Estee Lauder Companies Third Quarter Earnings Double; Driven by 10% Sales Growth and Strategic Savings Initiatives

Press Release, Apr 27, 2010

NEW YORK, Apr 27, 2010 (BUSINESS WIRE) --The Estée Lauder Companies Inc. (NYSE: EL) today reported financial results for the fiscal third quarter ended March 31, 2010 that were sharply higher than the prior-year period.

For the third quarter, the Company had net sales of $1.86 billion, a 10% increase compared with $1.70 billion reported in the prior-year period. Excluding the impact of foreign currency translation, net sales increased 5% from a year ago. The Company reported net earnings for the quarter of $57.5 million, compared with $27.2 million last year. Diluted net earnings per common share rose to $.28 compared with $.14 reported in the prior year. All mention of net earnings in the body of this press release refers to net earnings attributable to The Estée Lauder Companies Inc., which reflects the adjustment for noncontrolling interests.

The fiscal 2010 third quarter results included returns and charges associated with restructuring activities of $16.5 million ($11.4 million after tax), equal to $.06 per diluted common share. Excluding these returns and charges, net sales for the three months ended March 31, 2010 were $1.86 billion and net earnings increased to $68.9 million. Diluted net earnings per share rose to $.34 versus a comparable $.16 in the prior-year period. A reconciliation between GAAP and non-GAAP financial measures is included in this press release.

The Company posted across-the-board sales gains in its geographic regions and major product categories. Strong sales growth came from the Company's international businesses, particularly, travel retail and Asia/Pacific. There were also sales gains in the Americas. These results reflect solid increases from higher-margin product launches and the positive effect of foreign currency translation.

During the quarter, the Company continued to make progress on its strategic goals with significant improvements in cost of sales, reflecting a favorable product mix and the positive impact of SKU reductions. In connection with its long-term strategic plan, as well as certain ongoing initiatives, the Company realized savings of approximately $104 million during the quarter. Further, the Company's turnaround brands are successfully refocusing and repositioning themselves, collectively generating improved results for the third quarter and first nine months of fiscal 2010, compared with the prior-year periods. The wholesale distribution business of Prescriptives brand products ceased on January 31, 2010. The Company has directed consumers to similar products at other Estée Lauder Companies' brands and plans to leverage the assets, formulas and trademarks of Prescriptives within the Company.

Fabrizio Freda, President and Chief Executive Officer, said, "Our performance in the past quarter continued to be of high quality, reflecting strong top-line growth, particularly from our international businesses, a streamlined cost structure and improved inventory management. Not to be overlooked is our strong balance sheet and a significant increase in our cash flow.

"Our success is driven by a well-executed strategy and we are very pleased with our accomplishments over the past nine months. The progress we've made illustrates our ability to move the Company forward and create value. We are a growth company, with a sharp focus on increasing our top line where we can produce the highest returns, while, at the same time, remaining vigilant in our cost savings and financial discipline, with the goal of increased and sustainable profitability."

Mr. Freda added, "During the quarter, we increased investment spending behind more targeted advertising, merchandising and sampling to enhance competitiveness and accelerate momentum. For the balance of the fiscal year, we plan to continue these investments well above the prior-year period."

All product categories and geographic regions benefited from Company-wide efforts to eliminate non-value adding costs, as well as significant improvement in cost of sales from favorable product mix and enhanced inventory management, resulting in substantial improvements in their operating income.

Skin Care

• The skin care category is a strategic priority for the Company. In local currency, and on a reported basis, skin care net sales in Asia/Pacific and Europe, the Middle East & Africa grew double digits, while the Americas had a mid single-digit gain.
• The Company gained share in this category during the quarter in certain countries in stores where its products are sold.
• Across each region, the Estée Lauder brand had strong sales from the recent launch of Advanced Night Repair Synchronized Recovery Complex, the introduction of Hydrationist Maximum Moisture Creme and Lotion, as well as the Re-Nutriv line of products. Higher sales were also generated from Clinique's new Even Better Clinical Dark Spot Corrector and Youth Surge Night Age Decelerating Night Moisturizer, as well as from existing products in its 3-Step Skin Care System. The Regenerating Serum, a new product from La Mer, as well as other successful products from La Mer, also contributed incremental sales. These sales gains were partially offset by lower sales from other existing products.
• Operating income increased, primarily reflecting improved results driven by net sales from higher-margin product launches. These improvements were partially offset by planned increases in advertising, merchandising and sampling to further build sales momentum.

Makeup

• In local currency and on a reported basis, makeup net sales increased strong double digits in Asia/Pacific. Local currency sales in Europe, the Middle East & Africa were lower, while reported sales increased, reflecting favorable foreign currency translation. Sales in the Americas declined, primarily reflecting lower sales of Prescriptives products due to the exit from the global wholesale distribution of the brand.
• The majority of the sales increase came from the makeup artist brands, driven primarily by their international businesses. On a reported basis, net sales also increased in certain of the Company's heritage brands, primarily due to an improved international performance.
• The higher makeup sales also reflected increases across a broad range of products, such as the recent launches of Acne Solutions Liquid Makeup from Clinique and Resilience Lift Extreme Radiant Lifting Makeup by Estée Lauder.
• Partially offsetting these increases were lower sales of Prescriptives products.
• During the current-year quarter, the Company undertook an initiative to identify certain underperforming stock keeping units for the purposes of evaluating their relevance to its long-term perfumery strategy in the Europe, Middle East & Africa region. Based on this evaluation, the Company decided to discontinue certain of these products in perfumeries and recorded a charge of approximately $27 million to reflect the anticipated returns of makeup products from participating retailers, subject to the Company's approval.
• Operating income decreased, primarily reflecting the charge described above. This charge was partially offset by improvements at the Company's makeup artist brands and certain heritage brands.

Fragrance

• The double-digit net sales increase in fragrance was largely due to the international launch of Pure DKNY, the recent launch of DKNY Delicious Candy Apples and the domestic introduction of Coach Signature. Higher sales of DKNY Be Delicious Fresh Blossom and increased sales of certain designer fragrances through self-select outlets also contributed to the category's growth.
• Lower sales were reported for other fragrances, including, DKNY Men, which was up against its launch in the prior year, and I Am King Sean John.
• The Company's priority in this category was profitability improvement. Fragrance operating loss improved, primarily reflecting increased net sales from higher-margin products, partially offset by an increase in support spending behind specific launches.

Hair Care

• Increased net sales of certain styling and hair color products and expanded international distribution at Aveda, were partially offset by a soft salon retail environment in North America.
• Hair care operating results increased over 100%, reflecting the higher net sales, savings generated from cost containment initiatives and the closing of certain underperforming retail stores in prior periods.

The Americas

• Net sales increased for the quarter, with gains in the skin care, fragrance and hair care product categories being partially offset by declines in makeup.
• Strong sales growth was generated in Canada and Latin America, which were positively impacted by the weaker U.S. dollar.
• In the United States, sales increased modestly. Among the Company's heritage brands, results were mixed, with the largest gains posted by the Company's designer fragrance business mostly offset by lower sales of Prescriptives products due to the brand's exit from wholesale distribution.
• Sales of the Company's products online increased double digits, while results in other alternative channels were mixed.
• During the quarter, excluding the Prescriptives brand, the Company's share increased slightly in the U.S. prestige department store channel.
• Ongoing challenges faced by certain of the Company's department store customers in the U.S. may continue to affect net sales for the short and medium term.
• Operating income in the Americas increased 98%, due to improved results from certain heritage brands and the hair care brands in the United States, as well as from turnaround brands. The region also benefited from the favorable comparison to the prior-year period which was adversely affected by manufacturing overhead costs that were not expected to be recovered, along with a charge related to the liquidation of a retail customer. These improvements were partially offset by charges incurred in connection with the transition of the Company's subsidiary in Venezuela to highly inflationary accounting and the subsequent devaluation of the bolivar.

Europe, the Middle East & Africa

• The Company's travel retail business generated significant net sales and profit growth during the quarter, resulting from successful product launches, increased distribution and cost containment. This business reflects an improvement in global airline passenger traffic compared with the significant traffic slowdown experienced in the prior-year period.
• In constant currency, double-digit sales growth was recorded in a number of countries, with the largest gains coming in Russia and the Middle East. These gains were partially offset by sales declines in the Balkans, France and Benelux.
• The Company estimates that it gained share in certain countries in its distribution in this region during the quarter.
• Despite the net sales growth, parts of the region continued to be affected by weak economic conditions and further, yet more limited and selected, retailer destocking.
• As previously mentioned, during the current quarter, the Company undertook an initiative to identify certain underperforming stock keeping units and recorded a charge of approximately $31 million in the region to reflect the anticipated returns of products from participating perfumery retailers.
• Operating income increased significantly, with the strongest improvements in the travel retail business, the United Kingdom, the Middle East, Russia and Spain. The improvement in operating income also reflected a favorable comparison to the prior-year period when the Company recorded a charge for the impairment of certain intangible assets. In addition, as mentioned above, the Company recorded a charge related to the discontinuation of certain stock keeping units.

Asia/Pacific

• This region generated solid local currency sales growth, with most countries posting increases. The strongest gains were generated in China, Hong Kong, Korea and Taiwan. Sales declines occurred in Japan and Australia.
• Sales in this region grew double digits in each major product category.
• The Company estimates that for the quarter it gained share in the Asia region within its points of distribution.
• Operating income in the region rose, led by Hong Kong, Japan, Malaysia and Thailand. These improvements were partially offset by lower results in Australia, China and Korea. We have continued incremental investment spending in China to support our business in this emerging market.

Nine-Month Results

• For the nine months ended March 31, 2010, the Company reported net sales of $5.96 billion, a 6% increase from $5.64 billion in the comparable prior-year period. Excluding the impact of foreign currency translation, net sales increased 4%. On a reported basis, as well as in constant currency, net sales growth in Asia/Pacific and Europe, the Middle East & Africa, more than offset slightly lower sales in the Americas. Net sales grew in the Company's skin care, makeup and hair care categories, which more than offset declines in fragrance.
• During the nine months, the Company recorded charges for the impairment of goodwill and other intangible assets that negatively impacted the operating results of the skin care and hair care product categories, as well as the Americas and Europe, the Middle East & Africa regions.
• The Company reported net earnings, including returns and charges associated with restructuring activities, of $454.4 million for the current nine months, compared with $236.3 million in the same period last year. Diluted net earnings per common share for the nine months ended March 31, 2010 increased 90% to $2.27, compared with $1.19 reported in the same prior-year period.
• The fiscal 2010 nine month results included returns and charges associated with restructuring activities of $59.1 million ($39.1 million after tax), equal to $.20 per diluted common share. Excluding these returns and charges, net sales for the nine months ended March 31, 2010 were $5.97 billion, net earnings increased to $493.5 million and diluted net earnings per share rose to $2.47.

Cash Flows

• For the nine months ended March 31, 2010, net cash flows provided by operating activities increased significantly to $798.2 million, compared with $306.7 million in the prior-year period.
• The improvement primarily reflected higher net earnings and the timing and level of tax payments. The increase also reflected favorable net changes in certain working capital components, partially offset by the prior-year impact of significant inventory reductions as well as higher accounts receivable balances, due to increased sales.
• Operating cash flow was utilized primarily for dividends, capital investments and the repurchase of shares of the Company's Class A Common Stock.
• In the third quarter, the Company built inventory totaling $35 million in advance of the April 2010 rollout of SAP to its North America manufacturing facilities. While the Company continues to focus on inventory management, days of inventory at March 31, 2010, which reflects the additional inventory build, were slightly higher compared to the prior year.
• The Company believes that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support its currently planned business operations on both a near-term and long-term basis.

Outlook for Fiscal 2010 Full Year

During the balance of the fiscal year, the Company expects to increase investment spending well above the prior-year period to enhance competitiveness, build momentum and drive growth. The Company also plans incremental spending to build capabilities in the areas of digital applications, regional research and development and consumer insights.

The Company separately announced today that it has commenced a cash tender offer for up to $200.0 million aggregate principal amount of Senior Notes due in 2012 and 2013. Assuming the maximum amount of each series is tendered, the Company would expect to incur in its fourth quarter, a pre-tax charge to earnings in the range of $26 million to $30 million ($17 million to $19 million after tax), equal to between $.08 and $.10 per diluted common share. The tender offer is expected to result in pre-tax net interest savings in fiscal 2011 of approximately $10 million to $11 million. The Company has the option to extend or amend the tender offer at any time.

• Net sales are forecasted to grow between 4% and 5% in constant currency.
• Foreign currency translation is expected to benefit sales by approximately 2% versus the prior year.
• The Company projects diluted net earnings per share, including charges associated with restructuring activities and the impact of the early extinguishment of debt, to be between $2.26 and $2.47.
• The Company expects to take returns and charges associated with restructuring activities in fiscal 2010 of between $60 million and $90 million, equal to approximately $.20 to $.29 per diluted common share. The recording of charges will depend on when decisions are made and the relevant accounting criteria are met.
• Diluted net earnings per share before charges associated with restructuring activities and the impact of the early extinguishment of debt are projected to be between $2.65 and $2.75.
• On a product category basis, in constant currency, sales in skin care and makeup are expected to grow, hair care is forecasted to be unchanged versus the prior year and fragrance is estimated to decline slightly.
• Geographic region net sales growth in constant currency is expected to be led by Asia/Pacific, followed by Europe, the Middle East & Africa. Sales in the Americas are expected to be unchanged versus the prior year.
• In connection with its long-term strategic plan, as well as certain on-going initiatives, the Company now expects to realize savings of between $300 million and $330 million during fiscal 2010.

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• The timing and predictability of when charges may be recorded will likely vary by quarter. As restructuring and other special charges decisions are reached, the Company may communicate such decisions through 8-K amendments filed with the SEC.

Forward-Looking Statements

The forward-looking statements in this press release, including those containing words like "expect," "plans," "may," "could," "anticipate," "estimate," "projected," "forecasted," those in Mr. Freda's remarks and those in the "Outlook for Fiscal 2010 Full Year" section involve risks and uncertainties. Factors that could cause actual results to differ materially from those forward-looking statements include the following:

The Company assumes no responsibility to update forward-looking statements made herein or otherwise.

The Estée Lauder Companies Inc. is one of the world's leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company's products are sold in over 140 countries and territories under the following brand names: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M-A-C, Bobbi Brown, Tommy Hilfiger, Kiton, La Mer, Donna Karan, Aveda, Jo Malone, Bumble and bumble, Darphin,Michael Kors, American Beauty, Flirt!, Good Skin(TM), Grassroots Research Labs, Sean John, Missoni, Daisy Fuentes, Tom Ford, Coach and Ojon.

An electronic version of this release can be found at the Company's website, www.elcompanies.com.

-Tables Follow -

(A) In February 2009, the Company announced the implementation of a multi-faceted cost savings program (the "Program") to position it to achieve long-term profitable growth. The Company anticipates the Program will result in related restructuring and other special charges over the next few fiscal years totaling between $350 million and $450 million before taxes. The Program includes organizational resizing and regional realignments which principally reflects the reduction of the workforce by approximately 2,000 employees.

During the nine months ended March 31, 2010, the Company approved cost savings initiatives to resize the organization, reorganize certain functions, exit unprofitable operations and outsource certain services. For the three and nine months ended March 31, 2010, aggregate restructuring charges of $10.4 million and $31.0 million, respectively, were recorded in the Company's consolidated statements of earnings related to the Program. These charges primarily reflected employee-related costs, asset write-offs, contract terminations and other exit costs.

The Company recorded other special charges in connection with the implementation of the Program for the three and nine months ended March 31, 2010 of $2.1 million and $9.0 million, respectively, related to consulting, other professional services, and accelerated depreciation. For the three months ended March 31, 2010, the Company recorded $2.2 million reflecting anticipated sales returns and the write-off of inventory associated with exiting unprofitable operations of $1.8 million. For the nine months ended March 31, 2010, the Company recorded $13.3 million, reflecting anticipated sales returns (less a related cost of sales of $2.2 million) and a write-off of inventory associated with exiting unprofitable operations of $8.0 million.

Total charges associated with restructuring activities included in operating income for the three and nine months ended March 31, 2010, were $16.5 million and $59.1 million, respectively.

(B) During the second quarter of fiscal 2010, the Ojon reporting unit altered and delayed certain components of its future expansion plans, resulting in revisions to its internal forecasts. The Company concluded that these changes in circumstances in the Ojon reporting unit triggered the need for an interim impairment review of its goodwill and trademark. Additionally, these changes in circumstances were also an indicator that the carrying amount of the customer list may not be recoverable. The Company performed an interim impairment test for the trademark and a recoverability test for the customer list as of December 31, 2009 on this reporting unit. The Company concluded that the carrying value of the Ojon trademark and customer list exceeded their estimated fair values and, as a result, the Company recognized impairment charges of $6.0 million for the trademark and $17.2 million for the customer list, at the exchange rate in effect at that time. The Company also completed an interim impairment test for goodwill and recorded a goodwill impairment charge related to the Ojon reporting unit of $16.6 million at the exchange rate in effect at that time. These impairment charges were reflected in the hair care and skin care product categories and in the Americas region.

During the second quarter of fiscal 2010, the Darphin reporting unit identified issues related to the planned streamlining of its distribution process, resulting in revisions to its internal forecasts. The Company concluded that these changes in circumstances in the Darphin reporting unit triggered the need for an interim impairment test of its trademark and goodwill. The Company determined that the trademark was impaired and therefore, recorded an impairment charge of $5.8 million in the skin care product category and in the Europe, the Middle East & Africa region.

During the third quarter of fiscal 2009, the Company performed an interim impairment test for goodwill and trademarks as of March 31, 2009 on Darphin. The Company concluded that the carrying value of the Darphin trademark exceeded its estimated fair value and as a result recognized an impairment charge of $12.3 million at the exchange rate at March 31, 2009.

During the third quarter of fiscal 2009, the Company reviewed its other intangible assets for events or changes in circumstances that indicate the carrying amount of such assets may not be recoverable. Pursuant to this review, the Company identified a fragrance license agreement intangible asset which was tested for impairment based upon a history of operating losses in excess of projections and revisions in internal forecasts. The Company determined that the intangible asset was impaired and therefore recorded an asset impairment charge of $2.3 million.

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This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring activities and the early extinguishment of debt. The following is a reconciliation between the non-GAAP financial measures and the most directly comparable GAAP measure for certain consolidated statements of earnings accounts before and after the charges associated with restructuring activities. The Company uses the non-GAAP financial measure, among other things, to evaluate its operating performance and the measure represents the manner in which the Company conducts and views its business. Management believes that excluding these items that are special in nature or that are not comparable from period to period helps investors and others compare operating performance between two periods. While the Company considers the non-GAAP measures useful in analyzing its results, it is not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with GAAP.

The Company operates on a global basis, with the majority of its net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect the Company's results of operations. Therefore, the Company presents certain net sales information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of its underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency information by translating current-period results using prior-year period weighted average foreign currency exchange rates.

SOURCE: The Estée Lauder Companies Inc.

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