Q2 2020 Earnings Call
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Good morning.
On today's call or for Breazeale, Brita, President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer.
Since many of our remarks today contain forward looking statements. Let me refer you to our press release and other reports filed with the FCC.
Where you'll find factors that could cause actual results could differ materially from those forward looking statements.
Facilitate the discussion of our underlying business the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release.
Net sales growth numbers are in constant currency you can find.
The issues between GAAP and non-GAAP figures in our press release and on the Investor section of our web site.
The Mcewen <unk> session. We ask that you. Please limit your limit yourself to one question. So we can respond all of you within the time schedule for this call and I will turn the call over to for retail.
Thank you Tony.
Good morning, 21, we delivered exceptional results.
In the second quarter, which I will elaborate on sharply.
First I want to a knowledge of how concerned we are for older people, including our employee and consumers what affected by the recent outbreak of the quarter Novartis in China and add on to warrant.
Our hearts go out to them and I will discuss.
What steps our company is sticking to support them in a few minutes.
In the second quarter I, what prestige beauty before you reach ordinator weak consumer globally.
Our successful strategy based on more people engines of growth. Once again helps you with our performance as we grew.
You know regions in all major categories.
<unk> rose in every region as it did fragrance and they have care why is mid cap growth internationally.
The company generated 16% constant currency sales growth the highest organic growth rate.
In 20 years.
Indices, so not a lot of just quarter of our fiscal year, allowing guests to gain she needs. He got Shia in global prestige beauty.
Well I wear second quarter continues to be boosted by 40 now also includes and not the important event driver.
Single day.
Our advanced blending good for these events delivered strong growth across our business led by Asia Pacific region.
Global online and try to retail channels and the skincare and fragrance categories powered by the extraordinary performance, although it's still.
<unk> Lemaire and our luxury <unk> fragrance brands.
We disciplined expense management, we leverage our seems to grow into a 21% increase adjusted diluted earnings per share.
Our strong performance reflected smashed and deliberate investments.
In the best opportunities worldwide, including talk was broadly innovations increased advertising enhanced digital marketing battery use data analytics it great that local relevance.
We have dropped it it broder group of consumers and continued to be study.
I don't repeat rates for our products driving greater loyalty.
During the quarter, we completed the acquisition of the Korean They had then be company after having taken a minority stakes four years ago. It.
It's still sort of dry skin care brand has grown rapidly with captain.
Did you know vision and excellent speed to market capabilities. We are optimistic about our first acquisition in Asia, and we see many opportunities to find that close to date the brand globally as consumer interest in skincare couldn't genius to respond.
Our momentum continued in the first.
Three weeks of January.
But as you all know they globally in bottom it it's changed meaningfully following the outbreak of decode when a virus.
Our thoughts are with individuals who had been diagnosis and those were more in a family and friends.
The Chinese government has responded.
In a very serious manner, along with many other countries and organization and they are working tirelessly to address think wouldn't change outbreak and help those afflicted.
As a company we have focused on the well being of our employee in China Anglo body and not taking appropriate measures to.
Got that Dan based on guidance from local authorities and the World Health organization.
Our consumer and business Boston is seen China and elsewhere.
Also top of mind, we actively engage is wait to support them.
Pledging got 5 million at remedies to.
Fourth quarter, not autos release exports for needs across China, we're matching donations of U.S. based employees to assist with the outbreak.
Working on there do you have supported initiative to talk to support people and every call Buddy.
Over the past and yes in my role as CEO.
I'd made numerous threeps too many regions of China, I met with our local employees told to consume Minnesota or dangerous ankle Farid weed out what business Boston I tried to well over two or more bodies beautiful concentrates wonderful people My house goes out to the cities in China during this difficult.
And I look forward to my next Threep, there hopefully in the near future.
Well do it is difficult to anticipate that 40, but of the quarter and I do so now what business with but the next couple of months, we'd be very challenging.
Chinese consumer many big cities are staying home and retailers like.
Stores or limiting hours in an effort to help couldn't team to spread to the buyers.
Additionally, global try though is being restricted.
Yes, it is being felt beyond China into major try the retail corridors and large two cities.
Given where we know now.
And our students with past it'd be dynamics, we believe our business, we gradually recover toward the end all diffuse gadea.
We stand ready to invest to facilitate the recovery as soon as the market supports it leveraging the flexibility to about what are the source the location in our most.
Growth drivers.
We remain committed to China and to the Chinese consumers for the long term and plan to increase our R&D investment into market in order to drive those breakthrough prestige beauty innovation for China, The Asia Pacific region, and the rest of the award.
Reflecting China leadership in science, we will expand upon our existing in market capability it'd be the new state of Art Innovation Center complete with the latest technologies into.
This facility, we'd also highlight that what passion and commitment to quality sustainability and employee.
He wellness.
I would enhance capability and capacity we didn't show when we meet the needs of Chinese and Asian consumers, we look out relevancy and local trends as well as we could have TBT agility and speed you.
These investment aims to sustain the long term development of our company in China.
And around the world.
Well, we continue working to advance these new development and look forward to shed some more details in the future.
Turning back to the second quarter results. The Estero that Brian was again start in our portfolio. The brand grew strong double digit.
Globally in both skincare and make up and rose in every region, Taiwan bites, many ito franchises, including advanced night repair as well as I know Threep legalizing Supremes micro essence end up aware.
She is a beautiful example of our most people.
Engines, no Tony winning across many brands, but also we deem it beat Brent.
They know that even if they know the luxury skincare line Delever superb results supported by tied to get to not get him with a luxury consumer announced merchandising and desirable innovation [laughter].
Looking now at our geographic results seats advanced in every region, we strengths across categories in Asia Pacific virtually every market group led by China, which accelerated generating strong double digit growth.
And as well, what I, what brands category and China's.
Just.
We had to refi growth from smaller cities in China, We tried to becoming a greater past of our business in a promising long term growth driver.
We have expanded into two new cities, bringing I want to talk to went on to 23.
Our online business in China.
Hi, not more than doubled elevated by well integrated online and offline campaign for single day <unk>.
The estimated that Brian was in mono team all best performers for the event, what Mac a man in Jo Malone, London, each excel in their respective categories.
Our brand expansion strategy on chemo or was it distinct advantage as an example, following tone for beauty launch on chemo in 2019, the brand executed its first single date to tremendous success in both fragments and makeup.
Its performance was twice that of each team or.
Launch date, which was our biggest launch ever on the platform.
Chinese consumer interest in prestige fragrance category is rising when nicely position with our wide portfolio luxury fragrances.
Sure Malone, London and don't for beauty excelled in the course, there helping to fight of diversity.
<unk> our business in China.
We plan to launch additional luxury science there later this year.
We then even a stronger old in our Ida emerging market outside of China led by two lease it resolves the in Russia, India, Thailand in Brazil.
In the course that we couldn't do you know.
To invest for growth and attract new consumers.
For example, but as he is the fourth largest masking globally for health care and we launched have either our Tencent brand. There we have showcasing the brandy study could meet the to sustainability they've environment in book Tiny Kelly based products.
We just saloon in Sao Paolo that includes sustainable elements.
Across Europe, the Middle Eastern Africa, Estee, Lauder, Mack Clinique and limit our four biggest brands prosper demonstrating the appeal of established brands have broad exposure to most people.
What do you think pending innovation.
And that he got to an advanced in the region.
Our skin care brand led the growth we sought after newness from let Matt that fan in all regions.
In the UK grew modestly for the second can set of course that in a difficult environment and.
Several of our brands gained share.
Our gross strategy showing promise Amit macro industry specific headwinds.
In North America, we made good progress toward stability position of the business, we learned that we leaned into our multiple engines of growth leveraging our.
A successful skincare in fact, that's franchises during the holiday season.
Right all the industry challenges you make up.
There were seven a bright spots brand representing about house all of our sales grew and we had gains in the specialty moves Dee Ann online channels.
In fact, lemaire delivered record of Black Friday seeds on its own sites, but even by unique product assortment and influence OLED holiday campaign.
As we work to rejuvenate the makeup business in North America, we are creating products the leverage consumer audience.
Sides from our enhanced data analytics for example, we learned to consumers where I'm proud of the combined skincare benefits we'd make cap.
In response, yes, they know that Brent just launched future is either a rescue and you almost to rise even foundation, combining the positioning of our we need future to strengthen rising.
China, we couldn't human needs in North America.
The launch is off to a very strong start with high ratings and reviews.
Looking now at the channels, our global online business. The lever stated that results our brand sides third party sides and retailer size.
Grew double digits broad based strength across regions.
Our online business, what vibrant globally around cyber Monday, as our brands offer it well receive products and set in the important holiday gifting heating season.
We continue to invest in our.
Selling growth prospects online, we launched our brands are more third party sites, which are rising input to try to keep deployed new digital payment technologies across several of our blended sites in the U.S. and expanded our loyalty programs.
We reach and engaging content we have increased.
The time consumers spent on our brains sides and traffic has grown increase <unk> parent media value decides to provide.
Travel retail also continued its momentum our top aid brands grew double digits everyday we strength in skin care.
And our luxury in our seasonal sagas brands, we do strongly aided by expanded distribution in the channel.
Enormity pretty retail campaign unique retailers division and effective advertising all contributed to fantastic results.
The prepaid segment of.
The retail accelerates in the course and he is becoming an increasingly important part of our business pretty enable us to engage we consume it before they try them build brand equity and desirability and drive conversion.
When tourism and clouded rich you Foley.
Containment of the Cortona Vitesse, we anticipate the treaty, we continue to a spot.
And now that important highlights discourse that was the publication of our 2019 citizenship and sustainability report.
Last night, we announced new goes into reported.
He is our vision and progress.
One of our goals is to promote ingredient stressed by didn't see across our brands in Aveda led the way we did ingredient velocity on these websites other brands will soon for.
Innovation is the core of our company once again, how to drive out there.
Formants accounting for over 25% assays, we have exciting innovation from Iowa, four biggest brands coming into second half of our fiscal year. Many in the hero franchisees. We believe these launches will be well received by consumers globally and these important.
She's had high loyalty.
We are pleased by our strong stopped in the first HELOC House, we're now focused on managing effectively throughout the quarter when a virus outbreak.
Determinant to certify what consumers in the best ways possible.
We believe that.
Efforts of the Chinas government, along with leadership from around the world to contain the outbreak will prove effective.
I want to thank our employees worldwide to that extraordinary efforts working through these challenging time right supporting each other our consumers.
Communities, where we work in our business, they had grace and agility and a testament to our company culture.
Now I always turn Nicole overs to trees.
Thank you for Brito and good morning, everyone.
Certainly our thoughts and best wishes, our with everyone managing.
That's very difficult situation in China and globally.
We are committed to supporting our employees and other stakeholders. While we also managed the business impact as best we can during that time.
As a reminder, my commentary today is adjusted for the items at rainy mentioned at the beginning of the call and net sales growth.
Numbers are in constant currency.
We acquired haven't be the owner of the Dr. Charles ran towards the end of December.
The results for the new brand will be recorded in future periods on a one month lag. So you can expect operating results from Dr. jarred to be reflected in our fiscal third quarter for the first time.
Including the impact of purchase accounting and the interest expense on the debt issues largely Sun This acquisition.
So starting with the quarter result.
Net sales for the second quarter rose, 16% driven by strong growth in our international regions and improvement in North America.
Sales growth in Asia travel retail and online continues to exceed our expectations.
From a geographic standpoint, our Asia Pacific region that sales rose, 30% with broad based growth across the region.
Sales in greater China accelerated rising very strong double.
Our sales in mainland China continued to deliver a broad based growth across cities brand categories and channels and our brand saw record results on singles day.
As expected sales in Hong Kong declined more than 20%.
Among developed markets and they pack.
We again delivered double digit sales growth in Korea this quarter.
Our sales in Japan Rose mid single digits. Despite the October 1st VAT increase last year that contributed to double digit.
Ah growth last quarter.
And emerging markets in Southeast Asia grew high single digits led by Thailand.
Net sales in our Europe, the Middle Eastern Africa region Rose, 18% with most markets contributing to growth.
Our global travel retail business rose strong double digit driven largely by like door growth. The continued rapid development of online preordering and the successful introduction of newer brands like.
All about and Kilian.
Emerging markets in the region grew double digits led by India in Russia.
Western European markets grew low to mid single digit led by Italy, Iberia in Germany.
Net sales in the Americas rose, 1%, a significant improvement from last quarter.
In care in fragrance showed good growth driven by Estee Lauder origins and luminaire as well as strong holiday performances from Jo Malone and Tom Ford.
Initial shipments of Estee Lauder is new Futurist Hydro rescue Moisturizing makeup launch helped to partially offset the overall continued weakness in the.
Makeup category.
In North America sales rose high single digits across all our online channels.
Our sales in the specialty multi channel grew double digits, while the brick and mortar department store business remained challenged.
From a category standpoint, skincare once again led growth.
This quarter.
Net sales accelerated to 28% growth with strong contributions from Estee Lauder Lemaire origins and Clinique.
Innovations such as Estee Lauder advanced night repair intense reset concentrate lemaire, the regenerating serum and clinique I'd be.
Contributed incremental sale and supported their here refranchises.
Net sales in makeup grew 7% led by Estee Lauder, Tom Ford and Bobbi Brown.
Solid innovation and support in foundation and lift products as well as special holiday sets and products drove growth in the category.
Sales of fragrances grew 9% driven by strong holiday Activations that Jo Malone, Jo Malone, London, and the launch of meddling from Tom Ford.
Fragrance sales grew across all regions, but were strongest in the Americas and in Asia.
Our hair care sales rose, 5% driven by the launch of the neutral Helena.
Line of products from Aveda and improvement at Bumble and Bumble.
Our gross margin increased 20 basis points compared to the second quarter last year.
Favorable pricing and mix was partially offset by the impact of the incremental tariffs and higher obsolescence costs.
Operating expenses as a percentage of sales.
130 basis points, we continue to leverage higher sales and greater efficiencies in our selling model and store operating cost to fund advertising and strategic investments in technology and other capabilities.
Operating income rose, 23% and operating margin increased by 150 basis points.
Adjusted diluted EPS of $2, an 11 cents increased 21% compared to the prior year and the currency translation impact was not good negligible.
EPS was higher than expected due to the stronger sales growth as well as disciplined expense management and was partially offset by a slightly higher tax rate.
During the quarter, we acquired the remaining stake and have indeed, a Korean based skin care for company.
The transaction resulted in a onetime gain of $576 million primarily related to the Remeasurement of our previously held minority equity investment of to fair value.
We also recorded 777 million.
Millions of impairment charges related to three of our four makeup brands.
Reflection of the continued challenges in the makeup category that had been most prevalent in North America.
While the market momentum from makeup has slowed in the near term as we have previously discussed the growth opportunities and the strategic value of these brands.
Remains compelling as evidenced by our to increase share and capability and specialty multi retail the enhanced social media expertise of the brand and an increased consumer base of Gen Z and millennials.
Turning now to cash flow for the six months, we generated 1.26 billion and net.
Cash flows from operating activities, which was roughly flat with the prior year.
Hi earnings were offset primarily by the timing and level of accounts payable.
We invested 291 million and capital expenditures with cash and 1.04 billion to acquire the remaining equity interest in.
And haven't been which was funded with debt.
We also continue to return cash to stockholders.
Utilizing $813 million to repurchase 4.3 million shares of our stock and 330 million pay dividends.
So we ended the first six months or the fiscal year with strong net.
Sales growth of 14% in constant currency and adjusted EPS growth of 21% a tremendous reflection of the hard work of our teams as well as strong consumer mental momentum that we have in our markets.
So now, let's turn to our outlook for the balance of this year.
The.
Strong performance in the first half of our fiscal year on multiple engines of growth strategy and the greater financial flexibility and agility. We have built into our operating model is expected to help us to effectively manage through the short term disruption caused by the Corona virus outbreak.
Due to the rapid.
Escalation and solidity of the situation. It is both complex and difficult to predict the timing and the corresponding impact on our business.
Therefore, we are not giving explicit guidance for the third quarter.
We also remain mindful that a variety of macro risks such as ongoing trade tensions and.
Continued challenges in Hong Kong as retail environment could impact our second half result.
For the year for the fiscal year, we now strive to achieve net sales growth of at least 6% to 8% in constant currency.
This range as before the impact of one point of growth from.
On the inclusion of sales from from haven't me.
Currency translation is expected to negatively affect reported sales growth by one percentage point, reflecting weighted average rate of 110 for the Euro 127 for the pound and Stefano three when they want for the fiscal year.
With this sales guidance PPS is expected to range between $5.60 and $5.70 before restructuring and other charges.
This includes approximately five cents of dilution from currency translation, an 18 cents dilution from the haven't be acquisition.
In constant.
Currency, we expect EPS growth of 6% to 8%.
Excluding the dilution from haven't be EPS growth is expected to be at least 9% to 11%, which remains in line with our long term objectives.
For the second half net sales are expected to increase.
Approximately 1% to 2% in constant currency.
Currency translation is expected to negatively impact rose by one percentage point and the inclusion of haven't be is expected to add two percentage points.
In terms of cadence throughout the second half we have anticipated the greatest negative sales impact from the.
On a virus to be in the third quarter, followed by a gradual recovery in the fourth quarter.
We are severely curtailing discretionary costs, while continuing to support critical areas of growth.
Leading beauty forward has reduced our percentage of fixed cost in our operations, which gives us.
Peter agility to manage more effectively with slowing sales.
We expect the belt tightening to have the maximum benefit in the fourth quarter.
Yes, as forecast between a $1.86 and a $1.91 before restructuring charges.
This includes approximately three cents.
Dilution from currency and 17 cents dilution from haven't B, which includes some impact from the Corona virus outbreak purchase accounting and interest expense on the debt issuance as I mentioned previously.
While our outlook for the balance of this year is uncertain, we do remain quite.
Optimistic about the long term growth opportunities for that company.
We believe we can manage through this difficult health crisis, while maintaining the agility to invest as needed and regain our momentum once the recovery is established.
On behalf of the entire Estee Lauder companies, we extend our deepest well wishes to those.
Those who have been affected and thanks, everyone for their extraordinary efforts to manage during this period, particularly are incredibly hard working and wonderful team in China.
And that concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is open for questions. If you have a question you simply press the star.
Key followed by the did one on your Touchtone telephone questions will be taken in the order in which they are received two in sure everyone has the opportunity to ask their questions. We will limit each person to one question time permitting we will return to you for additional questions does he will begin by pressing the star key and the did did one.
Our first question today comes from.
Sarah most opinion with Morgan Stanley. Please go ahead.
Hi, good morning, guys.
So.
Just was hoping for a bit more clarity on the Corona virus and how you guys are thinking about the potential impact longer term, yes, what we've seen with.
Yes that but that makes is usually beauty demands come back pretty quickly. After a couple of quarters I know, there's not a lot of visibility here and the duration of the illness is obviously still a big wildcard, but just for Reed feel any initial thoughts are context on if you think this could be an issue that impairs longer term growth as we look out.
Over the next few years, you talked about a gradual recovery through fiscal year end should we expect things to sort of ramp up pretty quickly after that or how are you thinking about it in terms of longevity of impact. Thanks.
So obviously, we we don't know about this specific medical held to recovery.
Timing, which is the unknown at this point, but we are an agreement with your assumption, which is basically these we led even but in the short term and definitional short term is well keys are known today, but then after disputed that there will be a recovery and people will come gradually back to normal.
And so we do expect to recall that our momentum at the end of a de has crashed so and a in term of our assumption to de Eli and what you said, we assume the two quarters to be affected by the even got the and we have spent a normalization in fiscal year two.
Into one.
That's that's our assumption a two day D and adding poor something is that we are ready to stay close to the current that mitigation of the issue Andrey solution of the had crashes as we're doing a supporting our China team and all the.
It is the government is putting in place in China today, and we also we stand ready to support the recovery when the recovery will be happening and to invest behind duty called ready as required by the market opportunity, but most importantly by their needs of rebuilding their icon.
Function of Chinese consumers in the name of the economic development So China.
Great. That's helpful. Thank you.
The next question will come from Lauren Lieberman with Barclays. Please go ahead, great. Thanks, good morning.
I was heavily.
Packed actually a little bit about the Americas, Adam because the strength this quarter. The inflection was you know very notable so I was wondering if you could talk a bit more about how much. You think this is tied to just being really you know proactive in promoting them in getting behind it. It takes me fragrance and skin and holiday being the key to this.
Or are you starting to see other lift.
Are you thinking carried through past holiday and then in part with that of course, it had the news about incremental Macy's door closures. This weeks. If you can just comment any outlook for the rest of the year I'm in the Americas. Thanks.
So first of all in that as we said.
These scores that has contributed to this stability stability vision of our North American business and this would be new line. We the strategy we communicated in Investor day in the we remain committed to continue to work with subsidies issued in the next month. So whats happened. This quarter is first of all we have use that as anticipated.
Much more get onto a lot of insight in Damascus to activate our plans.
And much more.
Local relevance, India division, yet I seem to happen, we have recognized the softness audio it or mid cap markets and that's why we had accelerated our TV deans.
Okay, and particularly fragrances during the holiday the C. So they went well fitting the situation or we got great results. So we had a if you want and adjusted our engines will grow to in a way does it contributed to the good results.
And our innovation pipeline as anticipated that has been.
Being strong and the impact of innovation is as improved.
And so all these being a positive impacts we will continue to operate in that direction now we do have Steve to be come from some of the headwinds to be clear the makeup softness, particularly the color.
GAAP soft and this is continuing good as you mentioned the closures of of the certain retailing stores, where we do had high market share. We continue although we completely share the Macy's strategy of focusing on the high performance doors and all and gradually.
Stopping.
<unk> did this moeller and lower performance doors, we as I said, we supported the strategy, but obviously and we will need to date, we decided you with making sure that we retained the consummated the brands and these will be difficult, but we'll do our best to do that so we need to take on that account our extraordinary efforts to.
Improve our models that are working but also take into account that wouldn't be continues to be headwinds. So our strategy remains at this point stability.
And just as a follow up how are you thinking about the impact of Chinese travelers not really visiting the U.S. over the next several.
<unk> just in terms the outlook.
That's that's actually a good point, we assume that D. There would be obviously in imports done reduction of Chinese travelers. So no visiting the U.S. in the next at least two three months and India's we led in I guess, even but.
Obviously on the on the Sage two Chinese food is frankly in India is moment, we had assuming you now what a in our guidance also is low down on any try those copulation to be clear India's moment, because of the quarter and iris blue but concern.
Now a tourist in general is being reduced the temporary so we we have taken these temporary assumption I'm sorry, you assumption of these temporary reduction under account in our guidance.
Okay, great. Thank so much.
And I just want to add as it relates to our guidance.
I mentioned to a range of 182 to 191.
In our press release, I think I've mentioned, a different number in our guidance for the second half.
The next question is from Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking my question.
And congrats on a really good quarter, so I want to I want to ask you acute.
Thanks on the on the Doctor chart dilution could you walk us through how much you know the 18 cents. We're trying to think forward I guess or the the four quarters of integrating that business how much of that is onetime.
In nature, and when you see that.
And aware off or even possibly turned to to an accretive position and then I just I want to ask you.
As you think through the U.S. number a little bit. So do you think the retailers you worked with on the holiday strategy to get more skincare and fragrance out there.
They they really seem to want to keep pushing on make up even as the warning signs, where we're showing off over the last.
There are two do you think they've gone through the psychological change yet that skincare is gonna be the driver for the medium term and are they accepting that they have to pull back more on make up in a structural away or I guess or the gains you saw in skincare and fragrance.
Can you characterize those as sticky and shelf space gains that are going to remain dedicated to those categories. As we look into calendar 2020.
[noise].
Yes, so starting with the haven't be dilution you know, we obviously have to step up in inventory, which is one time depends on how you're treating the interest expense, which is also in that number on what I would say Michael is that we expect that happened be will be a if you think forward.
Relatively flat, including purchase accounting, so eliminating those onetime items next year and accretive the following year.
Okay.
The make up questions.
Yes, sorry could you repeat what was the subject to the make okay. When you said they understand yeah.
Well it sounds like it was a pretty meaningful acceleration and obviously in North America or in America, we can see your numbers, but it sounds like the.
The number that you got from specialty multi which was a great growth channel for you guys I'm over the last few years of it slowed recently sounds like it improved a lot this quarter and it sounds like you worked with them on skin care and I'm just wondering if you feel like.
That channel they feel they they feel like it had gone through that's the mental change of saying look skincare isn't is gonna be the bigger driver and we're going to give them give that category more shelf space at six around calendar 20, Hi, I frankly, yes, I think everyone realizes the power of skin care and there's momentum we own working together.
To leverage the power of skin care, which should be goes skin care for the eastern results in skincare product combined with midcap is on a growth. So then they're out yet you speak about shelf space, which obviously is a bit more gradually in the way it changes, but definitely innovation programs I would be flat.
I think a lot to do so that is more a TVT in most social media mood advertising is skincare them before and these are that he is a reflection on the results, but do we make copies a big opportunity. They didnt make kept for fees, meaning Foundation. For example, just didn't do it very very well there.
The plays which is a softer is called or and importantly, what we're doing to contribute to not only to leverages skincare fragrance is better but to the in state and growth. Even makeup in the future is we are accelerating the innovation in the makeup category contributing to.
The future resolves all of our retail Boston is also in these categories. So to be clear, we're not giving up a tool on makeup we had josh accepting that in the short term we are focusing more on other category and innovating that that he may cap to reactivate to the consumer interest.
Thank you very much congrats on getting North America.
Back to a positive.
Thank you.
The next question will come from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, Good morning, and let me add my congratulations I guess my question is around Amazon, There's been some press out recently talking about them potentially evolving their model to.
<unk> luxury brands, maybe using a concession model if something like this with the play out would you ever consider a reconsider excuse me Amazon as a as a channel for luxury beauty and then just a follow up on China can you share Tracy maybe what percent of physical doors have been shuttered and are you seeing any major change.
Trend in the online business in China since outbreak has escalated. Thank you.
Okay on the on the first question is you answer is no at this point, we are now considering Amazon a channel for our luxury beauty products and we are focusing.
<unk>.
Our current China us and our current Boston is to be they continue to study decision in North America lot would be [noise].
As far as the China question is D.
And the number of physical doors I, let let Tracy go read that yeah. So as you can imagine, it's it's quite fluid and a and one of the things that.
We've seen is the Chinese new year extended or you know for many many of our employees.
You know our stores have closed as malls have close. So you know very recently two thirds of a offered to our department store doors will close and the remaining doors were on reduced hours now.
That could change next week. So this is a very fluid.
<unk>.
And on the second part of the China question, which is the online.
Absolutely do online China is very strong in China, India speed or as we said into second quarter, a bad India's moment or so on.
In line is suffering because in this moment a in the middle of the outbreak did delivery system in homes and the into big distribution centers or so people are not walking liking is enrollment teed February 10.
Many people into known essentially a TV dean factories.
In other situation Idcs stopped it does seem is for distribution centers. The same sort of activities. So online in the at least into short term is having the same issues of brick and mortar.
Interim all the rule of thumb lining the recall that in the future we're optimistic that online we play it.
Very strong road in the recall that when the recall that it will happen.
Thank you for that context.
Thank you.
The next question will come from Steve Stricker, who you would you be it. Please go ahead [noise].
Hi, good morning.
So first <unk> preferred my question just wanted to follow up on.
Aarons question, Ed can you give us a little bit more texture as to how do disaggregate, how maybe mainland China sales are performing versus the travel retail component of the business primarily is how we think about modeling the back half the year. One of those businesses is housed within EMEA segment. The other businesses clearly housing a pack so just want to get little bit more.
Sure as to which ones being more impacted real time, and then Fabrizio if you use history as a as a guide post here how do we think about once the issue is call. It quote unquote contained what does like the recovery path off from that moving forward is it typically from what you've seen before three four months for travel retail to come back.
Online from flights being booked any help would be appreciated. Thanks.
Yeah. So in the short answer the first question in in this moment tried the retailer is the most impacted the China because if you think what's what's just to give you that come to still what SAP and you would probably know that more than.
60 at line said just closed that flights. So in this moment to add to try the Ina now to China is suspended in the large majority to your cases. So the delay there is lot go traffic for just in and out to China Sekone <unk> in general.
Two [laughter] India's moment these more prudent because it is a global issued the outbreak that he is a global concern and so many people which are concerned to travel in this moment I read using their choice or put spooning some of their travel and I'm speaking touristic travel.
And that he is a third factor is many companies have been that travel to to any place to China, but also to any other plays where there is the values in soup business travel is being reduced <unk> not to counter the many companies how did it using business driver for cost.
And reasons. So in this moment the amount will drive it in airports to ease and videos then tri cities significantly reduced so that's the biggest seep into second and the biggest seemed but he's obviously, China mainland itself and on conga, which allowed her to use the and significant so.
I would say the greater China area.
Because all the reason when do we already discussed in the prepared remarks that I'm not going to repeat but the most important think is that keep in mind that these February 10, most of the cities I know t. than people are now back to work and team at February She didn't know that school and that people have.
Quest and rightly so not to get out of home for reason, which I'm not essential and not to go in public transportation Swed. There is the result contamination. So they behaviors within tie up we're bullish on these and fundamentally change the and because of diseases. The second data where in the short term we have spent any but.
The second part to your question is they recovery now the recovery.
We know what what would you know we have studied all the threed use cases and know that Peter situation and what we see that the recall that he tends to be hockey stick, meaning when the things is back is back but equally in the traveling when traffic.
He is back trashing is back and the people die be does seem they can do we can do more into remote that business learning that we apply no doing during the period before the recovery the inside the retail will be very important to push conversion. Many when there is you know try meditates.
Needed by traffic it by conversion publishers in Asia, where are we making many improvements. So in this period of transition with traffic was.
We had reworking our plans to use conversion as a key mitigating element on the deep the and then obviously, we have Pee paid ingot, Florida future recoveries.
Plans when the time will arrive the last point I want to make is that did we will try to tune their recovery.
To do recall city of the Chinese economy into Chinese population, we don't want just to look these as a business we want to see Luca d.'s as a contribution to that.
He called many of the country and really supporting our employees at the country, Indeed and to see we lapped binion tried to retail where for example, some of our customers that retail Pashtun is our Chinese and we're going to stay close to them to contribute to the recording of the travel retail business to make sure that our.
Long term retail Boston this will benefit from the recall goody the match as much as possible and to start these only gain to restart that I process and to regain momentum not only for us but for the entire industry.
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The next question is from Andrea Teixeira with JP Morgan. Please go ahead.
Thank you good morning, and I just want to echo the congrats on your results.
Thank you.
Yes, so as a follow up on the North America and the commentary made for mix, probably too and obviously there was a it's.
I feel that into holidays is more giftable skincare and fragrance, whose and you also pretty more.
Okay prudently, putting more marketing behind those those those lines. So do you think that innovation and a and momentum continued to build a into the next few quarters or you know we maybe.
But they actually had some oh positive impacts thought that in into the the second quarter. Thank you. So I'll start and a and then for retail and can also add a at his comments.
Yeah, we are progressing towards stabilization in North America, and clearly it was a strong holiday you know.
Oh second quarter for us in a in North America, and and in other parts of the globe. So you know our teams have worked awfully awfully hard to make this this holiday season.
Very good one and done consumers respond and we're very happy about that you know as we look at the back half of.
The year, you know for retail touched on the fact that we do have you know tourists that we expect that that business to be you know a bit softer given given the situation that that we're managing through globally, and you know and and I would also say that North America is making.
Progressive progress. However, you know I would not expect that's the second quarter would necessarily be reflective of continued.
Acceleration from there, but North America team is executing against all of the strategies that are that were laid out last year.
And Ah and we're seeing some good good outcomes from that so what we told you last quarter was North America. You know, we expect certainly the have better performance this year than than we did last year in North America. So that is progression towards.
Yeah.
Lauren asked earlier about the Macy's announcement, and and clearly you know as we've been saying for some time, we believe that brick and mortar you know needs to be taken out of North America North America has been over retailed for for some time I'm. So we're very much aligned with let me as announced in.
Their investor day yesterday.
The doors that actually would be closing in our fiscal year. We're already included in our guidance.
That's helpful.
The next question will come from bark African with Stifel. Please go ahead.
Thanks, and good morning, everybody.
I'm wondering if you could quantify the online percentage of sales from China and related to that also if you could just quantify the impact benefit from.
E commerce accelerating consumption via enhanced availability in China in other words.
Previously consumers would have to visit cities selling the products and I are up 423, but but ecommerce obviously makes the product available everywhere. So maybe if you could just talk a bit about how you think about that dynamic as having helped the past tense sales and how you think about that on a go forward basis and maybe if you think about some of those tier three.
Two to five cities, which didn't readily available.
Product readily available for now people going were run line you. How do you think about that in terms of accelerating the man maintaining that demand and kind of how that will impact future growth.
Yeah, no and there's a very good question as I commented.
The.
Times on the subject [laughter], he's a very important phenomenon because and today, we have physical distribution in China. You went on to 23 C.D. with our most distribute the brands, which are Lauder and clinique and much lower seat coverage in the other brands, which are still only grow trajectory.
So that he is a lot of fees he got to distribution potential in the long term steel and talked about the same time, we we know duties demand.
And in China now in over a 600 cities. So there are over 450 cities, where there is strong.
And that is not yet to see sick of distribution, often pretty steep luxury and for sure, but a speech luxury or just a little bit brands and so this does demand get filled by online.
And get field by when these consume it travels also tried and we deem shine a light.
In the amazing and three key out in markets like China Night on that then Dan where they can access the projects or when they try to 40 internal business for vacation like going.
To be Reno to Shanghai, So thats the situation, but online called it a lot the cities and that's why.
I also is growing and he is very strategic because it gives us access.
To these consumers in a very productive.
The other important positive consequence of these dynamic is that the brick and mortar can remain very productive can remain very focused.
Whether he's the right productivity and online that can cause a productivity. The rest so disease that goosen all minimal continue to grow it is definitely one of the reason behind my comment that we're heading back to them better results also in that tier three tier four.
It is also with physical distribution is not yet arrived.
In term of percentage assays that China is the highest percentage of states on line that suse Adam Mascus. He's on the high side and has continued to grow.
We have time for one more question and that question will come from Nik Modi with RBC capital markets.
Yeah. Thanks, so thanks for the question, depending again I just wanted to follow up on next question did you how much flexibility do you had your turn up the dialogue.
You know really focusing on somebody's names here.
City that you just referencing I'm, just thinking about I've kind of be your addresses and you know if you really want at the turn up the dial to generate sales growth in some of these other tier cities do you have that kind of control in the near term or isn't that much longer term.
I mean, we.
We we have control over.
On the online I mean, if we talk about Boston is like two mold and obviously our online at <unk> by D and remember, we I weighed to be distribution. It also to be Calder edge is we out in luxury and for us selective distribution, which means demand I had to supply is very important so we'd gradually.
The demand and the reason why today demand is growing so fast those in D.C.D. social media because while in the past the advertising was local media advertising was focusing the cities, where there was he's got a distribution social media by definition.
One is national so you out in a dynamic where demand is normally a head to supply and that's the typical demand on the good luxury market and we have feeling these demand gradually and making sure. They we keep the concept of desirability and.
Hi, quality and high quality deals would be experience that we gave to our consumer in mind. So we're not selling Florida's we're selling quality and foolish speed and sees and we only do that when we can provide the best possible service to the consumer so the short answer is gradually.
But yes, we have the kept on BT today, a lot as the market opportunity reveals itself.
And just a quick follow up a bit 450 cities you cited in China opportunity. How many do you believe estee Lauder company has very good handle demand and just a general consumer insights in those in the city.
I would not give you a specific numbers back into you do we have the consumer data. So we we know the number of consumers. It a buying from different C. D. E. Then we use these data analytics.
To decide where to open physical distribution. So we use the demand Andy.
Elements of the strengths of the demand from the city's also to judge our physical distribution strategy to make sure do we continue to provide better hi, hi, touch services to the consumer when the demand is sufficient to be productive and to offer the quality into service that we need to offer.
So it's a good idea development of 42 service.
Very helpful. Thank you.
Well.
That concludes today's question and answer session. If you were unable to join for the entire call. It playback will be available at one PM Eastern time today through February 20 it.
Right recording of the call. These dial 855859 to 056 passcode 44377, Onenine that concludes today's Estee Lauder conference call I would like to thank you all for your participation and wish you all good day.
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