Estee Lauder's Q2 net earnings rose 15% year-over-year to US$396.7M, due in part to higher-than-expected holiday sales; net sales were US$2.74B, up 9.9% from year-ago period

Michelle Rivera

Michelle Rivera

NEW YORK , February 3, 2012 (press release) – The Estée Lauder Companies Inc. (NYSE: EL) today reported a strong financial performance for its second quarter ended December 31, 2011, which was slightly ahead of the top of its previously stated guidance. For the quarter, the Company had net sales of $2.74 billion, a 10% increase compared with $2.49 billion reported in the prior-year quarter. Excluding the impact of foreign currency translation, net sales also increased 10%. The Company reported net earnings for the quarter of $396.7 million, a 15% increase compared with $343.9 million last year. Diluted net earnings per common share rose 17% to $1.00, compared with $.86 reported in the prior year. All mention of net earnings in the body of this release refers to net earnings attributable to The Estée Lauder Companies Inc., which reflects the adjustment for noncontrolling interests. All per share data has been adjusted to reflect the Company’s two-for-one common stock split in January 2012.

The fiscal 2012 second quarter results included returns and charges associated with restructuring activities of $6.1 million ($4.4 million after tax), equal to $.01 per diluted common share. The fiscal 2011 second quarter results included returns and charges associated with restructuring activities of $19.3 million ($11.9 million after tax), equal to $.03 per diluted common share.

Excluding these returns and charges in the fiscal 2012 and 2011 second quarters, net sales for the three months ended December 31, 2011 increased 10% to $2.74 billion and net earnings rose 13% to $401.1 million. Diluted net earnings per common share rose 15% to $1.01 versus a comparable $.89 in the prior-year period. A reconciliation between GAAP and non-GAAP financial measures is included in this release.

Fabrizio Freda, President and Chief Executive Officer, said, “The Company’s strong second quarter results complete an outstanding first half performance. Our sales and profits this holiday season came in higher than planned and demonstrate the vibrancy of our brand portfolio in solid as well as soft economies. Our results were again broad based across brands, regions, categories and channels. The key drivers of our 10% sales growth were the U.S., China, travel retail and online. Importantly, we continued our consistent gross margin and operating margin improvements.

“Our flexible business model enabled us to outpace the global beauty industry. As planned, we will build on that trend with significant advertising and marketing spending behind existing product successes and upcoming introductions in the third quarter. Our underlying business continues to grow behind increased advertising and merchandising, despite softness in certain countries and currency headwinds. Reflecting our positive momentum, for the full fiscal year we are increasing our local currency sales forecast to between 9% and 10% and revising our earnings per share, before restructuring charges, to $2.16 to $2.23, after taking up the bottom of the range.”

The Company’s strong performance was due to solid overall business, particularly from its largest brands. The Company had strong sales gains in every region, including the United States. Sales increased double-digits in Asia/Pacific. Sales also rose in virtually all product categories within each region. Sales growth was particularly strong in travel retail and emerging markets, along with solid gains in many developed countries.

Additionally, in advance of the Company’s January 2012 implementation of SAP at certain of its locations and to provide adequate safety stock to mitigate any potential short-term business interruption associated with the rollout, some retailers, primarily in Asia/Pacific, accelerated their orders. Those additional orders amounted to approximately $30 million in sales and $23 million of operating profit, equal to $.04 per diluted common share, that would have likely occurred in the Company’s fiscal third quarter.

During the quarter, the Company made substantial progress on its previously stated strategic goals, with solid improvement in cost of sales as a percentage of net sales. All product categories and geographic regions benefited from Company-wide efforts to reduce or eliminate non-value added costs. In connection with the long-term strategic plan, as well as certain ongoing initiatives, the Company realized savings of $36 million during the quarter. As a percentage of net sales, advertising, merchandising and sampling expenses increased to support the Company’s biggest innovations, while other significant operating expenses were lower. As a result, gross margin expanded 150 basis points and operating margin increased 50 basis points, before restructuring charges.

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