Q4 2020 Estee Lauder Companies Inc Earnings Call
Good day, everyone and welcome to the I stay water companies fiscal 2024th quarter and pull your conference call today's call is being recorded webcast.
Any remarks, and introduction I'd like to turn the call ever to senior Vice President Investor Relations Ms. rainy missing.
Hello on today's call or for Breazeale freed up President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer.
Many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed with the FCC, where you'll find the factors that could cause actual results to differ materially from these forward looking statements.
Facilitates a discussion of our underlying business the commentary on our financial results, an expectation just before restructuring and other charges and adjustments disclosed in our press release.
All net sales growth numbers are in constant currency.
You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor section of our website.
For clarity I would like to remind you that references to online sales include sales of our products from our online channel.
Including brands Dot Com and third party platforms.
As well as its estimated sales of our products or are we have to retailers website.
During the Q1 exception, we ask that you. Please limit yourself to one question. So that we can respond all be within the time scheduled for this call.
And now I'll turn the call over to for Greenfield.
Thank you rainy and Hello, everyone.
Fiscal year 2020 was truly a year, we don't try to though.
As we Deleveraged one of our strongest first polyps record and navigate it with a GDP.
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In both of these dramatically different problems.
I'm pleased led <unk> stores, you know the passion TVT every single.
Our hearts couldn't you know to be read everyone him talk to coffee 19, and we remain focused on the safety and well being about what else lease facilities I think once you want.
The second half of our fiscal year or so much <unk> profound seen as tragic events in the United States highlighted the systemic racially ingested detest blacked out where society for far too long.
June we announced a comprehensive set of commitments to weed fortune, one achieving Russia <unk>.
We stand instead, he died weed out what Blake and please let consumers and black communities in firmly no black lives matter.
Among our many commitments, we're listening and learning to foster city stronger internal culture and advocacy and inclusion.
Focusing on cost into an opportunity to ensure that we are providing more equitable access to professional development and I've done to month for an hour black employees ready shooting dead end to end creative process curate Canadian consistently represents the black students and engaging.
Like professionals.
We are investing for change through a three year $10 million pledge for the company I what brands, our foundation employee matching gates and a lot of funding to support nonprofits and died in the process, making the initial $5 million donation.
Since announcing our commitments we have held off the town halls with our employees and began to you didn't decide gaps in our professional development and advancements opportunity for our existing like talent.
We have also engaged eight diversity focus the recruitment sure and created new that are a city recruit human resources, we have commitment to do anymore. It's a life, it's our company and in our communities.
In the last few months the company and I would employees have also made donations and pledges to organization around award to house limits the spread of coffee 19 and easily related how she faced by the communities in which we eat and work.
We made hand sanitizer for frontline workers high risk individuals in our employees. The production continues in the state at our facilities into United States, The United Kingdom, Belgium, and Switzerland.
Our brands I found meaningful ways to offer support and I beat that he's a shining example, you see Nishiwaki force alone or nursing studies served to connect and they do paid as well as to provide financial and business system.
But youre fitting extend to be Minster online seeds, the opening to Keith and over 1000 hours so be it shortly location.
Actively assisted network during this challenging period of southern closures.
Turning now to the yes performance in the first half of fiscal year 2020 sales rose, 14% and adjusted he has climbed 20%.
Our continued outperformance yelled at strong global prestige beauty share gains.
So our gates accelerated in calendar 2019.
We were well on our way with Ses Cadieux Dabo did you see in adjusted EPS growth.
Despite this extensive temporary store closures worldwide in the second house, it's called the 19000 damage to cool.
Sates fell only 20% and we were profitable as we keep weekly pivoted to online to capture consumption in adjusting our cost structure.
Our most people end user growth strategy, which has powered our success for over a decade continues to be highly effective.
The company diversified prestige beauty portfolio, you've asked and many levers to drive the business.
Our robust global skin care portfolio vibrant online business broad exposure to Asia Pacific.
Engines of diesel.
And then we enjoy both strong and growing prestige beauty Shia and profitability.
Across these engines, it's a little bit brands performance was manipulation in fiscal year 2020, as each achieved its third consecutive year double digit sales growth.
Impressively the brand here a franchise, that's all advanced night repair utilizing Supreme Perfectionists written treats in micro essence old contributed meaningfully to growth.
For the fiscal year skin care performed exceptionally well.
It's the lunar Lemaire, Tom Ford Orijin Stephane ended up <unk> drove growth organically why the category also benefit from depletion of sort of dry.
We delivered excellent performance across several categories.
Thanks to strong repeat purchase rates data analytics to be than marketing you social selling strategies develop duty called the 19th and highly desirable innovation.
Among the subcategories demand for what it elutions sorry, as I'd rate is that before serums and moisturizers into new era aseptic here.
The load at a macro essence lemaire the treatment lotion already jeans, Dr will make a mushroom treatment Lucian delivered outstanding growth for the fiscal year and we expect to continue forward ability in these compelling subcategory.
Beyond watery lotions, our serums and Ikea subcategories prosperity.
For Serums cherished heroes like instead of the advanced night repair and innovation from Clinique, even better line and they slowed it but affection need and renewed three franchise boats. There it grows fiscal year 2020.
Matt New icons and trade launched a few months ago has been highly so it's going to miss out embracing it light detection and new claims.
In EMEA the prouder was the best seller on Lemaire gone into fourth quarter.
Trusted brands likely need flourished online when brick and mortar closed.
In the fourth quarter, Clinique, U.S. prestige beauty Shia Roes on retailer Dot com solidifying its number one rank.
Saves phone Clinique dot com with a lot of just across all of what our brand sites into quarter driven by heroes dramatically different most are rising lotion and most are surge.
Unique promise to Delever, probably just as a simple safe and effective for 16 years of recent 80 loudly online.
Our online business search worldwide in fiscal 2000 at twin.
Delever nearly triple dodgy <unk> digit organic sales growth into fourth quarter, which she is a testament to the capabilities at scale, we had to be achieved.
Each of Brendel Chrome brand boutiques platform, such as T mall and retailer to calm doors contribute meaningfully.
Well now what Brian sites in particular, we delivered nearly 90% organic sales growth globally into fourth quarter.
As we increased investments to offer the best high touch services.
Weekly evolves I like shop capability to offer deal.
We also announced our vehicle trying on to include a more categories. We rapidly deployed life's threem first in mainland China, and then globally engaging makeup activities as well as brand ambassadors for towards.
Our lives streams shoppable, meaning that consumers can make purchases we deem given.
Across the brands Trust fees grew significantly in the fourth quarter and conversion rates rose dramatically encouragingly, we saw strong growth in engagement and repeat purchase behaviors.
Both new and existing consumers shopped, our brand sites more frequently as for example, we already genes and if that older in the United States.
Reinforcing the great work, we're doing two cultivated retain consuming through decent moment.
Consumer have discovered new shopping habits line did that in duty.
NDC through.
Oh ages.
Clinique live streaming series design to both interesting and a two paid let consume it to return more frequently spent four times longer on site and convert it far higher levels.
Brent June live streaming event, we Clinique global ambassador immediate Clark sort of past these newly elevate the conversion levels.
Bobbi Brown launch eat out these three like never before program in May.
Oh fitting consumers one on one as more deal comes from stations National makeup artist. These engaging sections ranged from 15 60 minutes.
Well the 30 minutes make cap that can make cooper session as the most popular.
That should rates had incredibly strong with a high level of units per ton session.
Bobbi Brown continues to scale these programs globally to meet the increasing demand.
This is just one example, the many ways how what brands up building community through these challenging moment and we see these as an exciting evolution of the shopping experience for the future.
Aveda, which led out what brands by first launching Ingredion Glossary Elliott, India, you seeing guest we engage we think the lawsuit. He spent three times more time on a d. the dot com than average.
Five the acting on our commitment to ingredient transparency Clinique man in all regions launch to date and greeting velocities into fourth quarter, if we had more to come.
<unk> 2021.
We maintained our strategy focuses on key online shopping events throughout the year.
Oh, well advanced lending for these events delivered outstanding results for the 618 media shopping festival them, if they do that Brent Sage on chemo type.
And it's safe ranked second among all prestige beauty brands.
Our Asia Pacific region delivered superior sales growth in fiscal year 2020.
But he casegoods Indonesian spend led by accelerating growth in skincare.
Fragrance also exited as consumer desire in the region for our portfolio of luxury in a seasonal fragrance.
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Mainland China performed exceptionally well, it's safe rising roughly 50% organically in the fourth quarter.
Korea and several other markets also grew for the year and fourth quarter driving prestige beauty share gains for both periods.
He mainland China, the premium luxury segment, so prestige skincare a booming.
In fact luxury is the primary growth driver for the two girls category.
For these lemaire is ideally positioned with each heritage iconic ingredients and so Peter.
Let met is helping to grow the category and the branch shares or prestige skincare is expanding significantly which is the idea of combination.
Desire for our luxury in our seasonal fragrances strong in the region and we continue to see the growth.
The fourth quarter, we launched Acadian afraid to come out in mainland China.
Okay, Great initially interest from consumers.
Korea, our fragrance sales soared as Jo Malone, London, and Tom Ford grew with our launches.
He didn't elaborate or so highly so collectively driving trustee share gains in the category.
We have trouble see largely <unk>.
We have focused meeting demand locally across the brick and mortar and online channels as well as localized to see nations Uptravi take.
Hi, and then in particular is prospering student gradually assumes which partially offset the decline of travel retail in the fourth quarter.
As of July duty free shopping allowances in China, and increased more than tripled, which his father boosting consumption.
We continue to strengthen our leadership in to travel retail channel.
Innovation is fundamental to our strategy and even these unique yeah. It once siggy represented over 25% of states. It's will play a vital role in fiscal year 2021, powering the engines that moment <unk> engines of the future.
Reighty out these amounts.
To be launches in skincare line that launched its new concentrate as a potent battery assume newly advanced we'd antioxidant power to be it doubled source of strength against embarrassment of stressors in their aging ethics.
It's still owed to introduce the breakthrough new generation of eats brands icon advanced night repair despite warehouse serum Steve has all the benefits and texture low your consumer no love now feature Inova <unk> technology.
Tested them women of older scheme towards it to me cities and ages eating out of the fast growing highly desired benefits firmness poor minimization, an eight hour anti oxidant towers on top of each existing wrinkle in uneven skin tone benefits too.
Recruit a younger consumers, whether retaining our low a loyal users globally.
It's pockets is being modernize into a lot shooters recycled glass bottles.
Supports our sustainability initiatives.
We have exciting launches to count from Mac and Clinique in makeup as we anticipate trends on the horizon.
Our pipeline in fragrances in healthcare is also robust we newness from Jo Malone, London innovator among others.
Looking ahead, we are confident we can return to our long term growth algorithm of 6% to 8% phase growth 50 basis points of operating margin expansion in double digit earnings per share growth in constant currency.
After it Peter normalization as that that's a coffee 19 subside.
Our CTO.
Sustainability goals remains on track. We are also implementing sustainable offices practices mainland China and is floating green energy solutions there.
For fiscal year 2021, we are investing in several strategic priorities you tend to drive our long term sustainable growth among the priorities are enhancing manufacturing capabilities expanding line fulfillment capabilities inside of the funding growth.
For 218, Asia Pacific, including our new State of Art Innovation Center emotion Guy.
Right. The world continues to confront mania knowns related to the pandemic certain realities and emerge to have accelerated our strategy.
As online as quickly grown we need to more aggressively adjust our brick and mortar footprint.
More closely aligned with how and where the consumer wants to shop.
The past call good business acceleration program, we announced today is designed to rapidly relocate our resources, enabling us to invest in the greatest opportunities for long term sustainable growth like online skincare for China.
First entity. This program, we'd also improved the true TV consistent <unk> of our brand building brick and mortar footprint and better position us to make it, especially actual and omni channel.
Tracey will discuss the program in more detail.
In closing.
We confidentially bring to strengths of the first house and learnings from the second house with us into a new fiscal year.
I want to thank all our employees for your exceptional contributions across the year in most especially the second house you navigate through an unprecedented Peter we grace it made us a bit difficult.
Now I will turn to cool over to trace.
Thank you for a brief yeah and Hello, everyone.
As for Greenfield said fiscal 2020 wasn't extreme tale of two halves at the end of December we delivered our best half year performance on record and by the time, we closed the year on June Thirtyth covert 19 had created the backdrop for our worst second half before.
Navigating through this year has certainly been one of the most significant challenges we faced.
Same time, we're proud to recognize the incredible compassion and resilience of our employees, who continue to support their communities and each other as they also worked does mitigate the business impact of covert 19, and also drive the recovery of our growth.
As a reminder, my commentary today is adjusted for the items that Randy mentioned at the beginning of the call and net sales for us numbers are in constant currency.
And now for the quarter result.
Net sales for the fourth quarter sell 31% as the majority of our brick and mortar distribution throughout the world was closed for much of the quarter.
We rapidly accelerated programs to capture additional growth.
Globally online, resulting in nearly double our online sales year over year.
As a result.
Lyme sales, including retailer dotcom represented more than 40% of our total sales in the quarter.
The December acquisition of Dr. chart added approximately 3.2 net sales growth.
Regarding our regional performance net sales in Asia Pacific or 16%, driven primarily by very strong double digit growth in skincare.
Mainland China returned to previous levels of robust double digit growth as brick and mortar retail reopened and online more than doubled and strong 618 mid year shopping festival programs.
Nearly every brand and channel rose strong double digits in China.
Korea Rose mid single digits, well other markets in the region had been slower to recover.
Net sales in our Europe Middle East, an African region fell 39% with all markets declining.
Global travel retail, which is primarily reported in EMEA.
It's hard hit by the 97% drop in international passenger traffic, but still managed to declined less than 30% for the quarter supported by strong local tourism within China.
Net sales in the Americas declined, 54%, reflecting a very difficult environment throughout the region.
From a category standpoint skincare was the most resilient.
Net sales grew 3% driven by continued strong increases from the Estee Lauder and Lemaire brands in Asia.
Skincare sales also benefited from the acquisition of the Doctor Chart brand.
Net sales and make up sell 61%.
Collecting the greatest impact of covet 19 work from home and social distancing guidelines on consumer preferences, particularly in Western markets, where makeup is the largest category.
Fragrance net sales declined 56%, reflecting the impact of store closures in a shift in consumer preferences from personal colognes.
The hand wash and home fragrances.
Our hair care net sales fell 35%.
Most stores and salons, where shuttered during the quarter.
Our gross margin decreased 840 basis points compared to the fourth quarter last year as we expected.
And number of factors contributed to the decline and most were triggered by the impact of Cobot 19 on our sales and on our manufacturing locations.
Increased obsolescence contributed more than half of the decline as demand for all products, particularly makeup with sharply curtailed by cobot 19.
Inefficiencies caused by the temporary shutdown in some of our manufacturing locations and the implementation of social distancing measures reduced capacity and triggered a requirement to recognize these manufacturing costs in the current period, rather than wind up here the product is sold.
This contributed approximately 210 basis points to the decline.
The inventory step up related to the Doctor Jarred acquisition increased tariffs and other supply chain impacts made up the remainder of the decline.
Operating expenses declined 22%, reflecting the $550 million in cost actions, we implemented during the quarter.
However, the sudden and dramatic sales decline and the gross margin impacts I just mentioned resulted in a 228 million dollar operating loss for the quarter.
The diluted loss per share of 53 cents, including three cents of unfavorable currency translation and six cents dilution from the acquisition of Dr. chart.
Let me now discuss a few elements of our full year results.
Net sales declined 3% in constant currency, reflecting the record performance in the first half followed by the impact of Cobot 19 on the second half.
Our distribution mix shift continued to evolve accelerated by covert 19.
Online sales growth accelerated during the year and continue to outpace other channels.
Online, including retailer Dotcom represented 22% of our total sales during fiscal 2027 point increase compared to last year.
Travel retail delivered a strong performance despite the sharp downturn in the second half and grew high single digits for the year ending fiscal 2020 at 25% sales.
Department stores globally, including their retailer Dot com business represented 31% of fiscal 2020 sales and North America Department stores were 9% of our global sales mix.
Our gross margin fell 220 basis points to 75.2% driven largely by the factors I just described in the fourth quarter.
For the full year the increase in obsolescence comprised about half of the decline.
The covenant related manufacturing inefficiencies were approximately 50 basis points and the Doctor Jarred acquisition increased tariffs and other supply chain impacts caused the remainder of the decrease.
Operating expenses declined 240 million or 3% for the year, reflecting savings from leading beauty forward and our ongoing cost initiatives as well as they can cost containment actions. We took in response to cover 19 in the second half of the fiscal year.
Our full year operating margin fell 280 basis points to 14.7%, primarily reflecting the gross margin declined 40 basis points dilution from the inclusion of Dr. jar and the de leveraging effect of lower sales.
The capabilities, we built during this time and the actions we took and are taking should help position us to emerge strongly when the recovery is in full swing.
Our effective tax rate for the year was 23.2% an increase of 200 basis points over the prior year, primarily driven by the geographic mix of earnings.
Net earnings declined 24% to 1.5 billion and diluted EPS fell 23% to $4.12.
Earnings per share was negatively impacted by four cents from currency translation and 11 cents dilution from the acquisition of Dr. chart.
We recorded 1.2 billion after tax or $3.31 per share of impairment charges, primarily related to our makeup brands that were initially challenge by a general slowdown in the overall makeup category.
And along with certain freestanding retail stores have been further challenge by the impact of Cobot 19 on consumer demand.
In fiscal 2020, we recorded approximately 68 million after tax or 19 cents per share in restructuring and other charges for our leading beauty forward initiative.
We remain on track to substantially complete initiatives under the program by the end of fiscal 2021, and we continue to expect annual net benefits of approximately 475 million before taxes.
These charges were partially offset by the gain on our minority interest in Dr. chart and favorable changes in the fair value of contingent consideration.
As you have heard Cobot 19 has created a number of disruptions to our business, including accelerating changes in our distribution mix that had been expected to occur over a longer period of time.
The post cobot.
Isn't this acceleration program that we announced today reflects the need to accelerate additional organizational changes during fiscal 2021 to operate more effectively in the post covered reality.
We expect to close select department store counters and between 10% to 15% a freestanding retail stores, primarily in Europe, and North America, well also further supporting the accelerating consumer shift to online shopping.
This necessitates commensurate changes in our commercial organizations that will result reduced the number of employees by in that range of 1500 to 2000, primarily point of sale and support personnel related to those retail locations.
Well some positions will necessarily be eliminated we also plan to increase investment in online talent and capabilities, including online consultation my sales associates.
We also intend to reinvest a portion of the savings from the program to further build out our online technical capabilities, including accelerating omnichannel capabilities linked to our retail stores and to increase digital media to reach both new and existing consumers.
The program is beginning now and we expect to realize result fairly quickly mostly in the coming two years, we expect to take charges of between four and $500 million through fiscal 2022 and generate savings of 300 400 million before tax by fiscal 2023, a portion of which will be.
Reinvested to drive growth.
Moving on to cash flows cash generated from operations was slightly below last year at $2.3 billion, reflecting lower net sales, partially offset by cost actions and favorable working capital.
We utilized $623 million for capital improvements, primarily supporting our ecommerce capabilities supply chain improvements and information technology.
We eliminated or defer at approximately one third of our planned capex, mostly related to retail stores in office space upgrades.
We also used 1.04 billion net of cash required to purchase the remaining ownership interest in Dr. chart.
During the year, we borrow 2.7 billion net of repayments to both fun the acquisition of Dr. jar and to provide liquidity and flexibility as the cobot 19 impacts spread during the second half of the here.
We ended the year with $5 billion in cash and cash equivalents and 6.1 billion in short and long term debt.
Even with these liquidity actions and with lower earnings. We returned 1.4 billion in cash to stockholders during the year via dividends and share repurchase activity.
In August we repaid the remaining outstanding $750 million drawn on our revolver.
In the near term, while we are encouraged by the gradual reopening of markets around the world. It remains difficult to predict the duration of the pandemic, the timing and trajectory of the recovery and the corresponding impact on our business, even while online remains a significant bright spot.
We're stores are open we are seeing traffic returned slowly.
We're also mindful of the risk of a global recession, and a likely slow recovery unemployment as some businesses in western markets remain closed and many government support measures taper off.
Therefore, we're not providing explicit sales and EPS guidance for the full year.
However, we can provide you with some underlying assumptions to help at least frame some of your expectations for the year.
We do expect to see progressive quarterly sales and profit improvement as retail doors, reopen and traffic and travel gradually resumes assuming no significant second wave occurs.
Given this expectation for the first half of the fiscal year comparisons to our record performance in the prior first half will be difficult with sales and profit below prior year levels.
Well online is expected to perform strongly the momentum for recovery in brick and mortar and travel retail will not be realized until later in the second half.
Conversely, we expect sales and profit to grow significantly in the second half of the year against a period of considerable cobot impacts, particularly in the fourth quarter.
The inclusion of six months of incremental sales from the acquisition of Dr. jar should add about one to two percentage points to sales growth for the fiscal year.
Pricing is expected to add another two points of growth.
Our manufacturing capacity is back to near normal levels, and we expect our gross margin to recover accordingly.
We expect to realize the full benefit from leading beauty forward in fiscal 2021, and we will continue to maintain some of the cobot 19 cost controls as we progress through the first half of the year.
These savings are expected to give us the flexibility to invest more in digital marketing and advertising to support innovation recruit new consumers and drive brand awareness, while also supporting our operating margin recovery.
Our full year effective tax rate is expected to be approximately 23% and net interest expense is expected to be approximately $170 million.
Capital expenditures are planned at approximately $900 million as we continue to invest in additional manufacturing and distribution capacity technology and data analytics research capabilities and E commerce to support future growth.
And as you saw in the press release today, we declared a quarterly dividend of 48 cents per share.
We also expect to reinstate share repurchases sometime during the year as we gain comfort that the recovery is more sustained.
As we are already halfway through our first quarter, we are more comfortable providing guidance for this quarter.
At this time, we expect sales to decline, 11% to 12% in constant currency.
Sales declines peaked in April and had been gradually improving each month as retail markets around the world reopen for business.
The incremental sales from Dr. jar are expected to add about two and a half points to growth and currency is expected to be dilutive by approximately one point.
We expect first quarter area of 80 to 85 cents, reflecting the sales outlook continued cost containment measures and investment in key growth areas like online innovation in China.
Currency is expected to dilute EPS by one cents and Dr. John is forecast to dilutive P.S. by six cents.
We look forward to leveraging the tremendous strength of our business and driving a strong recovery in the new fiscal year as the market accommodate.
Protecting our agility to invest appropriately for both the near term recovery and the long term opportunities inherent in global prestige beauty is paramount to the strategic actions, we're taking to continue to support long term sustainable growth.
On behalf of for Brito, and the Estee Lauder companies leadership team, we give thanks to all of our employees around the world for their extraordinary efforts to manage during this unprecedented period.
That concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is now open for questions. If you have a question you simply pressed to Starkey followed by the baby one on your Touchtone telephone to ensure everyone has the opportunity to ask their questions. We will limit each person to one question time Committee. We will return to you for additional question is to queue up again.
Hi, pressing the star key and they take it one.
Our first question will come from the line of Erinn Murphy with Piper family.
Great. Thanks, Good morning, I'm I guess my question is for greet you know you know you've had a lot ethic stuff and digital that was really expanded upon the quarter have you changed your views on how you view Amazon as potential beauty partner and then secondly, its doors are starting to reopen can you just talk about how consumers are in her.
Thing with at stores. Thank you.
So.
No.
Not changed our point of view at this point of time on a non zone, we see saatchi.
Huge long term sustainable evolution of our online that we want to focus on that and specifically I want to explain what's happening to online hi, no. Our our last quarter, our online business was growing <unk> type of.
These include.
90% grow to an hour Randall.
Great War on retail dotcom.
Plus percent and also triple digit in our platforms I like it did.
These increases, particularly the brain dot com and platforms using crazy I, what guided to once you win business, which means increasing our data availability of consumers and increasing our beauty to not get these consumers yeah. The thing we see it dramatic increase includes.
The wedding eating the world online and because these that that engagement, we have drive loyalty and repeat about what you across those like never before.
And finally, we really see increased almost exclusively meaning the consumers that will read the they're buying more exclusively I what brands in our brands online and we see at Rivaldo new consumers across all age groups was was not the case in the past where the younger age.
A group was ahead now we see really increase across all ages.
He's a tremendous.
We stayed focused on leveraging these opportunity.
Yes.
The other thing we're doing easy investing in creating better omni channel capability, which brings you bridge to your second part.
Which is what we see each store, we see that brick and mortar stores are it would remain very important.
But they will lead to be linked more wherever possible in an omnichannel waste with the online sequence you might expect to foolish speed and ended pretty good Martha Stewart do we need to become even more experienced over to attract the right traffic on top of being omni channel and so we have spent brick and mortar to be better.
Paul what kind of computer begin brand building that we need as we explained in the prepared remark to rationalize it because we need to increase Pluto TV, we need to bring that the crude TV level did it being diminished by the cockpit situation and bringing back the prudent TV, we make the brick and market more system.
For the long term, we continue to bleed in a sense attractive Brendan.
Thank you.
The next question will come from the line up Lauren Lieberman with Barclays.
Great. Thanks, good morning.
Wanting more [laughter] worthy until then we could talk a little bit and about North America, and true underlying branch performance and and take away the well, they're taking you know anything you could share I guess, one in terms of brand Dot com performance.
And then to the degree to which existing retail inventories. So you know retail inventory. It at Department stores. An example, and specialty multi what's sort of redirected kids are still online orders such that maybe the shipment numbers that you recording don't really give us.
Like a whole read on how the brands were actually performing.
During the quarter Bank.
Yeah.
So first of all your first part to the question in North America, Our online business has been exceptionally strong and our brand dot com business has been really exceptionally strong and a good penetration of the online business. It has increased dramatically up to the 40%.
And that and so that they changed now a lot to these would be sustainable for the reason or was this blaney before meaning that repaid dot com is increasing as a reason why wouldnt be sustainable.
Engagement with the consumers there is increasing our brand or chrome increasing the 90% east sustainable because we feed from the consumer engagement for demand to time people stand on our brand or chrome just to give you a sense.
Dr points that deep mutual try on the with our board shopped with consultants that we about or D entertainment activities that we got it didnt.
Story is split nation of innovation all these.
Broking some brands on its diluted as an example, we have consumer the spend 26 minutes of our site interacting with us for yet so we see real lead time of interactions simonton gauge and going up. So this is it wouldn't make these very sustainable growth over the long term and John with our new technologies, we make.
It probably one of the best consumer experiences or sign luxury goods you want to speed <unk>.
Vince and all omni channel capabilities. So that that's what's happening now to be clear. This was in our plan is worth five two of our come.
Back he called me 19, and PCP these trends in the speed of matching that these trends will be at least.
Thats, what we see.
The impact of coffee and tea outbreak. Okay that is also expected to disrupt the beacon Mark in the near term using costs include you know the store closure in department stores, which are hopping, obviously in the quarter last quarter. They were closed many many cases closure directed by we'd also be out there.
Future as recently.
<unk>.
Last called in 19 acceleration program and then we are cautious of the high level of unemployment and that that either second quick suicide.
In general.
And we see or so these are steady, but PBT for the time being that makeup category.
We are managing through these people working towards online business explain supporting also supported by our new understand granular understanding your consumer and the biggest ability to that.
Right.
And in our post called in business acceleration program. We look I'll have accident rate decrease from you know what freestanding store you know with department stores and should work really to rapidly bring proof.
Thank you.
Hewitt brick and mortar location, which is what.
Now in the shorter but also we continue in the media tour and whether it use our fixed cost issue that also making the region, becoming more profitable we the different mix between online.
And the only thing I'll add Lauren is the the brand Dot com business in North America in the fourth quarter was up almost 70%.
And represented about 60% of the.
The mix of business. So it was a it was a very strong performer as you might well imagine and that to for Pcls point was the case really across across all of our markets.
Thank you.
Our next question will come from the line of liquid <unk> RBC capital market.
Yeah. Good morning, everyone. Just a quick clarification I can you confirm the online margins are you just for the corporate average that was just a clarification and then proceed for Brazil, I mean, how do we think about you know the post cobot plan and kind of what you're targeting for like online as a percentage of the overall.
The seven point increase is quite dramatic I'm, just curious how you're thinking about evolution over the 24 month period over this program.
I don't know I can tell you know our own line margins are stronger than average so.
The development of our online business is accretive to the business that.
And how we think.
I think you know piece I mean, we're thinking of it continues growth of the penetration of online.
I'm not going to give you specific number because as long as to be should be recur in the future, but is it going to reference.
We have to de at the level of 40% in the most.
That looked online marketing work U.S., UK, China and other markets growing tremendously from the much lower base then these three markets.
Equity market that he is a tremendous growth.
The potential is very high and we will learn more about what.
Lending.
But he is going to be significantly higher than today.
Yeah. So we we finished the fiscal year I'm 20 at a at a 22% online mix as we said in our prepared remarks than we would expect.
Online penetration to grow from there even with the strong.
Growth in the fourth quarter, obviously with a lot of our brick and mortar close during during much of the quarter. We do still expect see I'm higher penetration in fiscal 21 of online on top of what we saw in full year on fiscal 20 with a portion of our in more doors closed so to Fabrizio point.
The acceleration of online that we are prepared to continue to sustain with all of the programs that are that we implemented in Q4 and unexpected continue along with other capabilities that we're adding in fiscal 2001 should continue to sustain a lot of those consumers that.
Perhaps discovered shopping online for the first time or at least certainly was was our record of of them for the first time and May continue that continue that practice.
Thank you.
Our next question will come from wind up more past pushing with Stifel.
Yes, Thanks, and good morning, everybody wanted to ask so.
Your your growth in calendar first top 20 slightly above what estimated market share for prestige looked like at least estimate about one of your.
Larger peers, but also then slightly below the growth from that larger pure which has been somewhat consistent in recent years I guess, you, perhaps talk a bit about the dynamics of that and how do you anticipate share trends to.
Progress kind of through your fiscal 21, maybe segments geography or kind of what perhaps a it has driven some of that underperformance, what you anticipate for the future and kind of your maybe your for all wrong. It kind of looking at that point that out as well. Thank you.
Yeah.
I'm not sure understood completely the way you frame the question, but basically we have growing.
Lose market share.
ER in prestige hour.
Loop a market leader.
And that the total market share is growing and he is growing.
Ahead of our competition engine.
Global level, because we are focusing on behavior.
This growth and most importantly, we are focusing on the areas profitable sustainable long term growth.
And it because these two is growth not there are areas office business, where because of our historical business model.
We are losing market share in some cases are we losing more market share than some of our competitors and those are specific this is it's easy to the U.S. full access to some extent.
But the areas like China try the retail Asia in general we are growing we're growing very fast so.
Our strategy is not to at our most people engines of growth.
To grow all at the same time at any cost we are trying to boot. The resources. We are looking to resources, where there is the highest sustainability and reader richer in that sense, we really look at the key measure of the global market.
And so that's on Sept parts of your quick other pockets based on how we see these markets should developed by quarter.
As we explained in our prepared remarks.
We see it really a gradual improvement although I would be.
Fourth quarter, you read fiscal year two anyway.
We explained with these are with you this quarter second quarter would be better and last semester.
Really strong and that's our view of the recovered in DC is a reflection of the way the stores, which we hope and call good wins.
Would it be manage around the world and the markets, particularly the consumer sentiment in different parts to the award.
Where the consumer sentiment is reestablished where called it is allows you to most of the China like China, we're seeing tremendous business and tremendous shared gain so is it also.
Eight or consumption in market share that was the core of your question, we see a gradual exhibition in recovery.
Yes.
Okay as Gideon.
Tracing maybe you want to us.
No and obviously, we have not provided a guidance for for the year for obvious reasons as a as we don't know how are the recovery will progress or or or covert 19 will impact a global markets for the fiscal year, but as we think about the second half.
Of the here because I know, we tried to provide you with as much as.
As we were comfortable providing as it relates to the guidance, but if you think about the second half of the year comparable assuming that there is a gradual recovery and there's no other shock to the system.
Very can be able to our fiscal 2019 S performance stronger sales growth, but but you know comparable to our fiscal 19 Dps growth and that's with obviously the tax rate and and the the interest expense call outs that I'm.
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Our next question will come from the line of lending into food cities.
Hi, Good morning. Good first question is on the stores that you will keep open you know can you give us some sense of what that footprint will look like maybe bike brand and by geography, and I know those stores, even though they spend.
Was that your clothing, they may have been unproductive, but they still have served as you know great ways to build customer relationships and they're great branding vehicle and all that kind of got stops on so so how much of the savings from closing those stores do you intend to drop to the bottom line versus reinvest to offset the benefit of that ran daying.
Present that you well on that you've had historically thank you.
Yeah, Let me start and then Crazy may add some <unk> first of all we we are doing what the consumers telling us they want.
So we are following the consumer preferences evolution and second we are responding to the decisions about what it the Boston because to be clear.
Repeaters, which are reducing the number of stores relocated which are closing.
So first of all we need to reflect what is the reality to the Mark second we need to be flat for the consumer preferences are.
And these will result in closing stores, which are at least productive and so the stores that we remain which is obviously the large majority these stores would be more productive and will allow us to make these store if.
And in the appropriate cases or should we be shut.
And that and these will make these stores not only sustainable for the long term, but would make these stores brand building, while at the nonproductive doors, which I know working and there is no traffic frankly are losing that power beam.
But the larger majority to the remaining brick and mortar we remain we'd be more productive it wouldn't be a fantastic Brent.
We continue to create the relationships you have experience.
But the unproductive stores of the award frankly, not very productive relationship.
And the on the contrary online new ways to work in particularly the new will consume it to engage on line is becoming much more relationship building much more brand building than ever before and I think you try to summarize what gives you might be the biggest change of coffee 19.
That it made all the online channel lender Com platforms. You are please repaid dot com much more branding aging and so much more fully luxury <unk>.
Thanks to technology than ever before into two lots parts of your question savings from these pretty good improvement because north that we'd be impact obviously going to the bottom line, but I think part will be reinvested will be invested making it the remaining brick and mortar store and.
Our online much more brand building and growing faster and continue to create US then the relationship.
Not to underestimate the fact that lot of the strong online growth using Brenda common platforms. So where we have the doctor access will also give out much more information data insights to manage the consumers and the business.
And the only thing I'll add to do that as most of our stores are profitable. We have had you know a portion of our stores is as you have heard us talk about the mix shift we've experienced in last few years.
Some of our stores, you know became more marginally profitable and obviously cobot 19 accelerated some of them into a losses, we think about recovery and what to expect in terms of brick and mortar recovery. Those our stores that now we believe me to need to close and as a as.
You all know.
The the de leverage related to some of the fixed cost of a freestanding stores when they are not productive.
His oh is burdensome and a and certainly prevents us from being able to invest behind recruiting new consumers and from a digital marketing perspective. So those are the stores that we will be taking action on they were you know I'm on that marginal Bob bubbles in with and a answer.
Certainly.
Have become a loss, making now that and we don't expect them to recover from from loss, making as it relates to our mix of stores you can imagine a as well you know clearly in the more.
Mature markets like like North American Europe, those are where the bulk of the stores are a that we will dressing.
And with the challenges and the makeup category I'm, a number of our and make up area, but they're not just make up they do comprise or some other some other locations as well where mall productivity has declined and or street productivity has declined with some of our freestanding stores.
Oh No question will come from the line, we'll see powers put Deutsche Bank.
Great. Thank you.
Okay. So I guess, if if we met.
All of that together and fast forward, so when you're sale do recover to pre Tobin levels.
Your expectation standing here today that the resulting profitability of margin against those sales will will be higher than before just given the productivity in restructuring efforts in the mix shifts that we're talking about the online and skin care or are the reasons to believe that that maybe delayed given given the growth Reinvestments you just spoke about maybe some residual weakness and.
Higher margin channels like travel I guess.
A little bit more color as to how you're thinking about all that.
So and obviously margin, we don't expect will recover this year and and certainly with the actions that we're taking.
We would hope that we could recover back to fiscal 19 margins by my next fiscal year, but but you know that just is just the pattern.
As we would we believe in fiscal 2002 again, all things you know all things going smoothly, which is up in the case the last several years, but.
That in fiscal 2002, assuming a normal normal year.
We will be back to the margins that we had pre coated.
And you know and Wouldnt progressed from there as Fabrizio indicated in his prepared remarks to back to our 6% to 8% topline growth and 50 basis points of margin expansion.
Our next question will come from the line up for touch points with Oppenheimer.
Good morning, Thanks for taking my questions. So on other makeup category I was curious just to get your perspective in terms of how you guys. I think the makeup recovery could take place from here and it also I guess related question I know ops losses related to make up with a big headwinds on the gross margin line in Q4. So just curious whether that Hadnt would continue well into into this fiscal year.
Thank you.
So I'll answer the second portion of that question you know, we clearly adjusted our demand plans in our forecast to to be more in line with the trends that we're seeing in a in make up this year even in the recovery.
One of the things that we have seen during covert 19, there has been even an acceleration from a penetration standpoint of interest in skincare and we certainly expect that to continue next year.
We have some great innovation programs behind our makeup brands as well, but we are adjusting our forecast to to the level of of consumption, we expect coming out of fiscal 20.
And in the ramp up through fiscal fiscal 21. So we certainly don't expect to see the same level of obsolescence unless there is another complete shutdown of business and we don't expect to see the same level of obsolescence in fiscal 21.
And then.
Yes.
Yeah, Yeah and to the into the question all the a will make Cobb recall there absolutely midcap is a category.
He's coming back is what we see is the fact that are well call. It has created on the consumer sentiment to consumer behaviors that resolved. So weird masks. Many parts of the award, which I didn't mean lipstick.
He's out to be homes, and having less interaction that social interaction between people and that he's also frankly stress the quality and that the situation today, many parts of towards creating that.
Couldn't use even less to the use the captain yen is part of enjoys momentum and do moment more than anything else and.
So we expect these two can begin to come back and now disease now into pulled into abuse, but my point of view that mid cap cycle, we come back very strongly as soon as consumer sentiment will be back up.
We did that you should we see these categories again, and we'll be ready for that.
That's exactly the essence of the most people engines of growth that.
In this moment these skin care and the reason why skincare somebody was asking me if they get sick.
It's finished you're already member Lipstick index cones. It was the beauty easily CDN category, both institutional classes like this one and in degrees intuition of recession Reis se because they are affordable.
Purchases for.
Thank you yourself.
And into consumer I really love their routines now this is remain exactly true.
What these changes the category because of what qualities lipstick was not the right category to indicate that by the receipt and see you will then review.
And he's very strong market, where the way I and cities Lipstick index is being substituted by the most arises.
But the concept of index is still there if he's.
Category and make up weaken back when consumer sentiment.
The next question will come from wind and stop with book with Jefferies.
Thank you I question relates to trial in discovery to treat the you mentioned you have new launches planned and also for making you talked about some of the emerging technologies live streaming virtual try on but you are you thinking your online business can you talk a little bit about how you think about trial in discovery going forward, whether its make up or.
Emcare and then also just entered planning your comments on data customer data and data Axa. Thank you.
Yeah first of all try a discovery is going very well and.
What is evolving continue to be very strong is obviously try that it's called the store is always being the coupon, but what he is evolving it's robin try the discovery online and in the way disease hop in its first ago, we see and I I said this before we see consumer spending much more time.
So the level of engagement the level of relationship with our online sites.
These increases they spent time in days, but it's time to discover knowing to remote trial, we are making it very big new investments since online. So you you will go and buy online for example in our brand Dot com.
We're pretty sure it hero products and then you will receive.
Samples, although our Dr. subject you may like around that when you open your park.
And Andy's way, we see how we had driving trial, we have driving discovery frankly stronger what we've ever been.
Stores, because the ability to know what people would like based on data to get that we did BDP to interact with people. We more time your line relationship and two sheep to their home than me toxicities allow us to me try them try it does cover everything.
Just a matter of techniques that we choose so this is the moment, where I believe trial discovery.
Can be further enhanced the luxury business model.
We are looking for hours.
The next question will come from the line Michael Binetti with credit please.
Hey, guys good morning, Tracy for Brazil.
We'd rather ask your long term question, you're right you want to clarify one thing that Tracy mentioned treated think he said the second half of the year earnings performance will be the same as fiscal second half of 19, and then I think later, you said EPS growth would be comparable to fiscal 19.
Maybe you could clarify that as I just looked back at the model you did about $2 nine Centsone P. us in the second half of 19, I think everybody's probably going to hook models to that comments would help to get a little clarification. There and then I guess and I do need to be near term, but it seems like it was first quarter guidance bakes in about 800 basis points of an operating more.
Jim contraction I think he said the gross margin should start to improve and obviously with the factories open you'll see less of the accounting drag there from idle factory overhead accruals I know historically reopening with yesterday, it was down but half a billion dollars in the fourth quarter. It seems like it should still be meaningfully lower year over year, even if retail starts to come.
Back online so I want to make sure I understand what were the pressures on the margin might be in the first quarter related to what you guys.
Sure. So let me start with the again reiterating the fact, we are not giving guidance. So you know as as we try to help you frame your model for the year given the fact, we're not giving guidance one of the things to think about as we you know believed that the second half of the year we will.
Still be a recovering our sales growth will be more normalized assuming no additional.
Impacts from Cobot 19.
The way you could think about our second half Es is similar to our adjusted fiscal 19 S. In the second half.
And again, you know with a with the ramp up an acceleration in and sales that are that we expect to see so that is a way to kind of think about the second half of the but again.
That depends obviously on a continuation of progress as it relates as it relates to the recovery.
As it relates to the to the first quarter, what what we said in our prepared remarks, as we do expect gross margin to to recover.
And and so when you when you think about the the margin for Q1, one of the things. We are doing is investing in advertising, so even with l. down in the quarter and we have the launch of our you know a one of our most popular.
Products advanced night repair and.
And that you know it is that we are supporting with total advertising some of the online initiatives as well we are supporting a with additional advertising and other innovation as well.
So that is a piece of what's driving.
Some margin de leverage in the first quarter on the other piece is higher shipping cost. So we are still catching up a bit from you know our plans starting up.
Well more slowly as it relates to social distances, but but now ramped up but really catching up on some of the shipping on to replenish.
Some of the some of the product that that was low on inventory in certain in certain markets. So I'm. So that is driving a piece of the margin.
And then when you think about as you know, we obviously have higher net interest expense. So we have higher interest expense and we have lower interest income given where rates are today.
So the combination of that is also putting some putting some pressure on our EPS in the first quarter I'm in the last piece, obviously as I do quote the tax rate, which would be the tax rate, we expect to see in the first quarter as well.
Thanks, a lot because there will be should help.
Sure.
Our next question will come from the line of internal Carroll with JP Morgan.
Hi, Thank you on a good morning, everyone. Then so be sequentially can you help me understand the trouble, we feel performance embedded into first quarter guidance.
Now that you have more than half of your quarter.
And just a clarification on the school Clinton said same thing is just described for the first quarter. So it's going to your thing.
Let's do a lot of the pressures that we signed the quarter. So if you can help us understand like that that's baked on on.
Some of these expenses right like a travel would be my Chris My main question side.
So I'll start and and then let retail share his perspective on travel retail. There you know there are still travel restrictions. So travel retail is still largely.
Closed in in the first quarter and and again, we expect travel retail really to be the slowest two to recover now again, we are seeing traffic.
Locally and in Asia in particular in China, and and so that is you know continuing to pick up and and Ah and for me to address some of that in his prepared remarks, but but we do expect the travel retail will be the slowest too to recover.
As it relates again to the to the first quarter.
You know it relative to the fourth quarter I guess, we'll I'll add to what I said just previously.
We did have some furlough programs in the fourth quarter on that also are not repeating in the first quarter. So that is another piece of why the expenses, if you're comparing the fourth quarter to quarter.
Might look a bit higher so it's the advertising it's the shipping.
Cost and you know and we do have some of the furlough programs that are that we had in the fourth quarter that will not be be repeating probably for EQT. <unk>. You know when you look at the quarter, a more comparable quarter would be the third quarter last year relative to our first quarter. This year in terms of.
Overall performance.
And I'm very helpful.
Well that will add on to try to Ricky is that first of all the in the long term, we believe trying to retain we couldn't be it continued to be very exciting.
In this moment that traffic is very low.
For example, the conversion of travelers into bias is increasing dramatically.
In Asia easing the biggest past travelocity globally and the good news the Asia is going to recover faster than the west driving traffic and the conversion did even by treating so basically by trying to repeat on line.
In Asia, even stronger than the rice work. So the good news that will over time.
The current lack we'll try to try to Dave is that the recall the starting from Asia Asia is the biggest.
In the most interesting property segment, yes.
Then team to see Treasury data in these moments the number of trying to educate also in the last quarter a minus 30%.
As being.
Better than than at least we.
There are three dogs because of the many closures around the world. The reason why it's been better got some mitigating factors, which are very important the most important I mean do the factor that is being.
Our China local internal problems that in many cases east usually travels liking the Hainan Island.
And the extraordinary increase.
The Chinese buying we'd be in their local three travel.
Yes mitigate.
Like the international travel, but then you can expect for the long term when the international travel we'd be restate that these local internal troubled would not go away and so there will be stronger even more exciting long term target markets to manage can reach.
We are to the market either and so that he loves to long term potential.
Two into that and then very exciting to see what's happening in China, particularly for for the future.
And the only thing I will add back you know in terms of quarter four versus order, one obviously being down 30% in sales in Q4, and and progressing to down 11 to 12 in a in Q1 and we are seeing obviously a pickup in.
Our brick and mortar business and so in July in fact, as Fabrizio indicated we actually had positive sales growth and that was related to some of the restocking that we saw in the trade for doors that had been closed and a and you know are now reopening. So I'm. So we are seeing policy.
And if signs that we will expect to continue to see throughout the first half I'm, even a as brick and mortar recovers a more slowly than Ah then obviously the strength, we're seeing continue in online.
Well thank you.
And we have time for one more question. The final question will come from the line Olivia Tong with Bank of America.
Great. Thanks. Good morning, everyone first just a follow up could you just say that July was positive overall or specific to the channel.
And then just.
Generally speaking I wanted to ask about the balance between.
Containing cost and supporting the top line because it's clear that your investments present in the top line. The last couple of years pre pandemic. So as we think about the time, you're getting back on your long term algorithm clearly the focus and efficiency can talk about how the organization claims to balance achieving.
Both of those things concurrent.
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So my comment on July was was global and it was a and it was sales growth and and.
A lot of that are being driven from North America actually in terms of some of the restocking within within North America, and still seeing growth obviously in markets like China and Korea, the same markets that had momentum in.
In the fourth quarter are much more moment, but you know every market is is improving a bit as a as doors reopen and we start to see traffic flow back into just stores.
But a bit July really was a restocking from a you know from many of our retailers that had had their doors closed and we're sourcing some of their online sales from their brick and mortar doors.
In terms of so yes July was positive comp.
But the.
To.
To speak about your second part to the question is the focus on the top line. We are we intend to remain in high growth company. So that we had really focused on growth and but we have focused on profitable growth.
And in the shorter we are we remain focused cost containment to make sure. We preserve the resources to invest in growth. So the cost containment not what proven and he's never sure store is always designed to preserve and relocate resources for investment in long term growth and obviously.
To drive profit that the.
The right level so.
We think about and in our compounds in our strategy process, a very focused in the fine the key areas of growth and yes, we are sustainable profitable growth and to invest in order proportionately and to continue to allocate resources.
That's what we're doing and also our restructuring program is.
He's also designed to give out the flexibility to continue doing that.
In the call. This situation spike that we are being local officials to mitigate the short term impact lacosse, we'd love to reduction of course.
D.
And we had really focuses on recall that the coupon the quality of our top line that overtime gradually bring back our profit.
In our ability to continue.
Two continues to deliver the kind of vps double digit EPS growth well into that even in the long term.
But also like to close this is the last question see even these call. These crisis as we tried to do an equity crisis I truly believe we're coming out is a better company and yet you are focused on the.
Profitability side is company can go but being high growth and be high growth with strong profitability.
But also is a better company inclusion in sustainability in the technology and all of these together will make us.
The employer and strongly loyal employees and of consumers and I think that's very important value for the company, we are which I company very long term photos and I think this crisis be managing anyway, we remain very long term for school.
And we remain better would be.
And that concludes today's question and answer session. If you were unable to join for the entire call I play back will be available at one PM Eastern time today through September 32 here recording the call. Please call.
Hi, Fi 8592 056.
Passcode 417, 0137 that concludes today's asked a lot of conference call I would like to thank you all for your participation and wish you all the great thing.
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