Soft Lotion. Origins is experiencing growth because of increases in masks, and Aveda’s Tulasara skin-care line also did well, the company said.
Fragrance sales were up 7 percent to $442 million from $413 million for the quarter, and hair-care sales inched up 1 percent, to $136 million from $134 million in the prior-year period. In fragrance, Jo Malone London and Le Labo posted double-digit gains, and in hair care, growth came from Bumble and bumble products.