The Estée Lauder Companies Inc recorded net sales of $3.04bn for its fiscal second quarter ended December 31, 2014; just a 1% increase, compared with $3.02bn in the prior-year quarter, and 5% in constant currency.

 

According to Fabrizio Freda, President and Chief Executive Officer – who made a presentation and answered questions during the company’s Q2 Fiscal Earnings Conference Call earlier today – net sales in travel retail declined approximately 4% in Q2.

 

“Retail sales grew mid-single digits in travel retail, while net sales decreased, reflecting a rebalancing of inventory levels at certain retailers; the timing of shipments attributable to a later Chinese New Year and softness of some key foreign currencies affecting travel and consumptions,” revealed ELC in a statement published on its website earlier today.

 

“The Company expects a more normalised sales growth pattern in the second half of the fiscal year.”

 

Freda told analysts during the conference call, that he believes that the slowdown in travel retail is a result of very specific abnormalities – such as the fact that the Chinese New Year holiday is occurring later this year. He said that currency fluctuations and political unrest have curtailed travel and affected groups, which historically had a high SPH including the Russians, Brazilians and Chinese.

 

‘WE ARE GAINING SHARE IN TRAVEL RETAIL’

Freda and ELC don’t appear to be fazed by these factors, when providing forward-looking statements: “We are gaining share in travel retail,” Freda told analysts earlier today. “The data we have available for travel retail is for the first nine months of 2014 (calendar year). In these nine months we continue to grow ahead of the market.

 

“So we continue to grow market share and we plan to continue to grow market share in travel retail. Key drivers of that are the expansion of our brand portfolio and continued expansion of our airport opportunities as well as growth in the existing high traffic airports. This is driven mainly by increased conversion…Today between 10 and 15% of the travellers buy anything, so just one or two points increase with this sort of conversion, is a great growth opportunity.

 

“The amount of traffic in airports, which is the other factor we monitor…is growing so the slowdown vs the traffic in this last period is not attributable, in my opinion, to any long-term trend, but a very specific situation. It’s to do with the mix of travellers.”

 

According to Freda there has been an increase of American and European travellers and a decrease in the number of travellers from Brazil, Russia and China [a lot of whom are high-spending travellers].

 

“It’s a temporary mix of travellers impact that makes the growth of the travel retail sales slightly lower than the growth of traffic and as soon as the balance and mix of travellers evolves, this will change again.” Freda says that once balance is restored he believes that sales growth will be able to push ahead of traffic.

 

Asia continues to present a long-term opportunity for the company, which Freda attributes to the huge increase in the region’s middle class and although spending in China has become more moderate, ELC believes that China and the Chinese consumers in particular continue to present a ‘long-term opportunity’.

 

And because Asian consumers tend to travel more frequently Freda said that ELC is, “really going to drive the travel retail channel in Asia.”

DECLINE FOR FRAGRANCES

He mentioned that fragrance saw a sales decline, however luxury fragrance sales experienced ‘sharp double-digit growth’. “In fragrance, sales declined against heavy launch activity in the previous year period. However, our luxury scents from Jo Malone to Tom Ford continued to rise in sharp double digits and we had a nice lift from our successful Michael Kors collection.”

 

It was clear from the presentation that the company’s mobile and e-commerce business is becoming increasingly important, especially in the US, the UK (the Group’s second largest market) and the company is making ‘good progress’ in China.

 

In a statement, shared on its website today, Freda said: “We began the second half of our fiscal year by successfully completing the acquisitions of Editions de Parfums Frédéric Malle and GLAMGLOW. These brands, along with RODIN olio lusso and Le Labo, which we purchased last quarter, complement our portfolio in skin care and luxury fragrance and further strengthen our long-term strategic growth plan.

 

“Our second half plans call for an acceleration of sales and profit growth supported by a strong innovation pipeline and current product successes, improving trends in our large heritage brands, emerging markets and our high-growth channels and brands.

 

“With the agility we have created, we will continue to strategically invest in growth opportunities, even in the face of softness and challenges in certain markets.

 

“With half of the year behind us, we are reaffirming our full fiscal year constant currency net sales growth estimate of 5% to 6% and earnings per share of 7% to 10%, excluding the effect of the retailer orders accelerated into fiscal 2014 from the rollout of our Strategic Modernization Initiative.”

 

Skin Care

Skin care net sales increased, reflecting the recent launches of Advanced Night Repair Eye Synchronized Complex II and Re-Nutriv Ultimate Diamond from Estée Lauder, as well as the Clinique Smart custom-repair serum and the Clinique Sonic System Purifying Cleansing Brush.

 

According to ELC, the skin care category was up against a difficult comparison with the prior-year period, which featured significant launches of reformulated iconic products from certain of the Company’s heritage brands. These included Advanced Night Repair products from Estée Lauder and Dramatically Different Moisturizing Lotion+ from Clinique.

 

Makeup

Higher makeup sales primarily reflected strong growth from the Company’s makeup artist brands and from recent launches, such as Pure Color Envy sculpting lipstick and Perfectionist makeup from Estée Lauder.

 

Fragrance

In fragrance, sales decreased, primarily reflecting lower sales of certain Estée Lauder fragrances, as well as certain designer fragrances. Partially offsetting these lower sales were the recent launches of Jo Malone Wood Sage & Sea Salt, DKNY MYNY and Tom Ford Velvet Orchid.

 

The Americas

Sales in the United States increased, primarily due to higher sales from the Company’s makeup and luxury brands, driven by new product introductions, successful holiday sets and expanded distribution. Sales in the Company’s online business grew strong double digits.

 

Europe, the Middle East & Africa

In constant currency, net sales increased in most product categories and in virtually all countries in the region. The Company estimates that it continued to outperform prestige beauty in many markets.

 

Asia/Pacific

Sales in the region increased in constant currency with double-digit growth in Australia and solid sales gains in China, Japan and Thailand. The higher sales in China were primarily from increased sales from certain heritage brands despite being up against a difficult comparison with the prior-year period that featured significant launch activity.

 

These increases were partially offset by lower sales in Singapore, Taiwan and Hong Kong. In Hong Kong, political instability has negatively impacted business and the Company remains cautious of the slower growth there.

 

In Asia/Pacific, operating income decreased, due to lower results in Taiwan, Korea, China and Hong Kong. The lower results in China reflect increased advertising spending to support sales growth. Higher operating results were posted primarily in Thailand and Australia.

 

Six-Month Results

For the six months ended December 31, 2014, the Company reported net sales of $5.68 billion compared to $5.69 billion in the comparable prior-year period.

Excluding the impact of foreign currency translation, net sales increased 2%.

The Company reported net earnings of $663.8 million for the six months ended December 31, 2014, compared with $733.2 million in the same period last year.

 

Outlook for Fiscal 2015 Third Quarter and Full Year

The Company continues to estimate global prestige beauty will grow approximately 3%- 4%. The Company expects to grow ahead of the industry by focusing on the fastest growing product categories, channels and countries. The Company also expects to leverage its strong sales growth and increase its operating margin and cash flow from operations.

 

Third Quarter Fiscal 2015

Net sales are forecasted to increase between 6% and 7% in constant currency.

Reflecting the strength of the U.S. dollar, foreign currency translation is expected to negatively impact sales by approximately 6% to 7% versus the prior-year period.

 

Full Year Fiscal 2015

Net sales are forecasted to grow between 2% and 3% in constant currency.

Reflecting the strength of the U.S. dollar, foreign currency translation is now expected to negatively impact sales by approximately 4% versus the prior-year period.

The impact of the accelerated retailer orders is expected to reduce the fiscal 2015 full year sales by approximately 3%.

Net sales excluding the effect of the accelerated retailer orders are forecasted to grow between 5% and 6% in constant currency