Some of the biggest brands within The Estée Lauder Companies Inc. continue to be hit by a decline in retail traffic, primarily related to mid-tier department stores, as well as certain tourist-driven doors in the United States. The trend affected sales of M.A.C and Clinique, which didn’t meet second quarter expectations, though sales of M.A.C performed better in the second quarter than in the first quarter.
Despite this, net sales are forecasted to increase between 4 percent and 5 percent for fiscal 2017 versus the prior-year period.
For its second quarter ended December 31, 2016, Estée Lauder reported net sales of $3.21 billion, a 3 percent increase compared with $3.12 billion in the prior-year quarter. Net earnings were $428 million, compared with $447 million last year. Excluding the impact of foreign currency translation, net sales increased 5 percent. Incremental sales from recent acquisitions, including By Kilian, BECCA and Too Faced, contributed approximately 90 basis points to sales growth. Earnings included a restructuring charge of $41 million in connection with its previously announced Leading Beauty Forward initiative, as well as a $19 million charge relating to its initiative to transform its global technology infrastructure.
By category, skin care grew 1 percent, returning to growth with strong double-digit gains in every region from La Mer, driven by the success of new and existing products, as well as expanded targeted consumer reach. The Estée Lauder brand delivered solid sales growth from recent product launches of Advanced Night Repair Intensive Recovery Ampoules and Revitalizing Supreme+, and double-digit growth in travel retail. Strong double-digit sales growth from GLAMGLOW reflected expanded product assortments and consumer reach. Offsetting these increases were lower skin care sales from Clinique and Origins. The decline at Clinique reflected “the overall global slowdown in the category and lower sales in certain countries within the Asia/Pacific region, particularly Hong Kong.”
Makeup sales increased 4 percent, primarily driven by double-digit increases from Tom Ford in every region, strong growth from Estée Lauder and La Mer, solid gains from Smashbox, and incremental sales from BECCA and Too Faced. The increased sales in Tom Ford were driven primarily by its lip color franchises, including new product offerings such as The Soleil Color Collection. At Estée Lauder, higher sales were fueled by the Double Wear and Pure Color Envy product lines. La Mer’s sales increase reflected the recent launch of the Skin Color Collection. Sales gains at Smashbox reflect the strength of the makeup category in specialty-multi. The overall increase in makeup also resulted from new product offerings, as well as the broadening of the brands’ presence in a number of channels, including travel retail and specialty-multi brand retailers, to reach new consumers. These increases were partially offset by lower sales, primarily from Clinique and M.A.C. The lower sales in Clinique reflect the timing of a gift-with-purchase program. Sales of M.A.C increased in constant currency but declined on a reported basis due to the negative impact of foreign currency translation. M.A.C’s sales were impacted by slow foot traffic in U.S. mid-tier department stores and certain tourist-driven M.A.C freestanding stores, partially offset by higher sales internationally. Makeup operating income decreased, primarily reflecting the lower sales at M.A.C and Clinique, as well as transaction costs related to fiscal 2017 acquisitions.
Fragrance sales increased 6 percent, primarily due to strong double-digit gains from luxury brands Jo Malone London, Tom Ford, Le Labo and Frédéric Malle, and incremental sales from By Kilian. Partially offsetting these increases were lower sales of certain Estée Lauder and designer fragrances. Fragrance operating income increased, primarily due to higher sales from Jo Malone, as well as a favorable comparison to the higher level of prior-year period support spending behind new and existing launches of certain designer fragrances.
Hair care net sales decreased, primarily due to a difficult comparison with several Aveda product launches in the prior year. Aveda plans to launch hair care initiatives later this fiscal year. Hair care operating income decreased, reflecting the lower net sales.
Fabrizio Freda, President and Chief Executive Officer, said, “Our second quarter sales growth accelerated as planned, reflecting the benefits of our portfolio diversity by brand, channel, product category and country. Our small, mid-sized and luxury brands continued to lead growth, contributing strong sales increases, and recent acquisitions added incremental sales. Additionally, among our large brands, Estée Lauder and MAC each grew in constant currency. We achieved strong double-digit growth in our most profitable channels including travel retail, online and specialty-multi. Sales growth accelerated in most product categories and every geographic region in constant currency. We have strategically invested in these growth engines to produce strong results, as well as position us for continued future success. For the quarter, our profits were higher than expected, reflecting our ability to leverage sales growth and manage expenses.