A difficult U.S. market and direct-to-consumer buying trends didn’t impact The Estée Lauder Companies Inc. first fiscal quarter in 2018, which ended September 30, with net sales of $3.27 billion, an increase of 14 percent, while earnings rose 45 percent, to $427 million.
Growth came largely from Lauder’s recent acquisitions of Too Faced and BECCA, which contributed approximately 4 percentage points of reported sales growth. The company also benefitted from a continued acceleration in China, Hong Kong, travel retail and global online, as well as strength in several developed and emerging markets in Europe.
And just what’s driving the global prestige beauty market?
“The higher consumption of prestige from the millennial consumers; the higher access to luxury and prestige businesses in emerging markets, particularly in China; and the higher level of usage, particularly on makeup, of the millennial consumer versus previous generations,” said The Estée Lauder Cos. President and Chief Executive Officer, Fabrizio Freda.
That said, Lauder’s U.S. business is still seeing challenges.
“Net sales in the Americas grew 7 percent in constant currency. Excluding the incremental sales from the acquisitions of Too Faced and BECCA, the region’s sales declined 3 percent. The U.S. had continued strong growth in specialty-multi, retail and online, including department store online sites, but remained challenged in much of the mall-based brick-and-mortar stores,” said Tracey Thomas Travis, Lauder’s Executive Vice President and Chief Financial Officer.
Prestige color cosmetics sales overall are also facing headwinds due to new retail trends.
“There are beauty brands that are direct-to-consumer that are online-only that bypass any retailer. And these are some of the indie brands, as well. And we see more of this phenomena in the U.S. market than in some of our global markets. So, I think that, too, is impacting some of the results of some of the retailers. They’re not captured in the retailers’ dot-com business because they’re actually – it’s a brand to direct sale, things that come to mind like Kylie Cosmetics, for instance,” continued Tracey.
And, the Lauder brand on everyone’s mind, MAC, is seeing “sequential improvement.”
“M·A·C North America, specifically, is continuing to decline in the brick-and-mortar part of the business, meaning the department stores and freestanding stores, [but] had a tremendous acceleration online and is performing very well in Ulta Beauty. In total, there’s a sequential improvement of the trend of the brand,” said Fabrizio.
Lauder Q1 Category Highlights:
- Net sales increased sharply, with exceptional double-digit gains from Estée Lauder, La Mer, GLAMGLOW and Origins.
- The Estée Lauder brand grew globally, particularly in China and travel retail, due largely to the launch of Advanced Night Repair Eye Concentrate Matrix and gains in other Advanced Night Repair products. La Mer was driven by the success of new products in its Genaissance franchise, the launch of The Moisturizing Matte Lotion, gains from existing products, and targeted expanded consumer reach.
- Outstanding double-digit sales growth from GLAMGLOW reflected additional product assortments and targeted expanded consumer reach. Sales growth in Origins was generated in Asia and travel retail due to the continued success of several product lines in the facial mask and moisturizer sub-categories.
- Increases were partially offset by lower skin care sales from Clinique and Aveda.
- Operating income increased sharply, primarily from Estée Lauder and La Mer, reflecting higher sales.
- Strong sales growth in makeup was primarily driven by incremental sales from the Q2 2017 acquisitions of Too Faced and BECCA, exceptionally strong double-digit increases from Tom Ford in every region, and double-digit gains from Estée Lauder. Higher makeup sales were also generated from MAC.
- Sales from Tom Ford more than doubled, driven primarily by its lip color franchises, including the Tom Ford Lips & Boys and Soleil Color Collections, as well as strength in the eyeshadow and foundation sub-categories. At Estée Lauder, higher sales were fueled by the Double Wear and Pure Color Lip product lines.
- The higher sales from MAC were due to strong growth in the Asia/Pacific region, particularly China and Hong Kong, and in travel retail.
- These increases were partially offset by lower makeup sales in the United States, primarily from Clinique and Bobbi Brown, reflecting a soft retail environment due, in part, to slow foot traffic in some U.S. brick-and-mortar stores.
- Makeup operating income increased. Strong growth from Tom Ford and Estée Lauder, primarily due to higher sales, and incremental operating income from Too Faced, was partially offset by declines from Smashbox, Clinique and Bobbi Brown.
- Net sales increased, primarily due to strong double-digit gains from luxury brands Jo Malone London, Tom Ford and Le Labo.
- Jo Malone delivered outstanding double-digit sales increases in every region, reflecting strong growth from existing fragrances, targeted expanded consumer reach and the recent launch of the English Oak fragrances.
- Increased sales from Tom Ford reflect, in part, the continued success of the Signature and Private Blend lines of fragrances, including new product launches and growth from existing fragrances.
- Le Labo benefitted from growth in existing products and new launches and targeted expanded consumer reach.
- Partially offsetting these increases were lower sales of certain designer and Estée Lauder fragrances.
- Fragrance operating income increased sharply, reflecting higher sales from Jo Malone and Tom Ford, as well as disciplined expense management.
- Hair care sales were unchanged, with moderate growth from Aveda and Bumble and bumble offset by lower hair care sales from Origins.
- The growth from Bumble and bumble reflected initial shipments in advance of the brand’s launch in Ulta Beauty, partially offset by softness in the salon channel. At Aveda, online sales grew, while sales in freestanding stores were lower.
- Hair care operating income increased, reflecting disciplined expense management.
- Online sales were up 33% in Q1. To-date, online represents about 11 percent of total sales globally, but the penetration is much higher in some of the top markets where online is very strong. There’s growth in brand dot-com, retail dot-com and in platforms.
- The company’s strong online business was led by third-party and retailer sites. Globally, metrics improved across the board, including higher traffic, conversions and orders. Lauder continued to garner new consumers throughout its business on Tmall in China, where sales more than doubled, fueled in part by M·A·C’s successful launch in May. In the recent quarter, M·A·C also successfully launched on a large online platform in Southeast Asia owned by Alibaba called Lazada with a brand building distribution model similar to Tmall, where the firm controls the look and the content of the virtual store. Lauder expects to expand on the platform in more markets and with more brands starting this quarter.
- Lauder’s global online footprint continues to grow with new site launches and retailer distribution expansion. In the quarter, it added more than 100 sites. The majority were retailers and most of them in the European region, demonstrating the scalability of its digital model.
- Spurred by the growth of social media and technology advancement, mobile is the focus of Lauder’s digital strategies. In the recent quarter, mobile accounted for 70% of global online traffic. The company is seeing results of investment in mobile, as it is an important factor driving first-time digital consumers in emerging markets and increasing the frequency of purchases in more developed countries.
Outlook for Fiscal 2018 Second Quarter and Full Year:
Global prestige beauty remains vibrant and is estimated to grow approximately 4% to 5% during the year, Lauder said in a statement. The company’s annual growth has consistently outpaced global prestige beauty and is expected, in constant currency, to rise 8% to 9%, and earnings per share growth of 12% to 14% in fiscal year 2018. The company expects sales growth to benefit from high-quality products, strong innovation, outreach to new target consumers and growth from recent acquisitions, while continuing to emphasize a digital-first marketing approach and a strong focus on fast-growing markets and channels as consumer preferences evolve.