Estee Lauder Companies, Inc. (The) (EL)

EL 
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The Estée Lauder Companies (EL)

Q2 2013 Earnings Call

February 05, 2013 9:30 am ET

Executives

Dennis D'Andrea - Vice President of Investor Relations

Fabrizio Freda - Chief Executive Officer, President and Director

Fabrice Weber - President of Asia Pacific Region

Tracey Thomas Travis - Chief Financial Officer, Executive Vice President, Member of Corporate Risk Management Committee, Member of Fiduciary Investment Committee and Member of Investment Development Committee

Analysts

Jason English - Goldman Sachs Group Inc., Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

John A. Faucher - JP Morgan Chase & Co, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2013 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir.

Dennis D'Andrea

Good morning, everyone. On today's call are Fabrizio Freda, President and Chief Executive Officer; Tracey Travis, Executive Vice President and Chief Financial Officer; and Fabrice Weber, President, Asia/Pacific. Fabrice will give a strategic overview of this fast-growing region.

Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. Except when noted, our discussion of our financial results and our expectations are before restructuring and other charges. You can find a reconciliation between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website.

And I'll turn the call over to Fabrizio.

Fabrizio Freda

Thank you, Dennis, and good morning, everyone. During the second quarter of fiscal 2013, we continue to constantly steer our strategy on a successful course through varying market conditions. This resulted in solid sales growth at the high end of our -- of the range we provided.

Sales grew 7% in local currency, while diluted earnings per share were better than we anticipated. Around the world, prestige beauty continues to grow but at a slower pace than a year ago. While this reflects the reality of the markets, our brands and high-quality products are winning with consumers, thanks to our diverse portfolio that gives us a presence in a full range of prestige channels. With effective advertising that promotes our outstanding innovations, we pull consumers to our counters, and then generate sales with High-Touch personal service.

In the recent quarter, all 3 of our geographic regions contributed to our highest sales, despite some soft market and specific challenges. Sales in all of our major category also rose. Continuing a recent pattern, the fastest brand growth came from the high end of our prestige portfolio. The affluent consumer is spending freely for a product she desires. As a result, our luxury brands including Jo Malone, Tom Ford and La Mer are striving, each up more than 20%. We believe these brands have terrific growth potential, and we plan to continue to invest in them over the next several years, so they become more formidable players in the beauty landscape.

Our emerging markets continued to deliver the most rapid growth. Sales rose 24% in the quarter, and they accounted for 40% of our total business. In China, our largest emerging market, our retail sales climbed 28%, enabling us to gain market share. We continue to push into new cities and add counters for our brands and also increase our advertising on TV in advance of the Chinese New Year. We foresee further expansion opportunities into smaller cities in China for several years to come.

Other emerging markets showing strong local currency sales growth included South Africa, Turkey, the Middle East and Brazil. And many of our brands in those countries gained share, thanks in part to their success in being locally relevant. Our brands continuously seek to reach new consumers, and one way is being -- expanding geographically. M-A-C, for instance, is deepening its presence in Sub-Saharan Africa. It recently began selling in Zambia, Nigeria and Botswana.

In Russia, ongoing distribution challenges continue to impact our 2 largest brands, yet our luxury and makeup artist brands are growing very fast and resonating with consumers. To compensate for the overall soft results, we are working to accelerate our innovation, marketing and online opportunities.

Turning to our established markets. We enjoyed a solid sales increase in North America as prestige beauty growth continued to outperform mass brands. In the past, our performance in our core market was largely dependent on our biggest brand. But this quarter, it was also due to healthy sales for several of our smaller and midsized brands, especially luxury and specialty ones. For example, gains in Bobbi Brown stemmed from successful products and special events.

From a distribution perspective, in North America, our fastest-growing channels were e-commerce and special [indiscernible]. Sales of our products in prestige department store outpaced mid-tier ones. Our North America results were positive despite the impact of the Hurricane Sandy tragedy, which affected a large portion of the Eastern U.S.

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