Q3 2021 Estee Lauder Companies Inc Earnings Call
Good day, everyone and welcome to the Este Lauder companies fiscal 2021 third 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 Relations Ms. Rainey Mancini. Please go ahead.
Hello on today's call our February steel, Freda, President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer since many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed on the S. E C.
Where you will 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, unless otherwise stated on net sales growth numbers are in constant currency and organic.
The results exclude the impact of acquisitions and you can find reconciliations between GAAP and non-GAAP measures and our press release and on the investors section of our website.
And as a reminder, references the online sales include sales, we make directly to our consumers to our brand dotcom sites and through third party platforms and also includes estimated sales from our products are a retailer's website. During the Q&A session. We ask that you. Please limit yourself to one question. So we can respond to all the wind and the time scheduled for this call and now all the.
Turn the call over to Fabrizio.
Thank you Amy and Hello, everyone.
Does the pleasure to speak with you today and I hope that you and your families are in good health.
Our house.
And we those impacted by COVID-19, particularly in places like India, and Brazil. The thought is speed and seeing severity resurgence as we remain committed to doing what we can to support and our employees and these communities.
Our third quarter or the fiscal year 2021 marks the continuation of strong sequential sales growth improvement. Despite the ongoing challenges from the pandemic, we exceeded our sales and earnings growth expectation, even as several markets experienced increasing COVID-19.
And pressure two out of the course debt.
Our multiple engines of growth strategy drove our success and powered by the exceptional creativity and passion of our employees. We achieved these outstanding results, while acting on our values first and foremost we continues to invest in employees and consumer safety and wellbeing.
During the house crashes and we expanded our work for the environment from setting innovative new sustainability goals and travel retail to seeing a wind farm. The wind farm in Oklahoma becomes fully operational which is our largest renewable energy concept to date and.
And the project, we were proud to support.
We made progress on our racial equity commitments and also outline the new set of commitments for women advanced and gender equality inclusive of achieving gender pay equity and globally increased representation of women from underrepresented groups.
In March we launched our new equity and engage them and center of excellence to drive greater equity a representation within our business and across the value chain.
We also launched the partnership with Homeaway University to support the success or the illuminate throughout experiential learning cadre of coaching and professional training and Mentorship opportunities.
While there was joy in this progress there was also sorrow, we stood with our employees consumers and partners and the announcing the rise in October Ireland's eight and discrimination against the Asia and Pacific in July and their community and committed to donate to organizations that support justice and <unk>.
Equal treatment from Asia and community in the United States.
We keep our employees and communities top of mind through these challenging times.
With that as our guiding principle, let me turn back to financial results.
Constant currency sales rose, 13%, representing a sequential acceleration over the guy and he still grows improvement we delivered the strong performance despite increased COVID-19.
COVID-19 hardship in Western Europe, Latin America, and parts on North America during the course debt.
Este Lauder, La Mer, Jo Malone, London, Clinique, and Tom Ford Beauty led the impressive performance of many brands.
Skincare and fragrance once again delivered superior sales growth, although they had the toughest comparison to the year ago period.
In fact, our skin care category was nearly 30% larger on a reported basis the scores to.
Then he was two years ago, owing to innovation in our powered food hero franchises and strength across multiple sub categories and the addition of total Josh.
And that before the future inclusion updates here.
And our fragrance category was 16% bigger than it was in fiscal year 2019 on a reported basis driven by our strategic focus on the luxury and our seasonal the segments.
Both of these categories now have even greater scale to capture prestige beauty share as debt he called very unfolds.
In the third quarter of fiscal year 2021, we focused our investment decisions on engines of growth and employed cross discipline in other areas, resulting in EMEA and doubling of adjusted diluted earnings per share versus the prior year period.
While the complexity so the pandemic pandemic at ever present, adjusted operating margin, none the less exceeded that of the third quarter of fiscal year 19, and adjusted diluted earnings per share was 5% higher.
Throughout the pandemic, we have been steadfast in our commitment to the long term as we successfully navigate the short term.
We continue to strategically invest to drive sustainable growth, including building and end to end innovation Center in Shanghai, and the state of art manufacturing facility near Tokyo.
These are expected to open in calendar year 2022.
More recently several of our brands decided to participate in the new passenger ship of Sephora with Kohl's and Ulta beauty with targets beginning in the second the house of this calendar year.
These new consumer coverage represents the promising the evolution of the retail landscape both in store and online in the United States for prestige beauty we are.
Also agreed to increase our ownership in DC and becoming majority investors with the path to full ownership in three years.
This year and.
We did the fast growing brand D over the and Eddie and new brands incubation capability aligns well with our multiple engines of growth strategy.
The ordinary further diversifies, our skincare growth engine by consumer segment price point, and geography with the superior online business the.
And the brand has redefined and prestige. We then increase the ingredient focused regimen based product portfolio to drive basket size.
And the ordinary has quickly established itself as the top five skincare brand in the U S prestige beauty heading improved its rank significantly over the last year.
Sustainability is integral to Daisy and equity products and retail practices, which will enhance our sustainability brand portfolio and fewer the achievement of our ESG strategy and goals. We look forward to continue the exciting journey, we and Nicola killed and there and her Inc.
Credibly talented team to realize these and global opportunity.
In the third quarter, the Este Lauder brand delivered stellar results led by strong double digit growth and skincare sequentially improving trends in the cap and the return to growth in fragrance.
The brand is driving it and you will in the skin indication on makeup trend with the significant growth, albeit the future its franchise and its new beautiful Magnolia fragrance is off to a very promising start.
And the Este Lauder skincare franchises performed exceptionally well led by advanced night repair and it's recently reformulate the namesake serum.
The <unk> Supreme.
So was the standout as the launch of Supreme Bright proved the highly sows.
So clean bright is an amazing story on east to West success with the proud the born in the browsing and trend in Asia, and realizing global Appeals 40, it's uneven skin tone benefits from.
And all three new IC room surged and create the halo effect for different sides phase and ice creams.
La Mer performance.
It was once again outstanding the brands worldwide success is multi face it.
From both loyal and new consumers and we the increasing demand from men, who now represent more than 15% of sales in mainland China.
The mers iconic product reached storytelling and ideal merchandising aligned to deliver the successful Jordan into the new World campaign for Chinese new year.
As well the brand executed a superb global campaign focuses on most of the risers.
The new Jane a sense the la Mer the concentrate the night volume continued to spark consumer desires elevating the brand ultra luxury franchise.
Clinique sales growth accelerated sequentially and rose inevitably region, driven by each skincare portfolio.
From consumers and excellent response to the new most of the sewage went on to our in the United States to even better clinical into rapid.
Substantial growth in mainland China.
In the man here on franchises light dramatically different moisturizing Clinique broth spurt.
Our luxury and artisanal fragrances realized significant growth in the Americas, and Asia Pacific Light skincare, and fragrance offer and means to express self care and the suit to the emotional and come forth of scent.
We are seeing strong repeat from the emerging category in Asia Pacific, While we continue to welcome new consumers in the region.
The strength and fragrances, driven by our strategic shift to the higher and is favorable to margin enhancement in the category.
Jo Malone, London, Tom Ford Beauty, <unk> and parties Le Labo, and Frederick mouth, each grew double digits innovation and hero Carl does work in harmony to fulfill consumer desires.
With newness from Jo Malone, London, and Tom Ford Beauty incredibly well received.
And Paris, the actual selling which engaged founder akela and hennessey influencers and indication ambassadors through live chat and sharper both livestreams contributed to superb online growth.
Each region grew this quarter led by Asia Pacific, which saw sales rise in every category and many countries contribute.
Mainland China was exceptional and delivering sequentially accelerating double digit sales growth with skincare and fragrance performing ahead of the previous quarter and makeup returning to growth up double digits.
Both brick and mortar and online strived driven by the strong equity of our brands desirable innovation high quality product, leading to repeat purchase competitive investment and advertising and investment and local talent and capabilities.
For the Chinese new year, we match, the consumer where she or he chose to sharp serving the local consumer as well the travel and consumer in China, both in store and pre tale to tremendous success.
On line continued to be a powerful growth engine and.
Global sales increased strong double digits in every region.
Sales of branded Com third party platforms and retailer Com rose strong double digits, while sales of pure play grew typo digitally as we are building, our consumer coverage, which sell at the pure plays and retailers.
Our online channel channel is now nearly double the size it was two years ago.
Importantly, the media value or brand of Com continued to rise as live chat the actual try on and live streaming and led to increased traffic and time spent on our sites.
EMEA online sales increased near Triple digits, while Latin Americas growth was also very high.
We are definitely met consumer demand in these regions.
Which way and more pressure than others from temporary brick and mortar closures.
In Asia Pacific and North America, where each store traffic is gradually improving and comparisons to the premier year on increasingly more difficult online sales still grew double digits.
We are innovating in the high touch on line consumer experience and harnessing our data to increase engagement and drive sales.
Let me share two examples from email.
In the United Kingdom, Clinique launched and integrated platform to deliver seamless end to end high touch virtual experiences with the personalized data led version of each scheme and schooled on demand.
Clinique is providing consultants with doctor to unlock more sophisticated recommendation and with a multitude of tools to ensure the consumer experience is customized based on preferences.
<unk> can now enabled co browsing and the adding of friends to services. This new platform, while still in its early days is delivering above average conversion rates.
La Mer enhanced its virtual experiences with more expert classes and one to one consultations tailored to local consumers and the brand expand the live chat to every market in the region with the standard hours and additional days leading to incur.
<unk> growth and conversion.
All told La Mer, so it's the region on line mix of business search.
Our brands and investing for growth with social media platform too faced and introduce a new via shall try on lens on snapchat to add the tweets growing portfolio of the actual try on experiences.
On the tick tock and launched a minimum the showcasing the plus formative experience better than sex months scatter.
It's first world premiere on the platform.
Those are drought seek a past call are correct and treatment pocket strong online sales in the United States for the brand amplified by social selling tick tock and influenza support.
Looking ahead, we are preparing a arena.
In makeup.
And we anticipate the momentum we get out of the early build around the world driven by local reopening and social and professional applications.
Our data and insights are driving new creativity to aspire consumer as they increase their location base makeup we are strategically well positioned to grow our sales and capture prestige beauty share and makeup recovery with our hero products robust innovation pipeline.
Analytics engine, driving aspirational intelligence and enticing in store and online activation centered on the omni channel consumer.
Already in the third quarter newness from Clinique, even better franchise in foundation and consider was highly suite as we saw consumer restocking. Their core makeup products to face new lip plumper was the major heat hero products like Tom Ford Beauty.
And I Shadows, and Mascara from two phase the Bobbi Brown and <unk>.
Performed very well Mac is launching a numerous scatter and debt is exciting innovation from many brands to come.
In closing.
We delivered outstanding performance, despite the surge the impact of the pandemic in many countries.
We lead with our values as we continue to prioritize the safety and wellbeing of our employees and consumers we made progress on our environmental goals and acted on our social committed.
And we invested in accelerating drivers for sustainable growth, including innovation and China manufacturing in Asia Pacific Global online and consumer analytics.
For the long term, we are confident the our multiple engines of growth strategy will continue to create value for our stockholders.
I want to say, thank you to our employees.
Who are integral to our success and are making asset better companies through this difficult moment.
We are beautifully positioned and prestige beauty to continue driving recovery with the house on the most dedicated and talented employees.
I will now turn the call over to Tracey.
Thank you Sabrina Yeah, I, certainly echo that statement and look forward to the continued progression of our recovery.
For our fiscal third quarter net sales rose, 13% as we lap the onset of the COVID-19 pandemic and delivered exceptional growth in the Asia Pacific region, and and the skincare and fragrance categories.
While our brick and mortar distribution continued to experience the foot traffic our online channel delivered strong growth across all formats and all regions.
Conversely, the environments and Western Europe, Latin America, and parts of North America were challenged throughout the quarter.
Our gross margin increased 90 basis points compared to the prior year quarter.
Favorability and category and channel mix, driven by skincare and online growth as well as lower tester costs were partially offset by obsolescence negative currency and COVID-19 related under recovery of fixed cost primarily in our facilities that manufacture and makeup products.
Operating expenses improved by 530 basis points compared to the prior year quarter, largely reflecting the improved sales and leverage this year.
You will recall that when the pandemic struck and the prior year quarter, the sudden and dramatic drop in sales created expense deleverage that was difficult to fully offset despite the cost actions we took at that time.
This quarter, we benefited from both temporary and longer term cost savings, which is reflected in the substantially lower selling and store operating costs as a percentage of sales continued to shift from brick and mortar to online as sales continue to shift from brick and mortar to online.
This was due in part the temporary store closures and response to a resurgence of the virus and certain EMEA and Latin American markets.
We realized some subsidies and the extension of furlough benefits and some of the affected markets. We are also prudently managed staffing levels and our stores and new hires on our management teams until we see the recovery gaining more consistent momentum.
Advertising spending grew double digits and was predominantly focused on digital spending.
We invested to support our online acceleration as well as our new product launches a strong recovery in certain markets and key shopping moments such as lunar new year Women's day and Valentine's day.
As a result, our operating margin rose 620 basis points to 25%, which was 40 basis points above fiscal 19 level.
Our effective tax rate for the quarter came in at 27%.
The lower tax rate for the quarter was primarily due to a lower rate on the companies foreign operations.
Diluted EPS of $1 62 increased 92% compared to the prior year.
EPS exceeded our expectations, primarily due to the higher sales continued cost management and a lower effective tax rate.
Our plans under the post COVID-19 business acceleration program are progressing.
Year to date, we have taken actions and three main areas.
To adjust our distribution footprint, and Latin America, and EMEA, including travel retail.
To exit global distribution of backup products.
And to realign resources and capabilities, including employee related costs between our brick and mortar and online channels.
We are already beginning to realize some modest benefits from these actions as the program continues we expect to further rationalize our brick and mortar retail footprint primarily in western markets.
For the nine months, we generated $2 78 billion and net cash flows from operating activities, which was substantially above the prior year, primarily due the higher net earnings as well as working capital improvements.
We invested $386 million and capital expenditures to support key investment areas like production and distribution capacity.
And technology, including our online business.
Conversely, we spent far less on counters and stores.
We ended the period with approximately $6 4 billion and cash and cash equivalents, including cash from $600 million and senior notes issued in March to support the increased equity investment and desking and once the deal is finalized we also reinstated our share buyback program in March and.
We utilized $316 million of cash to repurchase our stock.
And we paid $561 million in dividends and after the end of the quarter, we used $450 million and cash to pay down debt maturing in the fourth quarter.
Given our strong cash generation this year, and we still remain and a very strong position to pursue further growth opportunities. After these actions.
So now, let's turn to our outlook.
We continue to be encouraged by the sequential improvement, we have seen and our business throughout the fiscal year and we are optimistic that restrictions and hesitancy on travel and social activities will begin to ease and certain markets and vaccine coverage steadily increases.
In China, Australia and Israel.
Which are at the leading edge of recovery. We are seeing higher makeup sales with usage occasions, increasing and social and professional engagement gradually normalize.
For example, sales and our freestanding stores and Israel have returned to pre pandemic levels and even lipstick sales are almost back to normal.
And the upcoming edition of the desk, the and brands to our portfolio and the expansion of our business with Sephora and Ulta beauty and the U S represent additional growth drivers for us as we progress and recovery from the pandemic shock, giving us further cause for optimism.
We have led with our strengths our values and our amazing team and have proactively addressed areas, where which we can control while at the same time, ensuring we are protecting our strategic growth areas.
As a result, and the context of the very challenging environment in fiscal 2021, we expect to end the year with sales growth of between nine and 10% and constant currency.
Currency translation is expected to add approximately two percentage points to reported growth reflecting rates of $1. One eight for the euro 133 for the pound and $6 64 for the one.
Six months of incremental sales from the December 2019 acquisition of Doctor chart, and approximately one month expected from Decime are contributing approximately two percentage points to our expectations of growth for the year.
Mindful of the more gradual resumption of traffic to our brick and mortar distribution.
We kept tight control over costs this year to protect investments needed for long term growth.
Some of the cost we cut temporarily will gradually return as more doors open subsidies will correspondingly diminish and we plan to meaningfully ramp up advertising spending in our fourth quarter as consumers return to social and professional engagements.
That said, we expect to and this fiscal year with an operating margin of approximately 18, 5% and improvement of roughly 100 basis points above fiscal 2019.
Full year EPS is expected to be between $6 and five and $6 15.
Before restructuring and other charges.
This reflects approximately <unk> 10 accretion from currency translation and <unk> <unk> dilution from acquisitions.
Our fourth quarter sales are expected to rise between 44% and 50% in constant currency.
This reflects both the recovery in many parts of the world as well as an easier comparison against the prior year period, most impacted by the pandemic.
Currency is expected to be accretive by approximately four percentage points and the addition of approximately one month of sales from Decime wood contribute less than two percentage points to sales growth.
Fourth quarter EPS is expected to be between 38 and <unk> 48.
Reflecting the sales outlook and increased investments to support the ramp up of our and innovate innovation and manufacturing capabilities and Asia continued.
Investment to drive our online business and the advertising and promotion to support recovery with the resulting operating margin more typical of our pre pandemic levels of mid to high single digit in the quarter.
Currency is expected to add two cents to EPS and the addition of <unk> is immaterial for the quarter, given the short timeframe and purchase accounting.
In closing.
We are pleased with our performance and the third quarter and the context of the challenging macro backdrop, our skincare and fragrance brands have proven to be resilient. During this time as consumers shifted online and we enhance the digital experience with increased services on our sites.
As we navigate through the final months of our fiscal year, we are investing and both the near term recovery and the drivers of long term sustainable growth that create value for our multiple stakeholders.
While it is difficult to predict the growth of global prestige beauty and the near term.
We are confident as we have demonstrated that we can net nimbly allocate resources to continue to operate with agility and gain share as the recovery gives way to the new normal.
That concludes our prepared remarks, and we'll be happy to take your questions at this time.
The floor is now open for questions. If you have a question you may simply press star followed by the digit one on your Touchtone telephone to ensure everyone has asked the questions. We will limit each person to one question time permitting we will return to you for additional questions just.
You up again by pressing the star key and the digit one.
Our first question comes from the line of Laura Lieberman with Barclays.
Great. Thanks, good morning.
Good morning. Good morning, I was hoping you could talk a little bit about and Asia Pacific because as strong as trends are.
And on a two year basis things were a little bit slower this quarter and I know the fiscal second quarter. You have 11, 11, and that's probably a much bigger shopping holidays and Chinese new year.
But from the aggregate level that we see and Asia things are probably a little bit slower than people expected. So could you just give us a little bit more color there.
Describing maybe trends in China mainland, China, I should say versus whether it was the Hong Kong, Japan, and other areas, where things might have slowed down and.
And also any other thoughts on Hainan and the degree to which shopping there may be overlapping with things that.
Richard as it used to happen and other Asian markets.
The Chinese are traveling more overseas that are now maybe repatriating those purchases to the Hainan.
Yes, no sure let me start and then Tracey will add.
<unk> deep.
First of all and we believe China is Super strong I mean, we have accelerated the size of our reported number is 63% growth and which is.
Almost doubled last quarter so.
China mainland is very very strong and all of these numbers include total Josh which is a also a strong growing brand in Asia and now it's part of our <unk>.
Our portfolio.
So all good and now your question on China, and a high and was also strong and continues to grow and as we said, we really look and manage the Chinese consumer so we sell to the Chinese consumers, where they are when the travel to high and we sell to to them.
In the travel and when they are in the cities, we sell to them and the cities the opportunity of continue serving the growing middle class and D day.
The multiple smaller cities, which are becoming very important for consumption and from which the demand is growing it continues and we are serving these multiple and growth menu and so the smaller cities the tier three tier four.
And the different consumer groups, we are serving these both the mainland and in high net when the travel.
And in a very positive way, so China is very strong and and in our opinion, we continue a very strong trend.
The other thing the we seen which is important to us and China is the recovery of makeup because China is ahead.
Although the reagents in the control of COVID-19, and so and people going back with more confidence to shopping on symbolic and Mars and the and we see the positive impact on debt on makeup, which I said in my prepared remarks grew double digits.
And in and this obviously is encouraging for what's the day recall day will represent also and the west as the brick and mortar.
Sales go back into the new normal.
D.
The other part of your question was about Asia, and total and yes, Hong Kong is obviously smaller than what used to be and the recovery is lower.
And so on Kong is getting better, but it did and been resized at least for the time being to what used to be so still is a drag versus the historical levels and Japan was definitely hit by.
The new wave and there was new closures and a lot of the government activity to limit shopping in brick and mortar any way to limit.
On the the social the social life activity, which means the gain.
The very big impact on makeup and so the.
The Korea on the contrary start the recovery had the better and better quarter in Australia and.
And the destiny and better cost by the way of Australia is another place where is the visible the recovery on <unk> because of the opening of the brick and mortar and more social life. So Asia was the very mix back in summary, very strong China very strong heinen.
And is better Korea.
Better Australia, New Zealand and.
And still very hard to hit some of the emerging markets Japan.
And on Coke.
And you covered it perfectly and okay.
Good.
Your next question is from Erinn Murphy with Piper Sandler.
Great. Thanks, good morning.
The thing you could share a little bit more about the Renaissance of makeup you spoke to and China. In particular, how is the consumer interacting with the category. There are there new trend that they are starting to embrace and then are they sticking with virtual try on and some of the new ways of shopping like social selling our live streaming.
And or do you anticipate testers are samples coming back just curious on some of the behavior behind that category there.
And so the F.
First of all what we see is that the the recovery on makeup is particularly benefits, particularly of the recovery of brick and mortar and omni channel shopping because people don't like to interact with the products and like the speed and so shopping together.
And so this is really one driver and so in China, we see the is getting stronger.
And as the recovery unleash and while we see in term of product the people and again and I speak about China, where these after the dose Australia and Israel is and how the pleased where we see signs of what's happened during the recovery and the science at a consistent and by the way.
And first of all people go back to the core makeup.
Also because they have not used the for some time and then it'll be fresh anymore and some cases. So there is the lotto back to foundation.
And two lipstick mascara and that needs to be purchased back and are depending which region on the award and a different proportion of the subcategories as you know that but this is back to core but there is also a huge interest in newness.
Obviously, the from an emotional and pulling people don't want to go back to the past they want a new normal that want to forget doctor and it is very difficult year.
When they are in the recovery mode, and and go back to a new future. So they look for newness from novelty and that's why in our area.
And that plan, we are both planning and in every region of the wood web where when the recovery will happen we are ready to bring back our core and allow the consumer to reload what is their core habits of the core products and at the same time and on <unk>.
And the mix of new product innovation and breakthrough with the <unk>.
Fresh wood.
And to use makeup new luxe and and most importantly looks which are consistent with the rain a sense of the use of the dual patients because to be the key of mid cap is not on the about shopping emotional shopping is about hedging the locations and your social life your profession.
And on life to use makeup and so we are studying how those locations come back and which kind of makeup core and newness is of interest for each locations and the location of different by region and so with this level of analytics, we are prepared and what we call the arena.
Which is the comeback, but these are very specific and our ability to day to manage these we positions and avoid the excessive push avoiding debt.
The wrong sub categories Farquhar.
The awards, ensuring a good return of our investments during the recovery our ability to do that and dramatically increase thanks to analytics, which are not only giving guys more data to understand what's happening, but is giving us more of that debt to anticipate what is going to happen and that's what we're working on.
Great. Thank you.
Your next question is from Nik Modi with RBC capital markets.
Hi, good morning, everyone.
Good morning good.
I wanted to ask about the recent.
New hire for the online president.
That you brought in from the <unk>.
Outside I mean, obviously the online business for you has done incredibly well over the last and all.
10, plus years and so just wanted to get your thoughts on kind of what the priorities will be for new leadership, especially given that they do have outside perspective, and both CPG and retail.
Yeah sure first of all and <unk> is now in since some months and the.
He is an exceptional new lead new Hyatt and indeed, the well integrated by now and our organization.
He will bring to our online business to that level and as you said, we have done well for many years, but he is here to bring it to a completely new level and so the the priority is the first of all to continue our growth and leverage this huge acceleration in every single channel in.
<unk> com and third parties in pure plays and retailer com and in the making sure that we have the circulation on the best practices around the award that we learn from what's happening in every angle in the.
And of the world, both in our business and and what competition or retailers are doing at the party of doing it.
But I would say the center of the this is to add more technology in order to make the consumer experience and each one of these touch points.
Really really high quality and even more competitive so the focus is on taking the consumer experience to the next level you heard me speaking in the past about charts virtual try on live streaming and many other experiences that are possible but need.
To become better and better over time and the surprise the consumer for positive and if we do debt correctly, we will continue to drive traffic to our online because we'll attract traffic not only because of our great brands of our great innovation, but also because of <unk>.
Our outstanding services online and because of the experience on line there will be friction from this.
And also we will need to make sure the discipline in a very efficient way and in a way, which is driven by technology and become consistent across the world. So the weekend scaled it.
And very fast and every single time.
This is going to be needed and finally, we will also one of the priorities is to make digital advertising and particularly all the advertised linked to e-commerce.
More efficient and more effective and.
With this to continue to push conversion there will be one of the key challenges and the key opportunities of the next year and the word the wireline.
Yes.
Your next question is from Dara <unk> with Morgan Stanley.
Hey, guys.
Hello, John.
Just.
Given the unique nature of the COVID-19 crisis.
Can you just give us a bit of and update on your expectations for the travel retail category going forward.
Quickly do you think demand comes back how do you manage the business for the pace of recovery, but also potential volatility.
And I'd just love a good of an update there.
Thanks.
Yeah.
And our again, Chris I'll, let you add any preferred by the way our travel retail business is up and.
And so is the.
I would say that the recovery will be and net extra divestitures what is already growth. So what's happened in the speed of these you will know is that the domestic travel in general and particularly within China.
As being more than offsetting the.
The lack of international travel all over the world and particularly on the West and so in this moment, we expect the trends the today in travel retail.
And in domestic travel in China, with China, and with new centers like the Shenzhen, the greater Bay and other opportunities which are emerging over time, we expect this to continue and do remain very very solid.
But then at the certain moment when international travel.
And will be restated and then we expect international and travel to bring net extra opportunities, particularly in the west.
Yeah.
And there will be obviously, many more populations going back to travel.
And if and when this will happen we envisioned on travel retail to be even.
Stronger the what used to be historically and definitely stronger than two day, which is mainly driven by only the domestic travel.
So.
Strong reality today, a strong future for Travelocity now travel retail is the.
Is about traffic, which what I was commenting on now speaking about the future recovery and international travel, but it's also drove the conversion which is the percentage of travelers the buy something so we have seen recently the conversion on going up driven by prepaid so the ability to value on line.
And when you travel and our presale is accelerating in Asia is a very it's already about one third of the business in many parts of Asia and is not yet very prescient obeidi significant in the west. So we see in the future pre team to continue to grow and to be a significant part.
And on travel retail and with the growth of pre teen we see the opportunity of increased growth on conversion and in that sense. The does the debt trap.
Traffic coming back the last conversion of the travelers into values continue to progress those to keep your eyes will represent a very solid future for travel retail.
And the only thing I would add Dara to let Fabrizio said you know we are obviously watching traffic patterns and travel patterns pretty closely our travel retail team is so international travel.
Is is.
The projected at this point and time not to recover.
And until perhaps even the second half of fiscal 'twenty, our fiscal 'twenty. Two so again, we're watching it closely obviously on the to recover sooner on the travel retail business internationally in terms of consumption would pick up correspondingly, but in the meantime, the travel retail team has done a fantastic job.
And of making sure that we are managing the western and travel retail markets prudently in terms of in terms of investments until we see the recovery of traffic and consumption in.
In the western and the western markets.
And traveling and the only thing on the other thing I would say is that.
Travel retail and online combined now are a little more than half of our total business and so when you think about our growth momentum going forward and the recovery on the strength that we see and online and and the recovery of travel retail.
And it bodes very well for our future growth.
Great. Thanks.
Your next question is from Jason English with Goldman Sachs.
Hey, good morning folks. Thank you for slot and me in the morning, I guess I wanted to and Jason.
I wanted to come back to I guess, the first question were good.
Growth was a bit slower than many of the expected and one thing that surprised me and wishes and sequential drop.
No the <unk> is always bigger than <unk>.
But the dropdown from <unk> to <unk> in terms of revenue was larger than is typical pretty much across every region.
But especially in Asia Pacific.
And so it begs the next one or two questions one.
Was last quarter, and maybe a bit insulated with some retailers once again stepping back and the market reloading the inventory.
Or is are we seeing more of a setback on me I know you talked about some markets tightening down, but generally from where we sit and look globally and it looks like the world is slowly reopening and obviously not all consistent with consistency consistently.
And so help me contextualize around my head around why would why we would see the sequential dip.
Yeah, I mean, I'll start Jason I think that.
And what we're seeing more and more in the business.
Particularly and in Asia Pacific is more seasonality of the business. So Q2, you know as the as you indicate has become a very large quarter for us. It always was the large quarter with holiday.
But with the addition of 11 11.
And and the tremendous growth of that holiday year over year.
We're seeing a very large sales number in our in our second quarter on.
And the third quarter as Fabrizio mentioned, China had a very strong third quarter. We did have some large markets in Asia on that were a bit softer, Japan and I think through this pandemic, we're going to see ups and downs until things really.
More sustainably get back to normal when vaccine rates, obviously accelerate a bit so I would not read anything long term into it other than this is still part of the pandemic in terms of seeing up and down performance in various markets. Similarly, the in terms of EMEA as well obviously outside of.
Of the of travel retail, but the the western markets and EMEA, We're also quite challenged and in.
In the quarter as well so that that we expect to see until again, we see more stabilization and normalization from the pandemic.
Yeah and.
And so frankly, I just want to underline with Tracey said I would read and these more avi.
The strong force the tool, particularly driven by an extraordinarily 11 11, where some of our brands with top in the 11 11 projects and by the fact the holidays.
We're in a moment also in the west and that we're pretty positive people, where possible and where allowed win back to shopping some brick and mortar. We're open and then maybe because these early days or in some places. We are open to early then there was the lotto closures immediately after and so Japan U K.
Italy passed on North America, Canada. So we got an enormous amount of closures and the January March period and.
And in the west, particularly at <unk> and <unk>.
Japan, obviously and so the debt.
And that's the combination and the combination is the pandemic impact on brick and mortar now.
Keep in mind debt.
As you have seen and the results, we have and extraordinary skincare and fragrance and also on our <unk> brand is doing really strong.
The question is the makeup recovery and the and the mid cap is very linked to the comeback on the brick and mortar spin and so all the closures the happen actually after the holidays and menu western market and in Japan did have an impact on on makeup and and.
And we have seen debt. So I would not say there is any long term sign and this quarter. Three actually is it is an extraordinarily strong quarter by the way was ahead of our guidance because we had seen debt and our guidance. We had seen this these kinds of things that would have happened because of the closures and the.
It was a very strong quarter in quarter, two adjusted an extraordinary quarter by the as Tracey said quarter two will be.
And pretty strong because in the future there will be always the combination of holidays and strong peak of commercial activities like the Navy 11, 11, and more debt that we create a high in term of absolute level of sales.
Okay.
Operator next question.
Your next question is from <unk> <unk> per week with Oppenheimer.
Good morning, Thanks for taking my question. So from a brief here I guess getting going back to the economy. So skincare and fragrance have now exceeded FY 19 levels. So I was curious if you look at makeup going forward do you have any do you see any structural impediments and your business to get back to where makeup was pre pandemic from a sales perspective.
No no definitely not.
We are counting on it again as coffee the Bates and the opening of the as I said before and I want to repeat that makeup is it is about usage of patients so and the use the education on makeup at exactly the social and professional locations debt when there are closures the window.
Pandemic is very active and not there and so consumption goes goes down and so we are really we don't see any reason why we will now go back to.
The first stabilization and then growth in the cat when the social locations come back and the professional occasional comebacks and <unk>.
To take the opportunity to meet the pictures to to date.
We have our current drivers which are the Chinese consumer.
Global online and the skin care category and now the high and fragrance category.
That will continue to drive the.
There is no discussion this these areas and been accelerated by COVID-19, but in reality debt trends with strong already before so COVID-19 has accelerated and we are ready ready and as you see we are having great success on these drivers even in the middle and now there are new drivers that should be.
Added to these drivers as COVID-19 will abate makeup usage as I said brick and mortar productivity and most market certain markets and consumer groups like U S U K, Japan Continental Europe emerging markets debt today and.
Fortunately really badly hit by COVID-19.
And we come back and we gradually come back as the COVID-19 improved younger consumer consumption, which is especially Inc. To makeup we come back and the tier outside of high net as we said before and the presale acceleration we've come back. So there are all these new drivers that we need to.
Accelerate and the next 18 months, assuming that will be the pace of return from COVID-19. Gradually then there are new strengths that we have built during COVID-19 and we have invested that debt is better innovation and Asia, We the center in Shanghai and the quality of our innovation that is create the higher repeat purchase rate.
There is more skincare and more makeup signification and we had more production capacity of high quality production capacity and our.
Upcoming factory in Tokyo, and better consumer understanding and.
And better ability to anticipate trends driven by our investment and analytics more resources for advertising, especially the digital advertising, which is increasing back to the high touch services on line as I explained before when there was the question on online.
And Brian portfolio, which is becoming a stronger and stronger with the acquisition of decent Josh.
And huge investment and acceleration every E S G activity during COVID-19.
And the all of these combined is what I call the new strengths that we bring into the project. So the way we see it is that the current drivers will drive the new drivers, including makeup will come back and.
And the new strengths the with built in the Este Lauder companies. During this year will hit and that's why we really believe that this quarter is just the confirmation.
We are creating a very solid long term sustainable growth pattern for the companies.
Okay, good and the only thing I would add to that is.
Just to underscore some of the investment and technology, we've made for virtual try on and so when you think about those social and professional locations coming back on.
On whether someone wants to come and the store and try and makeup or if they want to try it online the engagement that we see online from some of the capabilities and features that we've added to the online certainly bodes very well for.
When windows occasions come back and and the makeup category and acceleration.
Okay, great. Thank you.
We have time for one more question. Your final question will come from Chris Carey with Wells Fargo.
Hi, good morning, everyone.
Yes.
So I wonder if you can just.
Provide some comments on how youre thinking about that operating margin for fiscal 'twenty, one, which I think you said was 18, 4%, but correct me if I got that wrong and you noted this quarter.
And that there are temporary but also longer term cost savings.
And substantially lower operating costs and store with the shift to online.
There are some subsidies and play.
But youre also reallocating costs for the longer term from brick and mortar to online channel mix, and obviously, you're going to be the dynamic going forward and and.
The underlying the question is that the.
Margins continue to come through at a much higher level channel mix is clearly element, but there are some costs that have come out permanently but also costs that are going to be coming back into the base and so I guess getting back to and I Wonder how you view this fiscal 'twenty one.
Target do you think that you can move up from there with all the initiatives that they have noted or or would you expect some sort of a step back as you whether some of these.
The cost coming back from the base and channel mix.
Evolving over the next year. Thanks, so much.
Yeah. So.
Chris as you know, we typically give forward guidance for the upcoming fiscal year in August, which we will which we will we will certainly do and this has been an unusual year because of all of the things that you've mentioned you know we had part of the year, where we had temporary salary reductions we've had furloughs.
And and we've also done a fantastic job our teams have in terms of in terms of managing managing costs. Some of those costs will come back next year and some of them then wont some of the door closures that we've permanently done.
Those are those costs and the remaining fleet of doors should be more productive as traffic continues to accelerate to two brick and mortar which is where we see the bulk of the recovery. So.
Given the cost actions that we've taken given where we expect growth to come from next year.
Disproportionately we would expect continued margin progression.
But but we'll be able to say more specifically what that will be in the in the August timeframe, but you know as we've said you know.
For many years.
Our growth areas are all margin accretive when you think about travel retail when you think about online when you think about the strength that we've had over multiple years in terms of skincare and as Fabrizio said, we expect skincare and fragrance to continue to grow and makeup will will also grow more strongly.
Certainly next year as those locations come back so we've got multiple engines multiple ways to progress.
Progress margin, even as and as investments do come back for brick and mortar and and and other areas. We will in the fourth quarter issue indicate and the and I said in my prepared remarks, though strongly.
Strongly invest as we normally do for the start of a strong fiscal year, and we will invest more in and advertising to support what we believe will be and acceleration. It's selectively in the markets that we think that it will happen and.
Thanks, so much from the perspective.
That concludes today's question and answer session.
I would like to turn it back over to management for closing remarks.
No just thank everybody for obviously, there are their interest and and the company and and again I think we want to thank all of our teams for the fantastic performance navigating through what has been a difficult year.
But we are incredibly proud as I mentioned, and Fabrizio mentioned of our results and and certainly.
And look forward to closing the year strong with the guidance that we provided so thank you everyone.
Thank you if you were unable to join the entire call a playback will be available at one P. M. Eastern time today through may 17th to hear a recording of this call. Please dial 18558592056 pass code number five five.
The six nine and 398 that concludes today the stay Lauder conference call I would like to thank you all for your participation and wish you a good day.
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