The Estée Lauder Companies reported strong financial results today for Q1 ended September 30, 2015/16, achieving net sales of $2.83bn – up +8% against $2.63bn achieved in the prior-year quarter.
Net earnings rose +36% to $309.3m compared with $228.1m in the comparative periods, while diluted net earnings per common share increased by +39% to $0.82, compared with the $0.59 reported in the prior year. For the quarter, the negative impact of foreign currency translation on diluted net earnings per common share was $0.11.
Excluding the impact of foreign currency translation, net sales increased 15% and diluted net earnings per common share rose 58%.
Within the huge beauty organisation, travel retail benefited from new launch initiatives, the rise in global airline passenger traffic and expanded distribution, as net sales rose due to favourable comparison of accelerated orders. Otherwise, travel retail net sales declined, reflecting weaknesses in some key foreign currencies, which in turn impacted upon the mix of travellers and their consumption patterns.
Accelerated retailer order effects
Back with the beauty company globally, Lauder’s fiscal first quarter 2015 included the effect of accelerated retailer orders, creating a favourable comparison with the fiscal 2016 first-quarter results. The company says that adjusting for the impact of the aforementioned accelerated orders, net sales and diluted earnings per common share in constant currency for the quarter ended September 30, 2015 would have increased by 8% and 16%, respectively.
Fabrizio Freda, President and CEO, said: “We began the fiscal year delivering 8% adjusted constant currency sales growth. We achieved this strong performance by leveraging our multiple engines of growth, driven by our broad portfolio of prestige brands, which is diversified by category, geography and channel.
“Our results this quarter were led by our luxury and makeup brands, Europe, where every country posted gains, emerging markets, and online, specialty-multi and freestanding store channels. Our strong earnings per share reflected the strong sales gains and our ability to leverage those sales through cost saving initiatives and continued financial discipline.
“These results demonstrate the balance we have achieved, as well as our success in navigating significant currency headwinds and slower growth in certain markets, like Greater China, by focusing on opportunities within our control and strategically investing to further build our brands to drive future growth.
“As we look toward the upcoming holiday shopping period, we are well-positioned with a strong array of new products and gift offerings across our brands and categories. We will continue to execute our long-term plan with strategic investments in high potential, high return areas of our business.
“This focus on supporting those areas of proven growth is expected to drive sales momentum throughout the fiscal year to achieve strong bottom line results. With the strong start to the year and the opportunities we see ahead, we are raising our forecasted adjusted constant currency earnings per share growth to 10% to 12% for the full 2016 fiscal year.”
Looking at the various product sectors, Skin Care net sales increased, due to the favourable comparison related to earlier accelerated orders. Contributing to the category’s sales were higher sales from La Mer and Origins, plus incremental sales from recent acquisitions.
Unfavourable currency translation
Lauder added that partially offsetting these increases were the unfavourable impact of foreign currency translation and lower sales from Estée Lauder reflecting softness in China and Hong Kong, due to difficult retail environments, as well as from Clinique, due to a difficult comparison with greater launch activity in the prior-year period.
Sales declines from these two brands were partially offset by recent launches, such as New Dimension products from Estée Lauder and Clinique Smart moisturisers. Operating income also increased, driven by earlier accelerated orders. Excluding this impact, skin care operating income declined, primarily reflecting lower results from Estée Lauder, partially offset by higher results from La Mer.
In the Makeup sector higher sales were recorded thanks to ‘excellent growth’ from the company’s makeup artist brands and strong double-digit growth from Smashbox and Tom Ford. Better sales resulted from new product offerings, as well as expanded distribution in a number of channels, including freestanding retail stores, travel retail and specialty multi-brand retailers.
A Tom Ford store execution at DFS Group’s T Galleria Waikiki in Honolulu.
Estée Lauder and Clinique posted higher makeup sales, with the Lauder increases primarily due to new launches such as Pure Color Envy liquid lip potion and Double Wear Makeup to Go liquid compact. New product offerings from Clinique – such as Beyond Perfecting foundation and concealer – contributed sales gains, with higher sales from Clinique driven by earlier accelerated orders. Excluding this impact, Clinique makeup sales fell due to unfavourable foreign currency translation.
Lauder says that the beauty company’s overall makeup category is experiencing strong growth in product areas such as lipsticks and foundations, as well as increased prestige makeup usage in Asia, with increased makeup operating income due to the Estée Lauder and other brands.
Turning to Fragrance, ELC’s sales increase primarily reflected strong double-digit gains from its luxury brands, including Jo Malone London and Tom Ford, plus higher sales recorded from the Aramis and Designer Fragrances division, and incremental improvements from recent acquisitions. Sales growth was attributable to new product launches and expanded distribution.
In the Hair Care sector, the category’s growth benefited from expanded global distribution, primarily in salons, freestanding stores and travel retail for Aveda and from specialty-multi brand retailers for Bumble and bumble. However, Hair care operating income decreased, due to higher investment spending to support new and existing products and expanded distribution.
Turning to sales in The Americas, business in North America was very healthy reflecting sales growth from virtually every brand, led by double-digit growth from some of ELC’s makeup, luxury and designer fragrance brands, plus solid growth from hair care brands.
Double-digit online business increase
The beauty company adds that this was driven in part by new product introductions and expanded distribution, as well as the favourable impact of earlier accelerated orders. ELC’s online business also grew in double digits.
Meanwhile, in constant currency, sales in Canada and Latin America rose in double-digits, with the strong growth in Latin America headed up by Brazil and Mexico, although both were significantly impacted by adverse foreign currency translation and reflected overall net sales growth primarily due to the expanded distribution of M•A•C.
In addition, operating income in the Americas increased due to earlier accelerated orders. Operating results in the region reflected higher selling, advertising, merchandising, sampling and store operating costs. These were related to expanded distribution, product launches and in-store promotional activities, plus an increase in product development and research and development expenses. The operating results also reflect the negative impact of foreign currency translation.
By contrast, countries in Europe, the Middle East & Africa all recorded constant currency sales growth, with most posting double-digit increases, led by the UK, France, Germany and Italy, and a number of emerging markets, including the Middle East, Russia and Turkey.
Origins seen here at the Lotte Duty Free flagship store in downtown Seoul, South Korea.
As mentioned in the introduction, travel retail continues to benefit from new launch initiatives, an increase in global airline passenger traffic and expanded distribution. Net sales increased, due to the favourable comparison of the accelerated orders. Excluding this impact, travel retail net sales declined reflecting softness of some key foreign currencies affecting the mix of travellers and their consumption.
In its analysis ELC estimates that it continued to outperform prestige beauty in most markets in the region, although foreign currency translation unfavourably impacted reported sales by 11%, due to the strength of the US dollar in relation to virtually all currencies in the region, with the largest impact affecting the UK, Russia, Germany and France.
Operating income also increased, with higher operating results posted in travel retail, due to the accelerated orders, the Middle East, France, Benelux and Spain. Lower operating results were recorded primarily in South Africa and Central Europe.
Meanwhile in the increasingly important Asia/Pacific region, sales increased in constant currency, with double-digit growth in Japan, Australia and the Philippines. The higher sales in Japan reflected, in part, the impact of earlier accelerated orders. Higher constant currency sales were also recorded in Korea and Taiwan.
Growth stalled in Hong Kong, China and Singapore
The beauty giant added that lower sales were reported in a few countries, including Hong Kong, China and Singapore, with previously reported social instability continuing to hit Hong Kong’s tourism and negatively impact business, particularly the Estée Lauder, Clinique and La Mer brands. As a result ELC says it remains ‘cautious of the near-term slower growth’ in this market.
By contrast, lower sales in China were primarily seen in the Estée Lauder brand, as a result of a difficult retail environment, while most other brands posted solid sales growth in this market. Meanwhile, foreign currency translation unfavourably impacted upon reported sales by 9%, due to the strength of the US dollar in relation to most currencies in the region, with the largest impact affecting Japan, Australia and Korea.
ELC said that in Asia/Pacific operating income fell slightly, led by lower results in China and Hong Kong, primarily due to the lower sales, and in China, also attributable to increased advertising, merchandising and sampling costs to support existing products. These results were partially offset by higher operating income in Japan and Taiwan.
Looking forward, ELC is forecasting a net sales increase in the second fiscal quarter 2016 of between 6% and 7% in constant currency. Reflecting the strength of the US dollar, foreign currency translation is expected to negatively impact sales by approximately 5% to 6% versus the prior-year period.
For the full fiscal year 2016 it is currently forecasting a ne sales rise of between 8% and 10% in constant currency and considering the strength of the US dollar, the foreign currency translation is expected to negatively impact sales by approximately 4% to 5% versus the prior-year period.
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