11.01.23
The Estée Lauder Companies Inc. reported net sales of $3.52 billion for its first quarter ended September 30, 2023, a decline of 10% from $3.93 billion in the prior year.
Organic net sales declined 11%, primarily driven by expected pressures in the company’s Asia travel retail business, as well as incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China. These challenges were partially offset by organic net sales growth in the US, many markets in Asia/Pacific, led by Hong Kong SAR and Japan, as well as in nearly all markets in Europe, the Middle East & Africa led by the UK and Germany. Organic net sales in fragrance and makeup grew, partially offsetting the decline in skin care.
The company reported net earnings of $31 million, compared with net earnings of $489 million in the prior year. Diluted net earnings per common share was $.09, compared with $1.35 reported in the prior year. Excluding restructuring and other charges and adjustments as detailed on page 2, adjusted diluted net earnings per common share declined to $.11, decreasing to $.12 in constant currency. The cybersecurity incident disclosed in July 2023 was dilutive to fiscal 2024 first quarter earnings per common share by $.08.
“In the context of a quarter which we anticipated to be challenging, we delivered our organic sales outlook and exceeded expectations for profitability,” said Fabrizio Freda, president and CEO. “Momentum continued in many developed and emerging markets around the world, where our organic sales grew strongly and we realized prestige beauty share gains. Encouragingly, we returned to growth in the US, with fragrance, makeup and skin care all contributing. This performance partially offset the pressures of Asia travel retail and a slower recovery of overall prestige beauty in mainland China.”
Skin Care
Skin Care net sales decreased 21%, reflecting a decline in the company’s Asia travel retail business, primarily due to the company’s and its retailers’ actions to reset retailer inventory levels. The decline also reflected the pressures of incremental headwinds from a slower-than-expected recovery of overall prestige beauty in mainland China and the changes in government and retailer policies related to unstructured market activity. Net sales declined from Estée Lauder and La Mer, partially offset by growth from The Ordinary and, to a lesser extent, MAC.
Estée Lauder and La Mer net sales declined, primarily driven by the aforementioned challenges in Asia travel retail and in mainland China. Net sales from Estée Lauder increased in The Americas due to the Advanced Night Repair product franchise, including the fiscal 2024 launches of Advanced Night Repair Rescue Solution with Bifidus Ferment and Advanced Night Cleansing Balm.
Net sales from The Ordinary increased strong double digits globally and in every geographic region, reflecting continued strength from hero products and successful new product innovation, such as the Soothing & Barrier Support Serum, as well as targeted expanded consumer reach.
MAC net sales grew double-digits globally and across every geographic region, owing to the launch of the Hyper Real product franchise in the third quarter of fiscal 2023.
Skin care operating income decreased, primarily due to the decline in net sales, along with the change in channel mix, as well as higher excess and obsolescence and under-absorption of overhead costs.
Makeup
Makeup net sales increased 1%, reflecting high-single-digit growth in The Americas and in Asia/Pacific, partially offset by a decline in EMEA due to the challenges in the company’s Asia travel retail business, as previously mentioned. Increases in net sales from MAC, Too Faced, Tom Ford and Clinique were mostly offset by a decrease from Estée Lauder.
MAC net sales increased, reflecting new product innovation, including the fiscal 2024 launches of Studio Radiance Foundation and Locked Kiss Ink 24HR Lipcolour, as well as continued growth from the core Studio Fix product franchise. Net sales also benefited from commercial activations globally.
Net sales from Too Faced increased double digits, benefiting from growth across the eye, face and lip subcategories, innovation, such as the brand’s new mascara primer, as well as compelling social media activations.
Tom Ford net sales rose strong double digits, primarily driven by growth from the lip subcategory, including the fiscal 2024 launch of Ultra-Shine Lip Color, and the eye subcategory, as well as brand campaigns particularly in Asia/Pacific to support the ongoing makeup recovery.
Net sales growth from Clinique reflected continued strength from hero products, such as Almost Lipstick in Black Honey, and the fiscal 2024 launch of High Impact High-Fi Full Volume Mascara.
Estée Lauder net sales declined, primarily due to the challenges in Asia travel retail. In The Americas, Estée Lauder grew mid-single-digits, reflecting strong growth in the face, lip and eye subcategories.
Makeup operating income decreased, reflecting higher cost of sales, as well as an increase in investments in advertising in support of new product launches as well as promotional activities and higher in-store staffing expenses, partially offset by the increase in net sales.
Fragrance
Fragrance net sales rose 5%, reflecting increases from Le Labo and Tom Ford, owing to double-digit growth in The Americas and Asia/Pacific.
Le Labo net sales grew strong double digits, reflecting growth in every region and benefiting from targeted expanded consumer reach, including in mainland China. Growth was driven by the brand’s hero product franchises, such as Another 13 and Santal 33, as well as its City Exclusives collection.
Net sales increased from Tom Ford, fueled by successful new product innovation, such as Café Rose, and continued strength from hero products, such as Ombre Leather.
Fragrance operating income decreased, reflecting strategic investments in advertising and promotional activities and higher in-store staffing expenses, partially offset by the increase in net sales.
Hair Care
Hair care net sales decreased 7%, driven by Aveda and Bumble and Bumble primarily due to softness in North America. Hair Care operating results decreased, due to the decline in net sales.
Fiscal 2025 and 2026 Profit Recovery Plan
Given the slower-than-expected pace of recovery, the company accelerated and expanded its profit recovery plan to preserve its expectation to progressively rebuild its profit margins in fiscal years 2025 and 2026, officials said.
The plan is anticipated to be substantially in place in the beginning of calendar 2024 to enable the realization of expected benefits in fiscal years 2025 and 2026, the majority of which are expected to benefit fiscal 2025 operating profitability. This plan is designed to target specific areas of the company’s business to improve gross margin and lower certain operating expenses over the next two fiscal years, while further investing in key consumer-facing activities. For example, the company intends to further reduce obsolescence and streamline overhead costs through enhancements to its global and local processes. The company expects to drive $800 million to $1 billion of incremental operating profit through the initiatives under this plan.
The company remains optimistic about the prospects and future growth opportunities in global prestige beauty, the re-activation of its multiple engines of growth and the continued investment in its strong brand equity, and believes it is well-positioned to drive diversified growth across its portfolio.
The company continues to monitor the effects of the global macro environment, including the risk of recession; currency volatility; inflationary pressures; supply chain challenges; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. The company said it is also mindful of inflationary pressures on its cost base and is monitoring the impact on consumer preferences.