Beauty and personal care products maker Estée Lauder Companies Inc. (EL) Thursday reported a sharp rise in second quarter net profit, helped primarily by higher sales from all businesses, despite an increase in operating costs. The company noted that high degree of global economic uncertainty has had a negative impact on consumer confidence, demand and spending during the period. Further, Estée Lauder provided an earnings and sales guidance for its third quarter, and also raised its fiscal 2010 adjusted earnings and sales view.
For the second quarter, the New York-based company's net earnings were $256.2 million as compared with $158 million in the prior-year period. On a per share basis, earnings surged 59.8% to $1.28 from $0.80 in the year-earlier period. Excluding returns and charges, net income for the quarter was $256.6 million versus $158.2 million last year.
On average, 17 analysts polled by Thomson Reuters expected Estée Lauder to earn $1.21 per share for the quarter. Analysts' estimates typically exclude special items. The quarter's results included an adjustment to reduce expected returns, as well as charges related to restructuring activities.
Estée Lauder noted that it was able to outperform its original expectations because of better-than-anticipated sales at lower advertising, merchandising and sampling spending levels in each of its product categories and geographic regions, despite the continuing challenging and volatile economic conditions. The better-than-anticipated sales reflected, in part, from strong growth in Asia, solid increases from higher-margin product launches, higher gains in the company's travel retail business and holiday season in the US and UK, and improved foreign currency translation.
The company stated that lower spending reflected the decision to eliminate less-efficient advertising, merchandising and sampling in some of its businesses, given the extent of the global economic downturn and potential risks in the near term that did not materialize during the quarter. During the three-month period, in connection with its long-term strategic plan as well as certain ongoing initiatives, the company said it realized savings of nearly $83 million.
Net sales for the period increased 10.8% to $2.26 billion from $2.04 billion in the second quarter of fiscal 2009. Excluding the impact of foreign currency translation, quarterly net sales were up 6% from the previous year. Analysts expected Estée Lauder to generate revenues of $2.24 billion for the quarter.
By product category, skin care net sales were $905.8 million compared to $772.4 million in the fiscal 2009-year quarter, net sales from makeup rose to $815.7 million from $728.3 million a year earlier. Hair care net sales were $110 million versus $108.5 million last year, and net sales from other products totaled $19.9 million as compared with $16.8 million in the year-ago period. However, fragrance net sales for the quarter dropped to $403.5 million from $415 million in the same quarter last year.
Region-wise, net sales from Americas were $916.9 million versus $903.8 million in the prior year, and net sales from Europe, Middle East and Africa region increased to $895.5 million from $762.3 million in the corresponding period last year. Asia/Pacific net sales were $442.5 million compared to $374.9 million in the year-ago period.
Estée Lauder stated that all its product categories and geographic regions benefited from the company-wide efforts to eliminate non-value adding costs, along with significant improvement in cost of sales from favorable product mix and enhanced inventory management, resulting in substantial improvements in operating income.
Gross profit for the quarter was $1.74 billion as compared to $1.53 billion in the comparable period prior year, while gross margin rose to 76.8% from 75.1% a year earlier.
During the three-month period, total operating expenses were $1.34 billion versus $1.26 billion in the prior-year quarter. Selling, general and administrative costs rose to $1.28 billion from $1.26 billion last year, and restructuring and other special charges totaled $9.3 million as compared with $0.3 million a year ago.
Commenting on the results, President and Chief Executive Officer Fabrizio Freda 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.
The company stated that, in the quarter, many aspects of its business came together, as strong global sales growth, cost of sales reductions, restructuring savings and efficient cost management translated into significant operating margin improvement.
In the second quarter, Estée Lauder incurred a one-time charge of $16.6 million with regard to goodwill impairment, which negatively impacted operating results of skin care and hair care product categories, as well as Americas and Europe, Middle East and Africa regions. The company also recorded a one-off charge of $29 million in connection with impairment of intangible assets during the quarter.
In the preceding first quarter, the company posted net earnings of $140.7 million or $0.71 per share, sharply up from $51.1 million or $0.26 per share in the year-ago quarter. Net sales for the quarter decreased 4% to $1.83 billion from $1.90 billion in the first quarter of fiscal 2009.
For the first-half of fiscal 2010, Estée Lauder's attributable income surged 89.8% to $396.9 million from $209.1 million in the previous year. On a per share basis, earnings were $1.99 versus $1.06 in the same period last year. Excluding returns and charges, net earnings were $424.6 million or $2.13 per share as compared with $209.4 million or $1.06 per share last year. Six-month net sales rose 3.8% to $4.10 billion from $3.94 billion in the first half of fiscal 2009.
The company stated that the wholesale business of Prescriptives brand is expected to close on January 31, 2010. The company has directed consumers to similar products at other Estée Lauder' brands and expects to leverage the assets, formulas and trademarks of Prescriptives within the company.
Going forward, Estée Lauder stated that for the remainder of the fiscal year, in order to enhance competitiveness and accelerate momentum, it intends to increase investment spending well above first-half levels behind more effective advertising, merchandising and sampling.
Looking ahead to the third quarter, the company estimates net earnings including charges related to restructuring activities to be between $0.17 and $0.27 per share, and net sales to increase between 4% and 7% in constant currency. Excluding restructuring activities related charges, earnings are expected to be in a range of $0.20 to $0.30 per share. Analysts currently expect the company to report earnings of $0.28 per share on revenues of $1.85 billion for the 2010 third quarter.
Foreign currency translation for the quarter is anticipated to benefit sales by about 5% versus the year-ago period. The company said it expects returns and charges associated with restructuring activities in its third quarter of around $10 million, equal to nearly $0.03 per common share. Estée Lauder noted that recording of charges will depend on when decisions are made and the relevant accounting criteria are met. With regard to its long-term strategic plan, as well as certain on-going initiatives, the company expects to realize savings of approximately $65 million in the 2010 third quarter.
For full year 2010, the company currently estimates net earnings, including charges related to restructuring activities, to range from $2.26 to $2.53 per share and earnings per share, excluding restructuring activities related charges, to be between $2.55 and $2.73, up from its previous range of $1.95 and $2.10 per share.
Estée Lauder presently anticipates full year net sales to grow between 3% and 5% in constant currency, up from its prior guidance of a growth of 0% and 2% in constant currency. Analysts currently expect the company to earn $2.59 per share on revenues of $7.78 billion for the full year 2010.
On a product category basis, in constant currency, the company said it sees sales in skin care and makeup for the full year to lead growth, followed by hair care and fragrance. The company also expects a geographic region net sales growth in constant currency, led by Asia/Pacific, followed by Europe, Middle East & Africa. However, sales in Americas are expected to decline slightly. Foreign currency translation for the fiscal year is anticipated to benefit sales by approximately 2% to 3% versus the previous year.
Estée Lauder currently expects returns and charges associated with restructuring activities in fiscal 2010 to be between $60 million or $0.20 per share and $90 million or $0.29 per share, down from its previous view of between $80 million or $0.27 per share and $120 million or $0.40 per share. The company noted that recording of charges will depend on when decisions are made and the relevant accounting criteria are met.
In relation to its long-term strategic plan, as well as certain on-going initiatives, Estée Lauder currently expects to realize savings of between $275 million and $300 million during fiscal 2010, as compared to its prior outlook of between $175 million and $200 million.
EL is currently trading on the New York Stock Exchange at $53.46 per share, down $0.18 or 0.34%, on a volume of 431,597 shares. In the past 52-week period, the stock has been trading in a range of $19.81 to $53.98.
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