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

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Estee Lauder Companies (EL)

Q4 2011 Earnings Call

August 15, 2011 9:30 am ET

Executives

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

Jane Hudis - President of Global Brand

Fabrizio Freda - Chief Executive Officer, President and Director

Dennis D'Andrea - Vice President of Investor Relations

Analysts

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Alice Longley - Buckingham Research Group, Inc.

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

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

William Schmitz - Deutsche Bank AG

David Wu - Telsey Advisory Group LLC

Alex Fuhrman - Piper Jaffray Companies

Linda Weiser - Caris & Company

Caroline Levy - Credit Agricole Securities (USA) Inc.

Nik Modi - UBS Investment Bank

Presentation

Operator

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2011 Year End 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

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 Jane Hertzmark Hudis, Global President of the Estée Lauder brand.

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 results in our press release and in the Investors section of our website.

I'll turn the call over to Fabrizio now.

Fabrizio Freda

Good morning. I'm delighted you joined us for our fiscal 2011 year end conference call. Once again, we finished the year on a positive note with a good momentum. We are now 2 years into our strategy, which is working well, and by virtually all measures, we made tremendous progress. As you know, our plan has many components, and we are fighting on all cylinders, leading to our excellent results.

Our business grew double digits. We exceeded our cost-saving projection and have achieved our stated operating margin goals 2 years in advance. In addition, we are executing with excellence on our strategy, and the strengths of our organization has been unleashed. Specifically, we have created robust launches, effective advertising, improved High-Touch services, stronger digital presence and cost reductions.

Our international growth has been terrific, and we sharply improved our North America business. Our brands and global workforce are more collaborative, which has led to a stronger organization. We have already achieved many of our original fiscal 2013 goals, and we are now extending the strategy for another year through fiscal year 2014 with a new operating margin target of 14.5% to 15%.

Fiscal 2011 was a record year for many financial measurements. Let me highlight our recent milestones. Our sales grew 13% to a record $8.8 billion, 3x the growth of global prestige beauty. Our largest categories, Skin Care, Makeup and Everyday Region climbed by double digits. By growing faster than the industry, we gained share in many important markets and channels, including China, the U.K. and Travel Retail.

The company continued to manage cost, enabling us to leverage our sales growth into greater profitability. Our net earnings were $743 million, and earnings per share of $3.69 were 34% above the prior year and the highest in the company's history. Also hitting all-time highs were gross margin of 78.1% and operating margin of 13%, which increased 140 and 180 basis points, respectively.

Our operating income and operating cash flow each topped $1 billion for the first time, and we created substantial stockholder value. We raised our dividend 36%, and total shareholder return nearly doubled.

I'm especially pleased with our 3 largest brands, which accounts for 70% of sales, had strong momentum globally and, combined, grew at double-digit pace. Estée Lauder resonated so well with Chinese consumers that it became the largest prestige beauty brand in our distribution in that rapidly growing market. Clinique Important [ph] Skin Care business rose 14% worldwide, driven by cutting-edge products that filled gaps in the marketplace.

As the biggest beauty brand in the U.S., Clinique grew share significantly in Skin Care, and M-A-C had double-digit gains in every region and attracted a following of more than 2 million fans on Facebook, the most of any prestige beauty brand.

An important element of our strategy is to win big with affluent customers, and our high-end brands enjoyed double-digit growth, as luxury consumer have been shopping enthusiastically again.

In a ringing [ph] endorsement, we are thrilled that 2 of our luxury brands had a role in one of the most newsworthy events of the year, the Royal wedding. Members of the bridal party used the Bobbi Brown Makeup, and Westminster Abbey was scented with Jo Malone Orange Blossom candles.

Another key goal is to improve our turnaround brands, and they made excellent progress with a significant gain in operating profit. The improvement was led by Aramis and Designer Fragrances, which grew sales and substantially reduced its cost of goods, creating solid profit progress.

We also set out to grow through acquisition. In fiscal '11, we added Smashbox to our portfolio, and it contributed 1% our growth. We also finalized a licensing agreements with Ermenegildo Zegna, which is one of the fastest-growing men luxury brands in Greater China.

Looking at our business geographically, our performance in North America was the strongest it has been in a decade. The surge was led by a terrific year at U.S. department stores, where our brands were key drivers of increasing store traffic and attracting new consumers, thanks to fantastic innovations backed by aggressive advertising. Overall, prestige grew faster than mass.

Despite the tragic event in Japan, Asia-Pacific had another solid showing, driven by sales growth in China of 33%, even better than the 29% the previous year. The Estée Lauder brand continued its rapid pace in China and La Mer sales skyrocketed. We have done so well that our company became the leading prestige player in China in our distribution, and our presence is growing. We recently introduced Good Skin Labs and Lab Series in the Chinese market, now giving us 11 brands there.

Aside from China, we saw strong growth in most markets, but some others were more challenging, due in part to natural disasters. However, a key pillar of our strategy is to expand our Skin Care business in Asia, and we delivered. The category grew 13% in constant currency.

Europe and Middle East and Africa was our fastest-growing region, led by many emerging markets. The bigger established countries, including the U.K., France, Germany and Italy, were also strong. In a major initiative to improve our High-Touch services, we began installing informative messages in perfumery to aid consumers in product selection.

Looking at our channels, we became the leader in Skin Care in Travel Retail, which is the fastest-growing category in the fastest-growing prestige beauty channel. Our exceptional growth was triple the rate of the passenger air traffic, thanks to better, more efficient advertising behind strong innovations in our biggest brands, personalized services and getting more people to shop and buy.

Our freestanding stores also grew nicely and now accounts for about 10% of our business. E-commerce continued its outstanding pace, which paced [ph] at 28%, and we added 22 new brand sites globally.

Our terrific performance stems from the innate creativity shared throughout our company and its strategic decisions developed fewer but more impactful products. Consumers learn about our high desirable innovation through robust TV, magazines and digital advertising. We advertise our newness and biggest products also in TV in many of our largest market, such as the U.K., China and the U.S. The campaigns work to pull consumers into stores, where we leverage our High-Touch service to the loyalty and sell additional products. The concept worked so well that our average sales per launch in the U.S. increased by 67%.

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