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

EL 
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The Estée Lauder Companies (EL)

Q3 2013 Earnings Call

May 02, 2013 9:30 am ET

Executives

Dennis D'Andrea - Vice President of Investor Relations

Fabrizio Freda - Chief Executive Officer, President and Director

Ivan Fernandez - President of Europe, Middle East & Africa

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

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Javier Escalante - Consumer Edge Research, LLC

Linda Bolton-Weiser - B. Riley Caris, Research Division

David Wu - Telsey Advisory Group LLC

Wendy Nicholson - Citigroup Inc, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

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

Christopher Ferrara - BofA Merrill Lynch, Research Division

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

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

Lauren R. Lieberman - Barclays Capital, Research Division

Presentation

Operator

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2013 Third 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

Thank you. 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 Ivan Fernandez, President, Europe, Middle East and Africa. Ivan will give a strategic overview of his 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. Our discussion of our financial results and our expectations are before restructuring and other charges. Tracey's discussion will also exclude the impact of sale shifts related to our SMI implementation. 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 third quarter of fiscal 2013, consumer demand for our prestige brands and innovative products remained solid around the world. Our sales grew 3% in local currency, more than 5% excluding the advanced shipments related to our Strategic Modernization Initiative discussed with you previously and reflected in this morning's press release. And we gained share in strong markets like China, as well as in soft ones, such as Spain and Italy.

The key forces driving our sales were emerging markets, e-commerce, travel retail and certain of our luxury brands. We made focused choices as we increased our media spending on our most promising opportunity, yet we also deferred some planned investment to the fourth quarter. Combined with strong improvement in cost of sales and our ongoing cost savings, we delivered 20% EPS growth before charges, which exceeded our expectations.

With most of fiscal 2013 now behind us, we are confident we can achieve double-digit earnings per share growth for the fourth year in a row. In fact, this morning, we announced we are raising our fiscal 2013 EPS guidance to a range of $2.56, $2.61. Our sales growth in the quarter was tempered by continued weak economies in Southern Europe and Korea.

Additionally, in the latest rollout of SMI, some short-term customer service challenges emerged, which negatively impacted our ability to ship all our orders in the quarter. We expect to have the issue resolved by the end of our fiscal year. Tracey will provide more details later in the call.

Despite these difficulties, we achieved higher sales in all 3 of our regions. In the Americas, across our diverse portfolio, the strongest advances came from our top-tier luxury brand as affluent consumers continue to demonstrate their purchasing power.

Additionally, the Estée Lauder brand benefited from several recent skin care launches and our makeup artist brands enjoyed healthy retail sales.

Aveda hair care business rose nicely, due largely to the successful advertising behind Invati, its hair product, which helps build awareness for the entire brand.

And in Latin America, Venezuela and Brazil lead our double-digit growth.

In the U.S., our company and the prestige beauty industry continue to outperform mass in the recent quarters, thanks to many of our brands' recent product and service innovation. As a company, we grew broadly in line with the prestige beauty and a number of our brands gained share, led by M-A-C and La Mer.

Our sales grew in Europe, the Middle East & Africa, even though consumer spending remains sluggish across Southern Europe. Many of our brands outperformed prestige beauty on the strengths of their appealing products, targeted marketing in the High-Touch services they provide to consumer in all our channels.

Our business was robust in the region's emerging markets, including the Middle East and South Africa. Ivan will go into more details about the region.

In travel retail, our net sales have improved as the year has progressed. Our double-digit net sales this quarter were closer to retail trends and nearly twice the growth of passenger traffic. Our sales at retail grew fastest in Asia/Pacific and rose sharply in China during the Chinese New Year. Other countries also benefited and saw stronger sales as Chinese consumer travels during the holiday.

Our U.K. business had a healthy retail performance, with positive results across most brands. For instance, Bobbi Brown enjoyed excellent sales at retail after launching a new campaign featuring the actress Katie Holmes, a trend we expect to continue.

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