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

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Estee Lauder Companies (EL)

Q3 2011 Earnings Call

May 05, 2011 9:30 am ET

Executives

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

Olivier Bottrie - President of Travel Retailing Worldwide

Fabrizio Freda - Chief Executive Officer, President and Director

Dennis D'Andrea - Vice President of Investor Relations

Analysts

Ali Dibadj - Sanford

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

Jason Gere - RBC Capital Markets, LLC

William Schmitz - Deutsche Bank AG

Wendy Nicholson - Citigroup Inc

Caroline Levy - Credit Agricole Securities (USA) Inc.

Linda Weiser - Caris & Company

Presentation

Operator

Good day, everyone, and welcome to the Estée Lauder Companies Fiscal 2011 Third Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introduction, 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; and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us is Olivier Bottrie, President of Travel Retailing Worldwide. Olivier will give an overview of Travel Retail and discuss our strategies for growth in the channel.

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. We will also discuss certain of our results in non-GAAP financial terms, and you can find a reconciliation between GAAP and non-GAAP figures in our press release and in the Investors section of our website.

I'll turn the call over to Fabrizio.

Fabrizio Freda

Good morning. Thank you for joining us. Our company had another strong quarter in which we continue to show fantastic momentum. Our growth was broad-based, encompassing all regions and categories, and every category grew in every region. More than half of our brands grew double digits.

The luxury consumer is clearly...

[Audio Gap]

The strength is driven by affluent shoppers in the U.S. and wealth creation markets especially in China. Demand for premium goods and services in the U.S. is expected to rise 8% this year according to a recent survey of affluent and wealth in America. In the U.S., premium brands are generating the strongest gains among consumer groups and luxury travel is outperforming economy travel. However, luxury consumers are very demanding. They're willing to spend, but they expect excellent product and services and an experience that provides added value. This trend rewards our focus on high-quality products and reinforces our commitment to invest at point-of-sales in beauty advisor online and all other aspects of our High-Touch experience. In fact, our luxury brands -- Bobbi Brown, La Mer, Jo Malone, Tom Ford -- grew strong double-digits for the quarter. The soundness of our strategy of launching fewer, bigger innovations and supporting them with stronger advertising and excellent High-Touch service is confirmed again this quarter.

We continue to lead in the strategically important Skin Care category, which saw strong increases in all regions. Recent technologically advanced innovations include Clinique Repairwear Laser Focus, Estée Lauder Advanced Night Repair Eye Recovery Complex, La Mer Regenerating Serum and Origins Plantscription. We are pleased with the success of these new products, and we have a strong pipeline of innovations ahead of us to sustain our leadership. Importantly, we continue to nurture our other categories. Makeup, our second-largest category also grew strongly in every region. Innovation drove sales at Clinique, which benefited from launches of bottom lash mascara and Chubby Stick lip gloss. Our makeup artist brands continue to lead the category. M-A-C and Bobbi Brown grew double digits, and Smashbox contributed incremental sales. M-A-C added $14 this quarter and is planning to open almost 30 more by our fiscal year-end.

Our Hair Care category is improving. Following a successful test in 10 stores, Bumble and bumble had expanded to all stand-alone Sephora doors in the U.S. Bumbles alone network should benefit from the referral program at Sephora. The brand has also launched its first ever print ad campaign for its new texture cream in North America in April, followed by the U.K. this month. Aveda is seeing increased sales of its styling products and professional hair color, and we are encouraged about the full quarter relaunch of our Ojon brand, with a reformulated product lineup. The brand is running a trading campaign in Sephora in May to encourage trial of new products. The brand narrative of the strength and is now focused on product performance, as well as strong sustainability platform.

Our Fragrance category grew this quarter despite a tough comparison with the 3-year relaunch of pureDKNY. Several of our recent launches performed well, including Coach Poppy and Estée Lauder pleasures bloom, as well as the premium Jo Malone and Tom Ford fragrances.

During the quarter, we announced that we are assuming a worldwide license for Zegna, which should strengthened our international Fragrance portfolio especially in China and Europe. We continue to improve the profitability in this category. It is now contributing nicely to our overall margin expansion.

Our turnaround brands have contributed to improve profitability in all categories, most notably Fragrance. The relaunch of Ojon is expected to further improve our Hair Care category and several other brands have streamlined their distribution and focused their product assortment to grow their profitability. Our business is responding well to our pool strategies around the world. We have been reinvesting a portion of cost savings and reallocating marketing dollars to advertising behind the most powerful innovations, a market where we believe the has the greatest impact, both emerging and developed. Fast-growing emerging markets and our ability to satisfy multicultural consumers continues to fuel our growth. China continue to grow strongly, rising 35% this quarter. Origins is well perceived in China, and its doors in that country are already the brand's second-most productive in the world. It just opened its first freestanding store at the popular [indiscernible] mall in Shanghai. Also, to promote its innovative new product, Plantscription, Origins is running its first TV commercial in the brand's history beginning in Hong Kong this month.

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