Estee Lauder Posts 2Q Results, Raises Expected Sales and EPS for 2010 Fiscal Year

The Estee Lauder Companies Inc. has reported financial results for the fiscal second quarter ended December 31, that were sharply higher than the prior-year period and the Company's original expectations.

In a release on January 28, the Company noted that for the second quarter, it had net sales of $2.26 billion, an 11 percent increase compared with $2.04 billion reported in the prior-year period. Excluding the impact of foreign currency translation, net sales increased 6 percent from the year-ago period. The Company reported net earnings for the quarter of $256.2 million, compared with $158.0 million last year. Diluted net earnings per common share rose 60 percent to $1.28, compared with $.80 reported in the prior year. All mention of net earnings in the body of this press release refers to net earnings attributable to The Estee Lauder Companies Inc., which reflects the adjustment for noncontrolling interests.

The fiscal 2010 second quarter results included an adjustment to reduce anticipated returns, as well as charges associated with restructuring activities. Excluding these items, net sales and diluted net earnings per share for the quarter were not materially different than reported results. A reconciliation between GAAP and non-GAAP financial measures is included in this press release. In connection with its long-term strategic plan, as well as certain ongoing initiatives, the Company realized savings of approximately $83 million during the quarter.

The Company's business in each of its product categories and geographic regions continued to be affected by challenging and volatile economic conditions. Despite these conditions, the Company was able to outperform its original expectations because of better-than-anticipated sales at lower advertising, merchandising and sampling spending levels in each of the Company's product categories and geographic regions. The better-than-anticipated sales stemmed, in part, from strong growth in Asia, solid increases from higher-margin product launches, higher gains in the Company's travel retail business and the holiday season in the United States and the United Kingdom, and improved foreign currency translation. The lower spending reflected the decision to eliminate less-efficient advertising, merchandising and sampling in some of the Company's businesses, given the extent of the global economic downturn and the potential risks in the near term that did not materialize during the quarter. For the remainder of the fiscal year, to enhance competitiveness and accelerate momentum, the Company plans to increase investment spending well above first-half levels behind more effective advertising, merchandising and sampling.

During the quarter, the Company continued to make progress on its strategic goals with significant improvements in cost of sales, reflecting the positive impact of SKU reductions and lower obsolescence. The Company realized substantial savings in connection with its restructuring and resizing efforts, as well as from initiatives in indirect procurement. Further, the Company's turnaround brands are experiencing success in their refocus and repositioning initiatives, collectively generating significantly improved results for the first six months of fiscal 2010, compared with the prior-year period. Additionally, the wholesale business of the Prescriptives brand will close on January 31. The Company has successfully directed consumers to similar products at other Estee 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, "The strong results we posted this quarter reflect the vitality of our brands, increased locally relevant innovation and the value consumers find in our product offerings. Our strong top-line growth indicates consumers have responded positively. I am very pleased with our performance in our travel retail business, the Asia region and a good holiday season, particularly in the United States and the United Kingdom, where we had the right mix of gift sets and basic products, supported by the integral personal service from beauty advisors. Many aspects of our business this quarter came together, as strong global sales growth, cost of sales reductions, restructuring savings and efficient cost management translated into significant operating margin improvement.

"While certain businesses have shown signs of improvement, and the economic challenges and some external uncertainties have abated, we remain mindful that they have not completely disappeared. We continue to examine our business to more closely align our cost structure with expected sales growth and plan to make targeted incremental investments throughout the balance of the fiscal year to support and grow our brands. Our strategic direction and long-term goals are supported by our entire organization, and step-by-step we have begun executing on each element of the strategy. The solid results for the first half and our confidence in our business for the balance of the fiscal year give us the ability to again raise our full-year sales and earnings per share estimates."

In the second quarter, 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.

All product categories and geographic regions benefited from the 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.

Outlook for Fiscal 2010 Third Quarter and Full Year

The high degree of global economic uncertainty has had a negative effect on consumer confidence, demand and spending. The Company cannot predict with certainty the extent or duration of these conditions. The Company's business strategies are designed to strengthen the Company over the long-term. The uncertainty about future market conditions, consumer spending patterns and the financial strength of some of the Company's key retail customers, coupled with select retailer destocking, will continue to negatively affect the Company's results for fiscal 2010. A continuation of these conditions makes definitive forecasting difficult.

During the balance of the fiscal year, the Company expects to increase investment spending well above first-half levels 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 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.

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