Diversification, digital, acquisitions and restructuring: Those are the ingredients for growth at The Estée Lauder Cos. — and Wall Street has taken notice.
“There’s not anymore one thing that could happen that can give a big problem to us because if one thing has a problem, something else is growing,” president and chief executive officer Fabrizio Freda said in an exclusive interview following the release of the firm’s first-quarter results. “We are well diversified in high-growth markets, high-growth channels, high-growth brands, high-growth categories or sub-categories…we are able to put the boat in the winds of growth in a way which is more sophisticated than we could do two or three years ago.”
Freda also stressed the importance of the firm’s Leading Beauty Forward program.
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“Leading Beauty Forward — which some people consider a restructuring program — it’s so much more than that,” he continued. “It’s a growth builder…for us [it] has been an accelerator of resource reallocation, so it has been pushing growth because the resources are working much better for growth where they’ve been allocated now.”
The prestige beauty giant’s shares surged more than 9 percent Wednesday, closing at $122.12, after the company reported a 45 percent year-over-year net earnings increase and 14 percent net sales jump for the first fiscal quarter of 2018. Net sales were up to $3.27 billion, driven in part by Lauder’s acquisitions of Too Faced and Becca, which it bought in 2016. Net earnings were $427 million, and diluted net earnings per common share increased 44 percent to $1.14.
“What stood out in this quarter…was our skin-care performance, which rebounded strongly, a trend we are seeing in the industry,” said Freda on the company’s earnings call.
He also specified that China, global digital commerce, product innovation and travel retail are areas where Lauder is investing.
“Double-digit strength in online/direct-to-consumer, travel retail and across the company’s luxury and midsized brands contributes directly to improved margins and helps to hedge price and margin risk in traditional department stores,” wrote Jefferies analyst Stephanie Wissink.
Younger customers are more comfortable buying online, Freda said, which has also contributed to broad beauty industry growth.
“The growth of makeup in the last years has been driven by the elimination of wait time,” he noted. People used to only go to the department store once a month, but now can replenish online whenever they want, he said. “That wasted time of not being able to have the product you want has been eliminated…this has created market growth.”
Regionally, Lauder grew sales in the Americas 8 percent year-over-year to $1.3 billion. Europe, the Middle East and Africa posted a sales increase of about 20 percent, to $1.26 billion. Sales in the Asia-Pacific region were up 16 percent, to $687 million.
Breaking it down further, Lauder specified that sales in China were up 50 percent, sales in Hong Kong were up 14 percent and Taiwan and Malaysia also grew in the quarter.
“Regionally, growth was strongest in international markets — growth in the Americas was 7 percent in local currency, with MAC and Clinique still down, but offset by the contribution from recent acquisitions and slight growth in the Lauder brand,” wrote Citi analyst Wendy Nicholson in a note. “High-teens growth in Europe was driven primarily by double-digit growth in travel retail while high-teens growth in Asia was driven by distribution expansion and the strong consumer spending environment.”
In China, the market for prestige is up 30 percent, Freda said, and Lauder’s like-door growth hovers around 33 percent. “We are building market share in China, but the consumer in China overall is really excited,” Freda said. “In China, department stores are growing, Sephora is growing, freestanding stores are growing and obviously online is booming, particularly Tmall.”
During the quarter Lauder focused its China efforts on increasing the number of doors in cities where it already sells its brands, versus venturing into new cities. “More and more of our online sales are coming from cities where we’re not distributed,” Freda said. “Which means the efficiency of the distribution system is improving. The cities that are not ready to have an effective or efficient bricks-and-mortar solution, they are ready to buy online.”
The real opportunity for Lauder in China is with makeup and potentially fragrance, Freda noted.
“In skin care, China is already superstrong, so the real acceleration is makeup, where we see it almost doubling,” Freda said, noting that younger consumers are wearing more makeup than older generations and that Tom Ford and MAC both doubled sales in the region during the quarter. Chinese consumers are also more open to fragrance than they were in the past, according to Freda. “Fragrances that are a bit lighter, more cologne types because [that consumer] doesn’t like heavy fragrances — fragrances like Jo Malone London are flying…The fragrance market is booming, but it’s booming in its own way,” he said.
Chinese consumers remain important to the travel retail landscape as well, he said.
“Travel retail is driven by traffic and it’s the traffic of emerging populations,” Freda said. “It’s not only a Chinese phenomenon.”
Lauder is investing in Brazil, Russia and the Middle East, as well as China, as it continues to expand its travel retail business, Freda said.
The group’s strategy includes investing in the markets with traveling consumers.
“We launched Jo Malone in Brazil just a year ago with two stores,” Freda said. “These two stores, an investment, have created interest in the brand. Before that, it was not the case.”
Product-wise, Lauder saw growth across all categories except hair.
The company posted a 16 percent skin-care sales increase with almost $1.3 billion in sales for the quarter. Growth was driven by double-digit gains at Estée Lauder, La Mer, Glamglow and Origins, the company said. Clinique and Aveda posted lower sales.
“By product line, [year-over-year] growth accelerated strongly in skin care, up 15 percent, including double-digit growth for Estée Lauder, La Mer, Glamglow and Origins,” wrote Stifel analyst Mark Astrachan in a note. “While limited, we believe this illustrates a resurgence in global prestige skin care following two to three years of near-flat sales, a trend that would benefit Estée Lauder’s bottom line given higher margins in the segment.” A recent report from the NPD Group showed the prestige skin-care category up 10 percent for the third quarter.
Freda tied the uptick in skin care to the makeup user realizing that makeup goes on better if the “canvas is in good shape,” he said. “Antiaging is solid as usual, but it’s not growing, just solid, while instant benefit and canvas preparation is really growing.”
The Too Faced and Becca acquisitions drove sales in the makeup category, along with double-digit increases from Tom Ford and the Lauder brand. MAC also generated higher makeup sales, particularly in the Asia-Pacific region (China, Hong Kong and travel retail). At Tom Ford, makeup sales more than doubled, driven by its lip color products, including Tom Ford Lips & Boy and Soleil Color collections, as well as eyeshadow and foundation. At the Lauder brand, sales were boosted by the Double Wear and Pure Color Lip lines. The U.S. posted lower makeup sales, primarily from Clinique and Bobbi Brown, which Lauder said reflected the soft retail environment. Smashbox also declined.
Freda expects the specialty multichannel to stay more focused on makeup, despite more growth recently coming from prestige skin care, he said. “For the U.S., makeup has gone from a megaboom to a normal growth [rate],” Freda said. “You cannot make skin care in specialty more important than makeup, but you can make it much more important [than] what it is today, and over time there will be a much better balance. Hair care too, will become much more important than what it is today, and fragrances.”
Fragrance sales were up because of double-digit gains at Jo Malone London, Tom Ford and Le Labo. Jo Malone posted gains in every region, with strong growth from existing fragrances, expanded consumer reach and the launch of the English Oak fragrances. Tom Ford’s Signature and Private Blend fragrances are growing; Le Labo’s growth was driven by new and existing products. Certain designer and Estée Lauder fragrances offset gains in the luxury segments.
Hair care sales were flat, with moderate growth from Aveda and Bumble and bumble offset by lower hair-care sales at Origins. Bumble recently launched at Ulta Beauty, helping sales. Aveda’s online sales were strong, but sales at free-standing stores were lower.
Freda said hair-care sales were hurt by the Ojon hair business, which was folded into Origins and “continues to decline.”
“Frankly it’s not a long-term business for us,” he added. Looking forward, he noted the hair segment should be able to grow by ramping up international distribution for Aveda and Bumble and bumble.
“Today, our hair-care business is mainly here, so we have enormous opportunity for bringing Aveda and Bumble around the world,” he said.
Lauder raised its financial guidance for fiscal 2018 to constant currency sales growth between 8 percent and 9 percent, and constant currency earnings per share growth, before restructuring charges, to 12 percent to 14 percent.