Q2 2021 Estee Lauder Companies Inc Earnings Call
Good day, everyone and welcome to the Este Lauder companies. The scope 2021 second quarter Conference call. Today's call is being recorded and webcast for opening remarks, and introductions I would like to turn the call over to the senior Vice President of Investor relation.
Ms Rainey Mancini.
Hello on today's call our trip rates, you're afraid of President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer James.
Since many of our remarks today contain forward looking statements. Let me refer you to our press release on our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward looking statements.
To 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 on.
Net sales growth numbers are in constant currency and all organic results exclude the impact of acquisitions.
You can find reconciliations between GAAP and non-GAAP measures in our press release and on the investors section of our website as a reminder, referenced in the references to online sales include sales, we make directly to our consumers to our brand dotcom sites and through third party platform. It also includes the estimated sales of our products through our retailers' websites.
During the Q&A session. We ask that you. Please limit yourself to one question. So we can respond to all of you within the time scheduled for this call and now I'll turn the call over the Fabrizio.
Thank you, Jamie and Hello, everyone.
Let me first wish the each of you, adding good health and that your families the world.
Our hearts continue to be with those impacted by COVID-19, and our focus remains first and foremost on the health and safety of our employees their families and our consumers.
Our employees.
Lifted us from catering for the physical and emotional well being of colleagues to making hand sanitizer seeking opportunities to support charities around the word generously contributing to the year to seek care employee relief fund and so much more.
In December the company made an additional donation to the employees fun and we continue to make progress on our citrus the sheep and socially but the commitments.
Our employees' agility and creativity empowered the company to deliver the exceptional results we announced today.
For the second quarter and fiscal year 2021 sales rose, 3% at 12 point policy. It is wing from the decline of 9% in the first quarter.
Impressively.
Brands group led by the double digit growth from Este, Lauder, and la Mer as well as great performance from Jo Malone London.
Let the boat and Friday now also rose double digits.
We focus our investment decisions on engines of growth, while employing strict cost discipline in all the areas delivering strong double digit adjusted diluted earnings per share growth.
In the quarter, we phased the increasingly complexity from the pandemic yet still deliver the results that exceeded our record second half quarter of fiscal year 2020, when sales grew the strongest in 20 years in our seasonally largest quarter.
Our multiple engines of growth strategy continued to prove its value, enabling us to pivot with the G. D. D. In this challenging moment, we successfully activate the day efforts behind the growth engines of skin care fragrance Asia Pacific travel retail in Asia and Blue book.
On line.
Our skin care category performed extraordinary Natalie.
It's accelerating growth reflected the strong and locally relevant innovation successful hero strategies compete.
The ingredient narratives in the deeper consumer relationships enabled by sophisticated data and analytics.
Growth of our high repeat hero products was broad based across the categories from clients as to watery lotions serum eye care and most of the risers. Our skin care business has continued to go from strength to strength bolstered by the peace of mind off the reachable.
Skin care is an expression of self care.
From N three prestige through luxury our brands the excel in skin care. Many brands contributed demonstrating the breadth of our performance those sort of John provided incremental sales from our.
Double digit organic growth with its appealing data on that brand positioning the.
Este Lauder brand once again delivered double digit growth across say that Oh, the theater of franchises in skin care.
It's the new advanced night repair serum was the powerful force thanks to each of the new formula and luxurious most sustainable glass bottle the.
The serum deliver the house defeat the advanced night repair eye.
And these two hero products benefited from the synergies and desirable sets the bar.
Revitalizing Supreme franchise accelerated significantly gaining momentum we did the hero most of the riser.
La Mer leadership in luxury skin care group.
As consumers demand for eats at Coney projects with powerful proven ex secrecy short here to seed them was it a vibrant sub category.
Each new the concentrate was the big contributor to growth I'm play five strengths of heroes like the la Mer and the treatment lotion.
The new Jane a sense did on their concept trade that night.
Performed exceptionally well driving the brands ultra luxury franchise to new highs.
Clinique the return to growth lifted by skincare as its hero franchises that the focus on hard to solve skin care problems like acne and docks book thrived.
Even better clinical interactor is now firmly established as the core performance of the brand and continues to deliver significant growth.
It was complemented by an acceleration in the brands three step product and Atkins I solution lines.
Our luxury and artisanal fragrances captivated consumer desires for Tom Ford Beauty, Jo Malone, London, Le Labo, Frederic mouth, and Kilian parties innovations and the Kony products. We are both highly sought.
These brands Oh, the Levered stellar online sales growth along with improving but he can morph the seats in certain markets Jo Malone, London book home products continue to flourish as consumer Crave The center.
<unk> to elevate the sanctuary of their homes.
Our global online channel.
The levered outstanding double digit sales growth.
And if he can tell the accelerated from the previous quarter and driven by every region grew.
Growth was robust across the board as brand com surpassed the platforms pure plays and retailer com doors all contributed meaningfully.
Our go to market strategies for each of these were tremendously successful, particularly during black Friday cyber week and team on 11, 11 Global shopping festival, driving strong consumer acquisition and retention.
We continue to enhance our brand sites with high touch services.
These strategies the strategic investments on elevating the consumer experience from convenience buying two enriched shopping.
Complete with useful tools target the recommendation and expert advice.
Across our brands, we are uniquely combining technology and that the with our talent the beauty advisor on the global scale.
The actual try on is proving to be incredibly powerful driving over twice the engagement as well as higher conversion and retention rates in the quarter, we add the via truck try on two more sites around the world.
The number of sessions nearly doubled from the three of course, the reflecting both the expansion to additional sites as well as.
Capstick, you know TBD on Brian size, the had previously launched eat.
The chart is also proving to be very impactful in order the Medicare conversion of life shot obsession is nearly four times higher than average conversion in the market the.
Video chat usage accelerated during the holiday season, as our skilled beauty advisor offered useful insights and customized education to consumers driving much higher basket side than on average.
Our brands are increasingly offsetting other engage M Dias field services and experiences to examples I've found on Clinique dotcom.
Clinique reality, the brands key yardstick tool instead ask to the consumer in the highly personalized manner, driving notably strong conversion rates.
And the Clinique skin school addresses the growing demand for credible indication you know interesting format with the new focus on real time interactions Skeens cool brilliantly integrates live chat and trend based program the with the Brent experts.
Consultants.
We continue to force through high touch innovation on line as evidenced by the Este Lauder brand, New AI driven proud the recommendations based on real time consumer behavior and preferences that we are piloting in North America, we anticipate that these dynamic merchandising holds great promise.
And that excited to scale in this year for Este Lauder as well for other brands.
We are welcoming new consumers on our brand sites, but also successfully driving repeat enabled in part by our loyalty programs in the first half of fiscal year 2021, the number of loyalty programs My members, who both rose strong double digits.
Driven by Triple digit growth all the international loyalty program members.
In so many ways, we are building deeper relationships with our consumers.
Our brands delivered excellent results for T. Mo 11, 11 Global shopping festival, leveraging the latest live streaming technology and capabilities to generate proud the discovery for the leather 11th the Este Lauder brand moved into the number one ranking beauty la.
Mayor notch number one rank in luxury beauty Mac was the number one prestige makeup brand and Jo Malone, London was the leader in fragrance.
We have long believed in the compelling growth prospects of online had they been investing you need for more than two decades.
At the onset of COVID-19, we nearly doubled our rate of underlying investments, including accelerating our consumer facing investments like the drug trade on social selling omnichannel on loyalty programs, while also increasing our investment in our digital infrastructure and fulfillment.
Work to meet the much higher traffic and demand.
In addition to these capital investments, we continue to optimize our advertising investment in digital channels as well as invest in our great online talent domestically in our headquarters in New York and in our local markets around the world.
I'm on the regions Asia Pacific delivered the strongest sequential improvement with sales growth accelerating from seven to 27 per cent mainland China prospered.
While Korea and several smaller markets contributed organically.
The mainland China momentum in brick and mortar carried into the court with sales say gain growing double digit.
On line accelerated significantly elevated via remarkable 11 11 event.
Nearly every brand group has across the brands, we have reached the more consumers.
Two locally relevant innovation hero products reached storytelling and successful Influencer activations as well as the dedication and creativity of the local team in China.
Travel retail grew single digits organically driven by strong results in Asia, particularly in Highland.
As we fulfilled the desires of the traveling Chinese consumers with the idea of the merchandising traffic too high on and continue to rebound.
The duty free and the world partial limit had increased three fold that in July providing a favorable benefit in the quarter ex consumer so to spend to the new annual limit before year end.
Conversion was also strong driver, Inc, prepaid, which newly offered live streaming.
Across China's demand from Chinese consumers accelerated, especially in skincare and fragrance the.
The long term growth opportunity, we foresee in the dynamic Asia Pacific region out of bond it.
Over the last 15 months, despite the challenges of the pandemic, we made three significant investment commitments as we stride to best meet the desires of Chinese and Asian consumers.
In late 2019, we acquire the Korean based skin care brands Doctor Josh while in early 2020, we committed to build an end to end innovation center in Shanghai today I'm pleased to confirm we are building a state of art the manufacturing.
The facility near Tokyo.
We are on track to open our Shanghai innovation on century Spring 2022, this will increase our local capabilities in product design and formulation. We are also strengthening our consumer insight and trend analytics in this vibrant market.
We broke ground in our new manufacturing facility in the half Tokyo, which is to be operational in late 2020 to it.
It will be enable us to better meet the mine that increased speed to market in the region. The fact.
C D D will house advanced technologies anything even get keeping it.
With high standards of sustainability and safety and will be designed to promote flexible and leading edge working environment.
Our cross sell what engines innovation contributed significantly in the second quarter ahead of our aggressive goals driven by focus on fewer bigger and better hero innovations.
We have it.
The ties the pipeline of new product launches for the remainder of our fiscal year.
Already out on two in skincare the Este.
Este Lauder brands launched Supreme Bright it addresses the trend writing in Asia and he is also highly relevant for consumers. So all skin tones around the world with the it's even better skin tone dark spot benefits meeting talk needs at the most the ethnic consumers.
Clinique introduced the Master suite search went on to our.
With an exclusive although there are the affirmant that provides a duration that goes 10 layers deep into schemes the phase and the also lost 100 hours, even after you wash your face.
In makeup clinique launched even better the clinical serum foundation, a waitlist leak with foundation with 24 hours with a good force key ingredients to help visibly improving skin east unclear and overtime.
Our strategic focus and investment in our E. S. G goals remain of utmost importance for us and our key stakeholders and we continue to advance our work in the course debt. Let me share a few examples in climate sustainable ingredients and packaging and include.
John and diversity for the many areas both on whether recent progress. We are pleased with John C. The PS 2020 climate a list having been awarded the highest score of eight.
In January the the proudly announce that eats product vegan.
As a mission driven brand. This was a natural step for the day the brand the continuously works to reduce its environmental impact while also responding to the fast growing consumer trends.
Our brands are employing more innovative sustainable packaging is the launch new products. While also improving the package you have existing products. The two new clinic project, which I. Just described are two such examples of innovation on launching a more sustainable packaging.
To continue to invest in and advance our diverse talent, we create the the sponsorship program for equitable advanced and professional development of our black talent from the from a very true leadership development program will ensure that our black employees have the.
Support and a book as you have senior executives and equitable access to leadership training Mentorship and career development opportunities.
In closing, we delivered excellent performance amidst the pandemic.
Average in the strengths of our multiple engines of the growth strategy hero products and robust innovation. We did this while leaving our values as we increasingly embed the ESG in everything we do focusing on safety and wellbeing of our employees make them.
Progress on our environment goes and acting on our racial equity commitments. We also invested in technology and data for the new capabilities to support accelerating growth drivers.
These accomplishments and actions give us confidence that we are well positioned to continue to drive recovery and return to our long term growth targets after the period of recovery.
I'm incredibly grateful to our employees, whose grace in force did you are making gossip better company throughout this very difficult moment.
While the road ahead will still be challenging together, we can be optimistic the brighter days on economy.
I wish each one of you good health and now I will turn the call over to Tracey.
Thank you for Brookdale and I, certainly echo your comments regarding our wonderful employees.
As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call and net sales growth numbers are in constant currency.
Our net sales rose, 3% in the second quarter the.
COVID-19 pandemic continued to pressure traffic in our brick and mortar distribution, but the sales declines in stores working.
Nearly offset by strong growth across our online channels and in travel retail in Asia.
The December 2019 acquisition of Doctor chart added approximately three points to net sales growth.
Sales performed above our expectations in large part, reflecting the outstanding execution during the annual team all of the 11 11 shopping festival as.
As well as the many activations are brands deploy during key shopping events like Black Friday and cyber week.
In addition to the acceleration in growth we saw on skin care fragrance sales were strong in the quarter and home fragrance continued to resonate during the pandemic.
Our gross margin increased 10 basis points compared to last year's second quarter.
Favorable channel mix was driven by the growth in our online sales and also reflects lower costs for testers in our brick and mortar distribution.
From a category perspective, the acceleration of sales in skin care also benefited gross margin.
The positive mix was partially offset by higher obsolescence and the negative currency impact.
Operating expenses improved by 160 basis points as a percent of sales, reflecting both the strength of our sales leverage during key shopping moments and our cost containment measures.
Many of our Covid related cost containment measures remained in place during the quarter and contributed to our improved profitability along with the benefits of our leading beauty forward initiative.
Lower selling costs and other in store promotion cost also reflected the mix shift of our business from break brick and mortar to online as well as some remaining government subsidies in certain countries.
Given the challenged environment, we continued to experience periodic door closures per.
Firstly offsetting the cost favorability was higher investment behind our strategic priorities, including China online and digital technology as well as the inclusion of Dr. John expenses this year.
As a result, our operating margin rose 170 basis points to 24, 3% a significant accomplishment during this important holiday quarter, considering the record results achieved in the year ago period.
Our effective tax rate for the quarter came in at 15, 9%.
The lower tax rate for the quarter was primarily due to the recognition of a one time retroactive benefit related to recently finalized guilty U S tax regulations.
We now expect our effective tax rate for the year to be approximately 20%, reflecting this development.
Diluted EPS of $2.61 increased 24% compared to the prior year.
EPS was higher than expected due primarily to the combination of strong performance during the key shopping moments in the quarter and the lower tax rate, while maintaining strict cost management.
This performance is truly a testament to our team's ability to navigate the business through the difficult macro environment.
Our plans under the post Covid business acceleration program are progressing.
Through the past six months, we have taken charges of $46 million, primarily to close underperforming freestanding retail stores in our EMEA region.
And in employee related costs, as we realign resources to support our online business and our digital capabilities.
As the program continues in the second half, we expect to continue to rationalize our retail footprint primarily in western markets.
Additionally, we took on the $81 million impairment charge for our glam blow brand, reflecting the COVID-19 related disruption of the brand's growth plans and lower than expected growth from its planned geographic expansion.
During the first half of our fiscal year, we generated 1.98 billion in net cash flows from operating activities.
Which was substantially above the prior year due primarily to improvements in working capital management.
Accounts payable increased reflecting timing related items that also support our second half growth plans.
And accounts receivable reflected the rapid growth in our direct to consumer business and a five day improvement in DSO.
We invested 250 million in capital expenditures to support key investment areas like additional production capacity and technology.
Conversely.
We spent far less on counters and stores due to lower traffic in brick and mortar doors.
We ended December with $5 5 billion in cash and cash equivalents just above our total debt.
With the strength of our cash position, our free cash flow generation and our confidence in our business drivers as we recover we expect to reinstate share repurchases and maintain our dividend during the second half of our fiscal year.
So now, let's turn to our outlook.
We are obviously encouraged by the sequential improvement we saw in every region as we continue to manage through the effects of the pandemic.
Well cases of COVID-19, and new variants are surging again in some markets, resulting in renewed door closures restrictions and Lockdowns. We are optimistic that once the vaccines reach enough on the global population the restrictions on travel and social activities will east.
Nonetheless, we had not assumed a second wave therefore, the more accelerated global recover covering we originally anticipated in our second half has clearly been delayed.
So while we are pleased with our performance in the first half the prolonged uncertainty with respect to the pace and timing of the recovery makes it still difficult to provide sales and EPS guidance for the full year.
We do continue to expect sequential quarterly sales growth improvement as comparisons to the prior year EPS in the global recovery unfolds.
The inclusion of six months of incremental sales from the acquisition of Dr. John <unk>, which benefited our growth in the first half adds two percentage points to sales growth for the full fiscal year.
As you know several of our retail customers are liquidating or reducing their store footprints.
Notably Lord <unk> Taylor stage stores, and Devin ends are liquidating and Macy's Nordstrom and do glass have announced or reductions.
Additionally, we expect to close certain freestanding stores in North America, and EMEA now that the holidays are behind us.
In aggregate the lost sales represent between one and 2% of our total full year sales and we do expect to recapture a portion of those sales and other locations and online.
While we will continue to execute our cost savings programs. It is important to recognize that some of the temporary cost measures. We took last year will be returning in the coming months.
The principal areas of returning cost includes some additional advertising promotion and point of sale employee costs, which were all meaningfully reduced during the time that retail doors were closed last year as well as the restoration of certain temporary pay reductions, we took travel and retail consulting costs.
Our expected to ramp up more slowly.
Costs will also increase as offices reopen and our facilities continue to implement enhanced safety protocols.
We will incur incremental spending for our new Asian manufacturing plant and innovation Center.
And as we continue to see signs of consumers' willingness to resume their normal activities, including returned to stores, we plan to invest incrementally as we normally did prepay the pandemic in our fourth quarter, just strongly support our launch programs and to begin to Reaccelerate. Our makeup business in the upcoming.
Fiscal year.
Looking at the near term for the third quarter, we expect sales to rise between 10 and 11% in constant currency we.
We have a terrific lineup of product offerings and activations for the lunar new year.
And we expect continued strong online sales.
You may recall that we had an exceptional January last year.
We have lapped the purchase of Doctor chart at the beginning of our third quarter and the brand is now part of our organic growth currency is expected to be accretive by approximately three percentage points.
Third quarter EPS is expected to be between $1 10, and $1 20.
The sales outlook and a careful balance between cost containment measures and investment in key growth areas, such as online and technology.
And currency is expected to add <unk> to EPS.
We remain optimistic that the pandemic will be controlled and out of home activities will resume under a new normal.
With a solid first half behind us we have proven we can deliver in the context of a difficult macro environment, while continuing to support our employees, our social and environmental commitments and invest in the capabilities needed to sustain our growth over the long term.
The resiliency of our business during this time and the passion and dedication of our teams reinforce our confidence in our strategy and the continuation of our our ability to deliver long term sustainable growth.
And that concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is now opened for your questions. If you have the questions simply press star The Star key followed by the digit one on your Touchtone telephone to ensure everyone can ask their questions. We will limit each person to one question time permitting we will return you for additional questions just queue up again by pressing the star Kian.
The digital one.
And our first question is going to come from the line of Dara <unk> with Morgan Stanley.
Okay.
Hey, good morning, guys.
Good morning.
So I just I wanted to focus on top line clearly very strong performance in the skin care and E commerce during COVID-19.
Can you just talk about the sustainability of that strength in each of those areas as we move to a post COVID-19 environment.
As well as what some of your key strategies might be to maintain momentum post COVID-19 and then on the makeup side, that's obviously been a laggard area.
For obvious reasons, how quickly do you think category growth recovers and makeup post COVID-19.
And what's your outlook there thanks.
Okay. So first of all.
On the key drivers for US, let's go one by one skin care bear.
The sustainable the consumers on it one was more and more into chassis for skin care, we have an amazing by flying on innovation for the future, yes, and the the strengths of visa and particularly on China ease in term of mix one of the biggest builder or skin care because the penetration on skin.
Good day penetration on beauty in the force skin care in Asia is very very high. So we assumed the skincare trends will continue after the call. It the other driver is China and the <unk>.
So on China, as we explained very well and we're the Investor day is the east for the long term on them.
On the Chinese couldn't shoot the demographic I right deep potential of the smaller cities. The tier three tier four cities will continue to grow the the power of online and offline distribution will continue to be very strong in the TR.
You know imagine that the tier growth today. The Ti resolves are mainly driven by Asia, and particularly by the domestic try but acceleration within China. So in the future the domestic travel acceleration with the China will continue.
The international travel will be reinstated and so this will be a further acceleration in the long term when COVID-19 will abate.
So all our key drive us are really here for the long term and most importantly, as you know our drivers tend to be accretive in profit the beat it too so that will create the resources over time.
The lager is the brick and mortar, particularly in the West now. These are obviously in the short term and east is a is an issue because the the reason like with traffic and the lack of traffic is create the issues of productivity.
Also on this one we are working for rebuild in this for the long term and so what is the drag today a big drag on what is about you know one third of our business is still in brick and mortar in the west and the and so if you imagine that the traffic boss called the would've come back debt debt Oh.
On the retailer closures that Tracey summarized the which will happen in the debt will reduce the amount of stores that we would not be sustainable in the long term and our business acceleration program, which is really putting the right sizing. If you want all the channel for us rebuild improve T V.
At this time and so the combination of traffic closures and business acceleration program is our answer to in the long term after coffee being able to make also brick and mortar again and engines of growth, which would be profitable the building the company for the long term.
Yeah, we are very positive on in summary on the continuous strength post the causes of our drivers and you accelerate the drivers and we are working to make also what is the drag in the short term rebuilt is it positive long term channel, which is the brick and mortar in the west in terminal on the cat It was.
Part of your question I wept.
The cap is very much driven by use educations. So use education, meaning you don't go into the office going out for dinner, having good attached the etc. So clearly the makeup category growth would be associated with the pulse of the recovery and the we will be ready for that.
The point of view is that when they use the educational we'd go back into the life of people the recovery would be fast and steep and so we are we are ready for a debt now if or when we assumed as we lap and frankly the answer is difficult to answer it the same way Tracey explained it's difficult to answer on when.
Vaccination and all the rest we let the fall in the <unk>.
But we believe that from what we see in the market. The starting the fall of 2021, we could see it begin to get on certain usage location to be the established because of these makeup growth. The willful look back in our opinion starting from the moment of Arts degree.
Great. Thanks, that's helpful.
That was good.
And our next question is going to come from the line of Lauren Lieberman with Barclays.
Great. Thanks, good morning.
I was curious if we could talk a little bit about E commerce development in Western Europe in particular because.
Cause I think wood.
Are the hidden if you will in the numbers and you work through contribution from travel retail and so on is that western Europe, while still down of course was down I think a lot less than has been the case, thus far through the pandemic you mentioned the cyber week.
On the shopping dynamic in Western Europe, but my sense is that that is the channel that had been somewhat less developed.
Historically, so I'd love to hear more about how that built up and thinking about kind of stickiness of that behavior going ahead, particularly in the quarter or two where there arent big shopping events that are typical for that market. Thanks.
Yeah. So first of all the the online business is has done very well this quarter plus 60% globally in the and is the interesting we are growing double or triple digits.
Every brand every region every channel and meaningful channel brand a call on retail dotcom the fastest platform pure plays and the and so Western Europe is the same is the western Europe is growing.
The depending by market double digit or triple digit in the line and obviously the holiday season has been the because of the locked down as you know in Western Europe, particularly called visa was pretty high you November December because of these the brick and mortar where close countries like the U K as an example.
And it was the super difficult months and so there was no the regular Christmas holidays in brick and mortar and and and and the obviously UK was not the only place and so because of this we were able to pivot to online. It you know you know the extraordinary anyway I think we our teams have done in the niche it didnt work in the in taking care of.
Our consumer online when the where because the prudent behavior for coffee and they'll go into the brick and mortar and what we have seen debt. These this works in many many cases, meaning at the end of consumers certain categories. The way of working because of the repeat many of the consumer didn't do we doubt that profit la mer cream of the pray for it.
And every day with Teva and so we got a lot of the selling via the online channel, but also the we were able to speak to the gifting habits, and we create the gift deal opportunities and deliver them all day for gifting et cetera. So there was a lot of creativity and invention.
In this area now these are online in general I I believe the on line will continue to be very strong also in the long term and this acceleration we've continued on with surplus called the and one of the reason for debt, which is particularly true in western Europe. The is that the <unk> the new on line.
The focus created the.
Brought on line or to create the new consumers, including more mature consumers online, particularly in Europe was really dedicated to millennial the younger consumers while during COVID-19 more matter of consumers came on line and they are liking it and theyre, becoming the loyal and so day will also cross called the.
Have a bigger percentage of the shopping online than before on top of this if you think the we are adding high touch services on.
On line. So what was the services they need before where available in brick and mortar now gradually but they are also available on line and we've been able to scale. The so the speed of light just to give you the number to understand our ability to scale. The new ideas is the two D. A day.
Sure I'll try on the is already available in 90 per cent Ozawa brand comp sales in terminal called the rich you know imagine debt and that was it wasn't the not even close to that six months ago and so the consumer is responding to that.
The and this is driving all the sudden western Europe, a lot of on line and probably sustainable and more loyalty on line Oh, good all the different group of consumers. So on line had the big role in Western Europe in quarter, two and will continue to weigh the bigger and growing role overtime in the next years.
And our next question is going to come from the line of Erinn Murphy with Piper Sandler.
Great. Thanks, good morning.
The question is around the landscape here in North America, we've seen some pretty unique partnership Inc. Recently with the coals into the flora in the open target or do you expect the participate in these partnerships I know historically map hasn't been that appealing, but maybe with the old the target structure, you know with some of your brands makes sense and then I guess secondly, if you think about.
Post the behavior of consumer.
Your post pandemic, how comfortable are you with the entirety of the brand portfolio stay with divestitures ever makes sense. Thank you.
I'm, sorry that the innocent the second question, how comfortable are we with the yeah wood.
Are there any brands I'm thinking of the makeup portfolio in particular that you would ever consider divesting on the other side of the pandemic I'm just curious on your comfort with the.
Entirety of the portfolio today.
So the first line studies that yes, we are working with our partners in discussing the Ulta target and the cold sit for that Oh opportunities as you said as part of your question.
These will depends on which brands in our portfolio. These two opportunities may fit different brands in our portfolio and so we are evaluating these without what Boston and we are we are considering participation by brand to these activities and this could be a driver of future acceleration or the car.
In North America, as well importantly to underline this to the opportunity.
The opportunities are both brick and mortar N on line and so obviously it will be very important also to our being able to manage the on line part of that opportunity in terminal debt portfolio of brands.
We continuously look at our portfolio, we look at our portfolio for efficiency and we have opened and the width and is already in the past the two rationalization on decisions in our portfolio, meaning the clothing brands debt for good reasons do not cannot sustain the long term investments and we continue to look into acquisitions.
The 24, reinforcing our portfolio in areas, where we have strategic opportunities or strategic gaps. So this is a continuous process.
And during called the industry is continuing.
Okay.
Great. Thank you.
And our next question is going to come from the line of <unk> Parikh with Oppenheimer.
Good morning, Thanks for taking my question and congrats on the nice quarter I'm, sorry, So Fabrizio I. The question just on your China business I was curious what you're seeing right now on the makeup category in China.
Yeah on the the makeup category in China is stronger than makeup in the other regions because as I say it responded to the.
Throw the social social locations and the user education, but he's still declining. So is the isn't is not is not a it's not different than the rest of the word the China. Many skin care is very very strong fragrance. He's on accelerating and makeup is the like even in China. However on a completely de.
The proportion because when you when you see the when.
When do you think of the explanation just gave before debt makeup is completely correlated to the location of usage.
In China because of the good control of called the and because of the Oh occasions like business offices are open. The people are shopping more regularly brick and mortar shopping is more is more present in most of the cities because of these modifications. The makeup is in better shape. The steel is the likelihood.
Queen the categories and the and mostly in China, I would say from our from our consumer understanding is because of mask wearing many China is better control the COVID-19, but also better control the causing because that he is very disciplined mask wearing a mask wearing also is the reason for less use of Joe makeup.
So stronger than the rest of the world the steel not as strong as it will be after the call it and post Covid, where we assumed it would be Oh I expect there will be a strong recovery on makeup also in China.
Great. Thank you.
Yeah.
Our next question is going to come from the line of Nik Modi with RBC.
Yeah. Good morning, everyone Fabrizio wanted to go back on on the on.
Online discussions you guys have done such a great job with analytics and understanding kind of consumer behavior and given how much migration has occurred on one I'm just curious what your data and research and analytics. The thing about the stickiness for instance, you talk about these very mature consumers in the developed markets migrating online.
You know how how sticky do you think that it will be actually I think that'll be an important kind of discussion going forward given the the margin differential between online and some of the other channels. Thank you yeah, no and it is the very good question and again our point of view this will be very sticky.
Because the people.
People are shopping online and and obviously some of them on shopping online because the brick and mortar were closed for sure in the case, the luxury but the but they're liking it and we see all the statistics. So the doctor telling guys. The day I enjoyed the spirits for example, our loyalty programs are working.
Better and better and we had more loyalty program as we have discussed and theyre getting expanded and the level of loyalty is growing up and the repurchase rate. Many of the economy back is growing up then we see conversions very strong traffic increasing and there are ways.
Where the conversion.
We will be will be the reason it would be maintained after the most important on the investment we are doing good in order to maintain conversion also after call. It the is the high touch services transfer online so the.
On the chart with the consultants the virtual try on the lives training Golf course to me it is D and use of our particularly the Brian to call them. In this case also as media platform, because we see that the time that the consumer spending on the on line is increasing.
The magically because one day the virtual try on sort of is the the possibility to talk to a consult on it they spend more time at this time you stifle the exposure toward our equity messages. So this is media value is is really media value, meaning we we had more than half the helium consumers Connie when our sites every year more than this moment.
And the and then.
Imagine that they stayed in nine minutes in the state the isn't that if we had to buy media to speak to have it be on consumer four 9 million as this would be a huge costs with these in place is that not the benefit of our selling operations. So there is a lot of value in the first in this high touch services, what they will do they will.
The increase differentiation with our sites from us they will the increased traffic because people are coming on strongly to byproducts before the sort of vicious and will maintain or possibly felt the increase conversion. After after caught it and then finally, we'll increase the value.
Our online as media value.
And so this is a very positive view for the long term obviously.
I, we believe that there is the lotto consumer debt will continue to shop on soon but it kept most of the after caught it and there is no one consumer there's only on line of only brick and mortar I believe the consumer will love the omnichannel the speed and so by the way after Covid there would be anxious to get the gained the brick and mortar.
The speed and so they will come back and that's why we are building. Good round. These reality does this petition and much better omnichannel platform, where the consumer will be able to choose the percentage of posture, so time or the speed and so on line and now match the want in brick and mortar and debt will navigate them on the two channels.
In new ways I believe the companies that we love the brands that we let the good omni channel model in the future we lay the competitor advantage.
Excellent. Thank you.
Good.
Our next question will come from the line of Olivia Tong with Bank of America.
Great. Thanks, good morning.
Firstly, just a clarification Tracey I believe you said that you were adding additional production capacity. So I'm just curious what categories. What regions. You are looking at for that and then my question is really around the margin progression.
Especially given this cornerstone I think that's the highest quarterly operating margin.
Machine doesn't public companies. So you know realizing of course, if there's a lot of normal expenditures that aren't happening right now, but as you think about second half long term on are there things you've learned over the course.
Almost 12 months now on.
On areas you can come back cut back on spend more permanently or are there areas where you.
You have to just push even harder and.
So as you think about specifically for Q3, what's planned in Q3, two because while.
While youre looking for margin expansion it looks like it would only imply about similar to what you achieved in fiscal Q2, despite the Covid, obviously now and treat the base. Thank you. Okay I'm Olivier no. Thanks for the question so regarding our production capacity.
As you've seen from our results over the last couple of quarters. Clearly you know where we are in had been the need and have been investing in terms of production capacity is in skin care and we have invested in North America, we've invested in Europe.
And as you heard us announce this morning in our prepared remarks, we are also investing in a new facility in in Asia to support primarily skin care and there will be some makeup primarily foundation is where we're thinking right now in Asia. So very much having you know.
Capacity closer to where our strongest demand growth is will.
It will be a real benefit a benefit to us and we're looking we're certainly looking forward to that.
As it relates to the the margin I mean, I I would you know as I said in my prepared remarks on linear.
<unk> done an excellent job of controlling costs last year once once the pandemic hit.
Many of those cost controls were temporary controls when you think about the management salary reduction some of the rent abatements that we got them given the fact that our stores were closed some of the furlough and benefits and the other.
At the back on we control the head count Teeny etcetera. So on.
So in terms of the learning going forward clearly.
There are some areas of I would say more discretionary costs as we emerge.
Out of the pandemic.
That we will continue to control, but the long term sustainable cost controls really come from our cost saving program, that's where the permanent more sustainable cost takeout.
It comes from so that's the reason why you're seeing if you think about you know what.
What we said last year in terms of our cost programs and the significant amount of management that we did in the third and the fourth quarter to control costs. Given the you know the fact that all of our brick and mortar doors over the courses.
Now ended up closing.
On that.
Those some of those costs certainly will will be back in in the second half in the third and the fourth quarter on but we will continue to manage our costs in a disciplined way as we you know as we have as we have up to this point.
Thank you.
Yes.
Our next question is going to come from the line of Chris Carey with Wells Fargo Securities.
Uh huh.
Hi, good morning good.
On them.
So I just wanted to follow up on the operating margin question I think it's important.
EMEA, our strongest margin we've seen fragrances I think strongest margin, we've seen and if I'm just you know hearing the answer to that.
It sounds like you know look there was there's been a lot of.
Efforts around cost savings.
But certainly the channel dynamics as well.
With EMEA.
EMEA.
All in line doubling.
And certainly you've seen strengthen and and skin care and in Asia, and so I'm just wondering how much.
The margin improvement actually it might be more sustainable.
Over time from a product or channel mix standpoint, well, yeah, I mean, absolutely we have tailwind as it relates to margin given given both our category mix growth as well as our channel mix growth.
We do have obviously, a fairly large footprint of brick and mortar on debt right now given where traffic is is.
Is a bit of a drag on our margin performance and obviously, we're addressing that and we will see.
Once the pandemic is behind us and traffic returns you know how fast it returns and and in the meantime, obviously, we're taking we're taking some actions, but we are very comfortable that we have margin progression ahead of us once the pandemic is behind us in a more sustained.
Waste, especially given the the tail winds that are that we have to your point Chris.
Okay. Thank you.
Our next question will come from the line of Michael Binetti with Credit Suisse.
Hey, guys. Thanks for taking the questions here.
I do want to follow that Tracey at the Analyst Day, you you you walked us to.
On a margin that was well into the high teens how much.
What's your view on the on the business there as we look around at some of the businesses that I would say are probably the closest in comparison to yours, we see some with let's start with the two on the on the operating margin.
So you've made the structural changes at a few of the other analysts the run through but you're going to end up in the bigger bigger travel business the bigger digital business the bigger China business closing some stores that were a drag I mean do you see over the very long term you know five to 10 years can this business move into the Twenty's on the on margin.
Yeah.
You know it's the it's it's again you said over the very long term. So look I would say that certainly that is something that we are are targeting given all of our you know again, given the tailwind in terms of channel growth and category growth might change. Obviously makeup might we believe makeup will recover and we're certainly good.
Going to support it to recover in the margins will improve on makeup as well makeup actually is the category that has the biggest penetration of freestanding stores and in brick and mortar. So it is on the category that is particularly challenged from a margin standpoint in a in this particular environment.
But certainly you know Michael on everything that we are doing from a business management standpoint, and from a cost management standpoint.
Wood would get us in in a in that North star.
Of the 20%.
And it's the prison, if I could follow that and you've seen some really strong growth in high NIM has come up a bit on the last two calls we've seen some new regulations, even as recently as this week government is going to allow consumers to ship goods home versus physical pick up in the past. So it seems like theres more and more friction coming out of that process and a lot of square footage is gonna be added there does the.
Does the island change your travel retail business, even after global economies reopen does it change your trap your outlook on travel and the Chinese domestic consumer.
Yes, no. This is the U S.
As I said before I would try travel retail business in the in the short term is really driven by Asia in general in China domestic in particular within China, domestic China and he's he's the star and the and it's the reason by the new traffic and bye.
The increased conversion and by the quantities purchased because of the regulations that you just explained and by the development of prepaid. So those are all the very important the long term.
The strengths of the channel, which is developing now.
When the normal travel with them.
Maybe it will never be normal exception, but the new normal traveled with the state of the Doctor caught it and you add the two this progress on the domestic travel in China. The International travel day in America, and Europe, the within the rest of Asia and the Chinese consumer will go back traveling the world.
And that's obviously their desire to one of the biggest expiration if you talk to the consumer I look to the consumer opinion on San research for the long term. So when the will be a combination of restated international travel with the stronger domestic travel model that has been developed during disputed the.
This will make tea on steel one of the most important long term channels of opportunity full of opportunities.
And again, the biggest opportunity remain technically driving conversion so the conversion of the travelers into by yourself and the three day. So the possibility of buying it all so without the you know queuing in the store for the long time, where you need to take the plane and things like that those two elements.
Our big drivers of the future of try the detailed independently from the short term management of the crashes.
And in terms of the China overall business, we do monitor Chinese consumers say, we spoke to it last time. This this time, our Chinese business between of course, the one of course, the two is basically doubled the level of growth, our China mainland business, our PR businesses.
So the accelerated but not as strong as the China mainland business.
It's driven by amazing online events like 11 11 during the November period and so.
The combination of the development on line within China. The fact, the brick and mortar in China still double digit in quarter, two was growing double digits, showing the potential of brick and mortar when caught it is more managed the or will be more manageable.
And the end and then travel retail continues to do very well and so when we look east also to our total Chinese consumer consumption, bringing all together what is domestic travel retail and mainland China, we still see an acceleration in total from course, they want to course the tool.
So we believe this is a very very strong potentially we are working to manage it in a way, which is still building equity of our brands still protecting.
Every single one of our touched on us being able to do good business with us for the long term that's our goal and we are working on it.
Thank you so much.
And we have time for one final question on our last question is going to come from the line of Mark Astrachan with Stifel.
Yes.
Good morning, everybody.
Maybe just one follow up and one other question just on on online where does the subtle as a percentage of beauty category sales post pandemic and how do you think about retention of those incremental.
Tumors are on.
On retailer Dot com versus your own brand dotcom I assume higher.
For you all and then just quickly on Holistically on thinking about your guidance on on a go forward basis are big events like the pig.
And in the 11 11, becoming more important in driving your business, meaning that the June quarter, it might be a little bit bigger than the historical levels same thing for the December quarter, and you did that partly explain kind of why we saw somewhat weaker September quarter guidance and I think maybe people had expected at the time of the same for the March quarter today. Thank you.
Some of it could.
Go ahead Patrick.
You can go on.
Let me, let me talk about the the key shopping moments absolutely, particularly in the holiday period.
As you recall last year in the second quarter.
Had in the 16% growth in constant currency very much driven by key events that are that are in the second quarter on the fourth quarter six eight teams a little bit, but you know quite a bit actually less and less meaningful to the quarter. Then certainly 11 11 11, but we are seeing you know concentrator.
<unk> in you know in some of those the those those events.
And certainly that beat in terms of our expectation on sales really flowed through to the bottom line in the second quarter.
On the brand will come I mean, the different one line is different channels, the Brenda com retail dot com pure play.
And third party platform.
Which we defined that is the the T mall model and so in these channels have different level of development by countries and these are the results of consumer preferences and the historical development on the channel.
So it is not the we are driving we are driving all of them and particularly we work with the Iowa retail partners very closely to drive the retail com, which is most of the times doing very well, particularly in the speed it but also for the long term.
For example in China retail Telecom is very limited and why brand Dotcom and most importantly third party platform model is the most developed the wide in the U S. Retail the economy is very very strong and we see a lot of great developments recently in the retail Docomo Wawa Patrick.
And these also served as seen in this moment as a mitigating factor to the brick and mortar issues. The productivity that we have discussed before so we will continue to develop each one of these channels and he's the consumer deciding where to go and obviously, we've talked on it with each one of our.
Hey, good partners to do the best possible job in every channel.
Thank you.
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Good morning.
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