NEW YORK — The Estée Lauder Cos. on Thursday reaped a 23.1 percent rise in profits as earlier investments in its brands paid a handsome second-quarter dividend.

Investors rewarded the beauty giant’s diligence about focusing on long-term growth by trading its shares up $3.47, or 13.1 percent, to close at $29.89 on the New York Stock Exchange on Thursday. Over the last 52 weeks, the shares have traded as high as $38.80 and as low as $25.20.

This story first appeared in the January 31, 2003 issue of WWD. Subscribe Today.

Assuming there are no major geopolitical disruptions, Lauder is looking for its growth to continue into the second half.

Earnings attributed to the firm’s common stock bounded up to $103.8 million, or 44 cents a diluted share, for the quarter ended Dec. 31. The improvement was attributed to modest gross margin improvements and operating expense reductions. Results compared with year-ago profits of $84.3 million, or 35 cents. In both the most-recent and year-ago quarters, the firm paid out preferred stock dividends worth $5.8 million.

Results beat Wall Street’s expectations of 40 cents a share by 4 cents and the upper end of the firm’s previous guidance by 3 cents.

Sales improved 8.8 percent to $1.41 billion from $1.3 billion a year ago. Without the impact of foreign currency translation, sales rose a more modest 6 percent.

Richard Kunes, senior vice president and chief financial officer, in a telephone interview, attributed the strength to “very solid” results from the international business, the recovery of the travel business as well as new programs and new brands, “all of these factors plus our ongoing focus on controlling costs.”

The quarter benefited from nearly $10 million in pretax savings related to the globalization of the firm’s organization last year. Savings in each of the third and fourth quarters should reach $10 million under the program and eventually top out at $40 million in savings annually.

Lauder, he said, has also been focusing on creating efficiencies in the selling organization, with better hiring practices and training, as well as in the general and administrative areas.

On a morning conference call, Fred Langhammer, president and chief executive, noted: “Overall, we believe cosmetics performed better than the other categories in the department stores, particularly makeup and skin care,” in the Americas.

“In the U.S. we are seeing progress from the investment we have made in the Estée Lauder brand renewal over the past year, stemming from product innovation as well as new advertising and reduced promotions. For the Lauder brand we strategically shortened the time of the holiday blockbuster program to create a high degree of desirability for the sets, while supporting it with more broadcast media,” he said.

The move exceeded expectations with a 98 percent sell-through rate.

Despite Wall Street pressure to conserve cash and tepid top-line growth, Lauder in recent quarters made a concrete effort to support its brands and fattened its advertising spending. Strength in the second quarter “validates our strategy to invest in marketing activity to generate growth,” said the ceo in a statement.

When asked about the firm’s 7 percent increase in advertising, sampling and merchandising expenditures in the second quarter, Langhammer didn’t mince words.

“Don’t drive me crazy about the quarters. I’m looking at the annual scenario. We have two major seasons here: the fall and the spring season. Managing this business by quarter drives everybody crazy. I let the quarters come out the way they come out.”

Besides, expenditures were down slightly as a percentage of sales.

Banc of America Securities analyst William Steele noted, “It was a very good quarter, good top line, good bottom line, improvement in the balance sheet. It’s what the investment community wants in any consumer product company.”

The firm, he said, has invested behind its brands “through thick and thin” and that consistent brand promotion, along with the introduction of new products, is beginning to resonate with the consumer.

“They did spend behind the brand at the expense of near-term profitability and because of the nearsightedness of Wall Street, they took a lot of heat,” he noted. “People are going to back off a little bit.”

Standard & Poor’s debt analyst Lori Harris was encouraged by the results as they show Lauder “is executing against its plan, which is particularly impressive given the lackluster global economy and soft holiday selling season. Significant and growing cash balances provide the company with substantial financial flexibility, whether to make an acquisition and/or continue with share repurchases.”

At the end of the quarter, Lauder carried cash and cash equivalents of $694.8 million, a 4.7 percent year-over-year rise.

Langhammer was noncommittal on the call, but said the options created by the abundance of cash would certainly come up during the next board meeting: “Suffice to say, we feel pretty good about the position we’re in and we’re going to take some action in one direction or another.”

As reported, the firm earlier this month notified the Securities and Exchange Commission that it had signed an agreement to purchase French skin care company Darphin Laboratoires, a deal expected to be completed this year. Lauder’s last acquisition was in June of 2000 when it acquired a majority share in the hair care firm Bumble and bumble.

The company saw sales gains in all of its product categories during the quarter.

Makeup sales rose 11 percent to $476.8 million, or 9 percent before the impact of foreign currency translation. Reflecting a 50 percent uptick in the travel business, fragrance sales were up 7 percent to $386.3 million, or 3 percent before currency translation. Hair care sales rose 3 percent to $60.2 million, an increase primarily attributable to growth at Aveda and Bumble and bumble.

Sales were also up in each of the firm’s geographic regions.

Net sales strengthened 4 percent to $783.5 million in the Americas. Operating profits rose 16 percent to $70.9 million.

In Europe, the Mideast and Africa, sales swelled 19 percent to $438 million, or 10 percent before currency conversion. Operating profits shot up 36.4 percent to $73.4 million.

The increased operating profits were primarily a result of the turnaround in the travel business from last year’s depressed levels, and, to a lesser extent, improved results in several other markets led by the U.K. and France.

In the first half, profits attributable to Lauder’s common shares grew by 10.6 percent to $171.3 million, or 73 cents a diluted share, from $154.9 million, or 64 cents, a year ago.

Both periods included $11.7 million in preferred stock dividends. The year-ago period included a one-time aftertax charge of $20.6 million related to an accounting change.

Sales for the six months climbed 6.5 percent to $2.66 billion from $2.49 billion a year ago.

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