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

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Estee Lauder Companies (EL)

Q1 2011 Earnings Call

October 29, 2010 9:30 am ET

Executives

Richard Kunes - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Harvey Gedeon - Executive Vice President of Research & Development and Product Innovation

Fabrizio Freda - Chief Executive Officer, President and Director

Dennis D'Andrea - Vice President of Investor Relations

Analysts

Ali Dibadj - Sanford

Victoria Collin - Atlantic Equities LLP

Lauren Lieberman - Barclays Capital

Constance Maneaty - BMO Capital Markets U.S.

John Faucher - JP Morgan Chase & Co

Joseph Altobello - Oppenheimer & Co. Inc.

David Wu - Global Crown

William Schmitz - Deutsche Bank AG

Wendy Nicholson - Citigroup Inc

Andrew Sawyer - Goldman Sachs Group Inc.

Linda Weiser - Caris & Company

Caroline Levy - Credit Agricole Securities (USA) Inc.

Neely Tamminga - Piper Jaffray Companies

Alice Longley - Buckingham Research

Presentation

Operator

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2010 Year End (sic) [First Quarter 2011] Conference Call. [Operator Instructions] 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; and Rick Kunes, Executive Vice President and Chief Financial Officer. Also on the call is Harvey Gedeon, Executive Vice President, in charge of Global R&D and Innovation. Harvey will be available for the questions.

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. You can also find a reconciliation between GAAP and non-GAAP figures in our press release and on the Investors section of our website. So I'll turn the call over to Fabrizio.

Fabrizio Freda

Good morning, and thank you for joining our Fiscal 2011 First Quarter Conference Call. Today, I will discuss the quarter's highlights and progress we made against our strategy, and Rick will provide details of our financial performance. We announced this morning that before restructuring charges, sales for the quarter grew 13% to $2.1 billion. This was a milestone since it's the first time we have exceeded the $2 billion in sales in our first quarter. Our strong performance was due to robust business around the world and was helped by the dollar, which was weaker than we had forecast. Diluted earnings per share were $0.97 on a non-GAAP basis, up 14% versus year ago.

Our success was broad-based. Sales climbed by double digits in every region, including North America and in our three largest categories, driven by strong product launches and increased advertising spending in the previous quarter. In fact, our highest sales spanned the range of the portfolio, from our entry-level Prestige brands to high end luxury ones. Most significantly, our largest brands led the way, Estée Lauder, Clinique, M-A-C and Aramis designer fragrances had such great momentum that each rang up double-digit sales gains globally and delivered substantial improvement in North America.

All in all, it was a terrific performance in many regards. Several of our financial measures broke records for the first quarter, including sales, operating margin, earnings and EPS. Our strategy is clearly working, and we are executing it well, which is reflected in these outstanding financial achievements. We've also made progress against many of our specific strategic goals. We again gained share in skin care and in important channels and countries, including U.S. Prestige department stores and our Prestige distribution in China. Also, our turnaround brands showed further improvement. Our creativity resulted in robust launches. We exceeded our cost-saving projection by about $50 million and we continued building our strategic capabilities.

William Lauder and I are proud that our executive leadership team is directing our strategy so well around the world that the entire organization is executing it so successfully. This strong start is a fantastic way to launch a new fiscal year. Our positive performance this quarter give us greater confidence in the remainder of the year. So we are increasing our full year EPS guidance to $2.90 to $3.10.

Let me now provide you with some color behind the numbers. In recent quarters, the fastest growing areas have been Skin Care, China, Travel Retail and Online. While these businesses continue to record solid growth, we also saw a strong performance in U.S. department stores and fragrance, which had been declining. We attribute our success to external factors, including pent-up demand and stronger consumer spending, as well as internal achievements, creating exciting new products and unique High-Touch services that appeal to consumers over the world. Our more effective marketing, which includes compelling advertising has contributed to our success by making consumers more aware of our newest products and services. A key part of our strategy is focusing our talents and efforts on fewer but bigger product launches offsetting cutting-edge innovation. Recent introductions from our research and development teams have been outstanding, and the success of these products underline our superb sales growth. Our brands had a rich pipeline of truly novelty launches over the next several years that we believe will continue to set the pace and set us apart in the industry. Harvey can answer questions about our innovation strategy during the Q&A.

Our year old America affiliates have been working with department stores to make the beauty floor more exciting and the initiatives are paying off for us and the retailers. Our sales in North America department store grew double digits this quarter. Sales of Estee Lauder and M-A-C brands into China grew double digits and Clinique recorded solid gains. Some of our largest U.S. department stores customers, particularly Macy's and Nordstrom, posted solid sales gains for the recent three months and higher traffic contributed to our sales growth. We believe our more focused and frequent advertising, which entices consumers to buy our must-have products helped generate the higher traffic. And while we have made inroads against Prestige competitors, we have also gained against mass. The luxury consumer is shopping again, and we are seeing our strategy contribute toward the old Prestige beauty growing faster than mass in many parts of the world. For the three months ended September 30, 2010, total U.S. beauty sales in Prestige department stores and Sephora rose 4% according to NPD, while sales in mass channel grew 1%. The strength was even greater in skin care, where Prestige sales growth was five points higher than mass. Our sales in Europe rose sharply, helped by incremental orders from perfumes as part of the reassortment effort we began last March. Asia sales growth was a little softer this quarter, but still rose 10%. Skin Care in Asia is a main area of strategic focus, and now accounts for 61% of the region's total sales, up from 56% only a year ago. In the recent quarter, our Asian Skin Care sales rose 19%. Rick will talk more about the regions in a few minutes. A key strategic focus has been to advertise our newest and most popular products effectively to pull consumers into stores. We have put the most money behind Clinique Repairwear, Laser Focus and even better Clinique Estée Lauder franchise and the pure DKNY Fragrance. Once consumers come to our counters and websites, we leverage our High-Touch service to build a personal connection, foster brand loyalty and sell multiple products. Although we are investing more in advertising, our total advertising and promotional spending hasn't increased as a percentage of sales. Instead, we have reallocated our spending in the category. We are putting less into gifts and sampling and more into advertising, including TV, online and print to build greater awareness and demand for our brands globally. The company's focus on skin care is driving sales growth at many of our brands: Estée Lauder, Clinique, Origins and La Mer have substantial advances in their Skin Care business. Both Estée Lauder and Clinique's global skin care sales surged more than 19%, with gains in all regions. The Estée Lauder brand continues to make impressive gains in Asia/Pacific and Travel retail, fueled by the popularity of several recent product introductions. Currently, the flagship brand is updating Re-Nutriv Ultimate, its luxury line, which we believe will continue to propel its winning skin care story.

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