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

EL 
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The Estée Lauder Companies Inc. (EL)

June 11, 2013 5:15 am ET

Executives

Cedric Prouvé - Group President of International Operations

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

Presentation

Unknown Analyst

All right. We're going to get started with Estée Lauder. It's my great pleasure to invite Estée Lauder's management team back to the conference after a couple of year hiatus. We're going to start with Cedric Prouvé, who is the President of Estée Lauder's International business. Thanks, Cedric.

Cedric Prouvé

All right. So good morning, everyone. It's a real pleasure to be with you this morning and to share our accomplishments and our future opportunities. I just want to -- before I start, I just want to remind you that some of our remarks will contain forward-looking statements.

Historically, the Estée Lauder Companies has been a high-growth company. This is our strength and our strategy will continue to leverage this going forward. We are a global leader in prestige beauty, with sales expected to exceed $10 billion this year, thanks to our ongoing focus on sustainable, profitable growth.

Since our strategy began in 2009, we have made tremendous progress and believe that our 30 brands are well positioned for continuous long-term growth. We have a rich portfolio of world-class aspirational brands. Along the prestige spectrum, our brands range from entry level, like Clinique and M.A.C., up to premium luxury with La Mer and Tom Ford. They also appeal to different sensibilities. Estée Lauder attracts consumers of varying ages and ethnicities; Origins and Aveda emphasize their natural ingredients; and Smashbox and Clinique attract younger consumers. We believe that no company has a more comprehensive prestige portfolio of brands today.

We are the largest global beauty company focused solely on prestige, which is the fastest-growing segment of global beauty and the preferred consumer experience in many markets. Our creativity delivers high-quality breakthrough products, aspirational brands and High-Touch services in channels fully dedicated to me time, what we call me time. Our prestige model includes education, customization, and a personal experience. When you buy products at M.A.C., our makeup artist instructs you how to apply them to achieve different looks.

In terms of customization, a trained Clinique consultant advises the consumer on the right treatment for her skin concerns. The $100 billion industry at retail expanded by 3% to 4% annual in the past decade, and is forecasted to rise at least that much over the next 10 years. Our share is approximately 15%, and our goal is to keep growing at least 1% faster than the industry. Over the past 4 years actually, we have grown about 2x faster than our industry.

Several demographic trends support continued industry growth. The first comes from emerging markets, of course, where more women are entering the middle class and enjoying higher disposable income. We've had robust sales gains in many of these markets, including China, Brazil and the Middle East. Another factor is the aging of the world's population, which creates greater demand for many of our products, particularly antiaging skin care and foundations.

Prestige beauty account for 30% of total beauty globally, so there's enormous opportunity to win over millions of new consumers from mass channels and brands. Thanks, in part, to our brand's outstanding new products and effective advertising, we've attracted consumers to our counters and contributed to global prestige beauty sales, outpacing mass in many global markets, including the United States, China, Italy, and Germany, as you can see here.

Our terrific growth during the last 4 years is due to success for many part of our business. We've delivered constant innovations across our products and services and doubled our advertising spending, which has full consumer to our counters and website. That has helped increase brand awareness, as has the expansion of our freestanding stores, which currently number more than 1,000 around the world. We've also increased our e- and m-commerce sites from about 30 in 2009 to nearly, 200 today; and in the same span, more than doubled our online sales. We are nearing completion of our multiyear strategic modernization initiative, or SMI, and have nearly 75% of our global sales SAP enabled today. The last major wave is scheduled for July 2014.

In our first 63 years through fiscal 2009, sales grew to $7.3 billion. Since then in less than 4 year's time, we've added about half that much again. Since 2009, operating profits have tripled and operating margin climbed from 7% to an estimated 15% in fiscal 2013. Our winning strategy has produced a powerful financial performance.

As we look ahead, we are guided by our 10-year strategic compass, which identifies the biggest and fastest-growing opportunities, shaping the beauty industry. We intend to stay ahead of prestige by focusing our creativity and our technology on these best opportunities.

Building on our stellar track record, we're designing a promising future. We are pursuing high-growth channels and markets, focusing on key product categories, then leveraging our creativity and innovation to create superb products and High-Touch services. We continue to modernize and sharpen our capabilities and eliminate non-value added cost that we can internally invest in our growth drivers.

Every year, we refine our strategy to hone in on the most promising areas. We look at different markets within each region to find the best opportunities for growth. Our focus has been on emerging market consumers, high-growth distribution channels, exemplary innovation and creating locally relevant products, services and communications. We are the leading prestige beauty company across all key categories in the United States. We have 3 of the top 10 prestige brand and our share is more than twice that of the next largest company in the country. But even with this ceiling [ph] position, we see solid opportunities for growth. By converting consumers for mass, marketing to different ethnicities and looking at different regions as distinct opportunities. Consumer behavior, ethnic backgrounds, competitors and channel activity differ by subcategory and by region in the United States. Each subregion has terrific growth potential and rivals the size of many of our international affiliates. For instance, the company sales in the Pacific region are comparable to the size of our business in Japan. The coastal regions are large, fast growing and multicultural, while the middle of the United States is less diverse. The U.S. regions that have the greatest growth potential also happen to be the most ethnically diverse with more than 1/3 of the consumers, non-Caucasian.

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