The Estée Lauder Companies (EL) reported results for the first quarter of fiscal 2010 with earnings of 85 cents per share. Earnings were in line with the Zacks Consensus Estimate of 85 cents, but were up a robust 223% year-over-year compared to 26 cents reported in the prior-year quarter.
The company’s business in each of its product categories and geographic regions continued to be affected by challenging and volatile economic conditions. Nevertheless, the company was able to outperform because of the better-than-expected sales and lower spending levels in each of the product categories and geographic regions.
The better-than-expected sales were driven by strong sell-in of higher-margin product launches, greater passenger traffic in the company’s travel retail business and improved foreign currency translation. Furthermore, the lower spending reflects caution in many of the company’s businesses given the extent of the global economic downturn and the potential risks in the near term.
However, consolidated revenue for the quarter declined 3.7% to $1.83 billion amid weak global retail demand on account of the economic recession. Top-line growth is typically constrained by low volume growth and limited pricing power.
By product categories — Skin Care sales increased 1.9% to $687.8 million, while Makeup sales declined 3.4% to $718 million, Fragrance product sales fell by 11.1% to $292 million, and Hair Care product sales declined marginally by 0.9% to $98 million. By region — sales in The Americas fell 5.0% to $892 million; in Europe, the Middle East & Africa sales were down 6.2% to $602 million. However, in the Asia/Pacific region, sales went up by 10.7% to $358 million.
In addition, to combat the downturn, in February of this year, management announced a four-year strategic plan (fiscal years 2010 – 2013) to cut costs by $450 million to $550 million, trim headcount by approximately 2,000 employees, or 6% of the work force, realign and optimize the structure of the geographic regions to better leverage scale, improve productivity and reduce complexity, which should accelerate sales growth. Management expects savings in the range of $175 million to $200 million during fiscal 2010.
At the end of the quarter, the company had cash and cash equivalents of $799 million, and long-term debt of $1,389.4 million representing a debt-to-capitalization ratio of 42.8%.
Based on the strong profits in the first quarter of 2009, management raised its annual earnings for fiscal 2010. Full-year 2010 earnings are now expected to be in the range of $1.95 to $2.10 per share.
Net sales are reiterated to grow in the range of 0% and 2% in constant currency. Foreign currency translation is expected to positively contribute approximately 2% to 3% to sales.
During the fiscal year, the company expects to invest a portion of the savings from the first quarter to build momentum and drive growth. On a product category basis, in constant currency, sales in skin care, hair care and makeup are expected to grow. However, Fragrance sales are expected to decline.
Geographic region net sales growth in constant currency is expected to be led by Asia/Pacific, followed by Europe, the Middle East & Africa. Sales in the Americas are expected to decline.
Management also provided guidance for the second quarter of fiscal 2010. Net sales are expected to increase in the range of 0% and 3% in constant currency. Foreign currency translation is expected to benefit sales by approximately 3% to 4%.
Quarterly earnings are expected to be in the range of 80 cents to 87 cents per share. The company expects to realize savings of approximately $50 million in the second quarter of fiscal 2010, in connection with its long-term strategic plan, as well as certain on-going initiatives.
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