Beauty and personal care products maker Estée Lauder Cos., Inc. (EL) reported Friday that profit for the first quarter of fiscal 2010 climbed significantly from last year, reflecting higher margins and lower expenses amid progress in the company's strategic initiatives and cost discipline drives, despite a 4% sales decline.
Adjusted earnings per share for the quarter soared and significantly topped analysts' expectations as well as the company's original estimates. Quarterly sales grew 4% and also beat consensus estimate. Additionally, the company provided earnings guidance for the second quarter, and raised its earnings forecast for the full-year 2009. Following the announcement, the company's stock is trading up nearly 9%.
The company noted that it was able to outperform its original expectations because of better-than-anticipated sales and lower spending levels in each of the company's product categories and geographic regions, despite the continuing challenging and volatile economic conditions.
In a statement, president and chief executive officer, Fabrizio Freda said, "Our strong performance this quarter is an encouraging start to our fiscal year and to achieving our long-term strategy and financial goals. We capitalized on our solid pipeline of innovative products, initial improvements in certain areas of our business and increased cost discipline, which led to a significant improvement in operating margin. We believe we gained share globally in much of our distribution this quarter."
First Quarter Results
The New York-based company posted net earnings of $140.7 million or $0.71 per share for the first quarter, sharply up from $51.1 million or $0.26 per share in the year-ago quarter.
The results for the latest quarter include returns and charges associated with restructuring activities of after-tax $27.3 million or $0.14 per share. Excluding returns and charges, adjusted net earnings for the quarter climbed to $168.0 million or $0.85 per share from $51.2 million or $0.26 per share in the year-ago quarter.
On average, seventeen analysts polled by Thomson Reuters expected the company to report earnings of $0.34 per share in the first quarter. Analysts' estimates typically exclude special items.
Earlier in the month, the company stated that it expected adjusted earnings for the first quarter, before restructuring-related charges, to be "significantly higher" than forecast, citing better-than-anticipated net sales and cautious spending. However, the company also warned it remains cautious regarding the economic climate and consumer spending throughout the year despite stronger-than-anticipated first quarter results.
Net sales for the quarter decreased 4% to $1.83 billion from $1.90 billion in the same quarter last year, and marginally topped fourteen Wall Street analysts' consensus estimate of $1.82 billion. Excluding the impact of foreign currency translation, net sales decrease only marginally from last year.
The company, whose brands include its namesake Estee Lauder, Clinique, La Mer and Aveda, attributed the better-than-anticipated sales for the first quarter to strong sales of new products, continued strong growth in Asia, higher passenger traffic in the company's travel retail business, and improved foreign currency translation.
Peer Performance
Among Estée Lauder's peers, New York-based direct-selling cosmetics company Revlon, Inc. (REV) reported Thursday a year-over-year decline in profit for the third quarter, reflecting the absence of a year-ago gain from discontinued operations. However, the company posted a profit from continuing operations, helped by cost cuts, despite lower sales. Net income was $23.1 million or $0.45 per share, lower than $29.2 million or $0.57 per share last year. Quarterly net sales declined 2.5% to $326.2 million from a year ago.
Another New York-based peer, Avon Products, Inc. (AVP) also reported Thursday a 30% year-over-year decline in profit for the third quarter, hurt by restructuring expenses and foreign exchange impacts. Net income was $156.2 million or $0.36 per share, lower than $222.6 million or $0.52 per share in the year-ago quarter. Total quarterly revenues declined 4% to $2.55 billion from $2.64 billion last year.
Segmental Details
Based on geographic regions, the Americas posted sales of $892.3 million, a 5.0% decline from the year-ago quarter, while in local currency, sales decrease was 4.1%. Sales for Europe, the Middle East & Africa region declined 6.2% to $601.9 million from the prior-year quarter, while in local currency terms, sales edged up 0.2%.
The company's Asia/Pacific sales rose 10.7% to $357.7 million from the comparable quarter a year ago, while sales increased 12.4% in local currency.
Based on product category, skin care products net sales totaled $730.3 million, up 1.9% or 5.0% in local currency terms, from the year-ago quarter. Sales for the makeup products decreased 3.4% or 0.8% in local currency terms, to $717.9 million from the prior year quarter.
Fragrance products witnessed a net sales decline of 11.1% or 8.0% in local currency terms, from last year and totaled $291.5 million. Hair care products net sales were $97.9 million, down 0.9% or up 0.9% in local currency terms, from the year-ago quarter.
Other Metrics
Operating income for the first quarter climbed to $220.4 million from $92.5 million in the prior-year quarter, while operating margin also climbed 7.2 percentage points to 12.0% from a year ago.
Gross profit for the quarter was $1.39 billion, down 1.1% from the year-ago quarter, while gross margin percentage increased 2.0 percentage points to 75.7% from last year.
Total operating expenses were $1.17 billion, down 10.9% from a year ago, while operating expenses margin declined 5.2 percentage points to 63.7% from last year.
Estee Lauder said that its lower spending than planned during the first quarter reflected its measured approach to investing in light of the length and extent of the global economic downturn as well as the potential impact of the H1N1 virus. In an effort to control costs and offset weak sales, Estee Lauder is in the midst of a four-year restructuring plan that includes cutting 2,000 jobs, or 6% of its work force, freezing merit raises and maintaining its hiring freeze.
In connection with its long-term strategic plan, as well as certain other on going initiatives, the company has realized savings of about $48 million during the first quarter.
Looking Ahead.......
"While satisfying, these strong results should not mask the challenges and uncertainties we still see in the global economic environment. Additionally, we are at the beginning of our four-year strategic plan, which involves significant cultural changes and multiple initiatives, and we still have a lot of work ahead to achieve our goals. However, we will continue to focus on opportunities that are in our control, namely reducing our cost structure and building our brands," Freda added.
For the second quarter, Estée Lauder anticipates adjusted earnings in a range of $0.80 to $0.87 per share on expected net sales growth of between 0% and 3% in constant currency. Analysts are of the view that the company will earn $0.85 per share for the second quarter, with estimates ranging from $0.77 to $0.93 per share, on revenues of $2.13 billion.
Further, the company expects to realize savings of about $50 million in the second quarter in connection with its long term strategic plan.
For fiscal 2010, the company raised its adjusted earnings forecast to a range of $1.95 and $2.10 from the prior guidance in the range of $1.55 and $1.70. However, net sales continue to be forecasted to grow between 0% and 2% in constant currency. The Street is looking for full year 2010 earnings of $1.79 per share on revenues of $7.57 billion.
The company also expects to realize savings of between $175 million and $200 million in fiscal 2010 in connection with its long term strategic plan as well as other certain on-going initiatives. However, the company continues to anticipate returns and charges associated with restructuring activities in fiscal 2010 of between $80 million and $120 million or $0.27 and $0.40 per share.
In early October, Piper Jaffray analyst Neely Tamminga upgraded her rating on shares of Estee Lauder to "overweight" from "neutral", citing improving customer traffic and growing market share among upper-middle income teenage girls and mothers. Tamminga also noted that national mall traffic is improving, which would benefit Estee Lauder. The company sells its products mostly in mall-based department stores.
Stock Quote
In Friday's regular trading session, EL is trading at $44.71, up $3.57 or 8.68% on a volume of 3.40 million shares. In the past 52-week period, the stock has been trading in a broad range of $19.81 to $45.42.
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