Q3 2022 Estee Lauder Companies Inc Earnings Call
[music].
Good day, everyone and welcome to the Este Lauder companies fiscal 2022 third quarter conference call.
Today's call is being recorded and webcast for opening remarks and introductions I will.
I'd like to turn the call over to senior Vice President of Investor Relations Ms Rainey Mancini.
Hello.
Hello on today's call are Fabrizio, 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 with the SEC, where you'll find factors that could cause actual results to differ materially from these forward looking statements.
Cause 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 all net sales growth numbers are in constant currency and all organic net sales growth excludes the non comparable impacts of acquisitions divestitures and branch closures and the <unk>.
Impact of currency translation.
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, our references to online sales include sales, we make directly to our consumers through our brand dotcom sites and through third party platform. It also includes estimated sales of our products through our retailers' websites during the Q&A session. We ask that you please limit.
Out 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 to Fabrizio.
Thank you Rainey and Hello to everyone.
I want to begin by expressing the great sadness weird for our colleagues and all the people impacted by the invasion who cranium.
Who are experiencing a devastating do many times create crashes.
We continue to focus on our employee safety and our Derisked hope is for peace to predate.
In the third quarter of fiscal year 2022, we delivered organic sales growth of 9% in line with our guidance. Despite the acceleration of temporary copy 19 restriction in China in March.
We exercise cost discipline as volatility increased and our adjusted operating margin expanded leading to stronger than expected adjusted earnings.
Earnings per share growth.
17%.
Our multiple engines of growth strategy enabled us to amplify the engines of the moment army, they intensified macro environment, which saves rising organically across both brick and mortar and online.
Every category grew organically led by fragrance. His outstanding performance 11 brands contributed double digit organic sales growth and further demonstrated our diversified drivers consumer demand remains robust even in these inflationary environment our largest brands.
Provided highly sought after Mac Este Lauder and Clinique each delivered double digit growth in makeup fueled in the category of Renaissance, while a man thrived in skincare.
Four of our scaling brands reached one eight strongly we consumers as Jo Malone, London, Tom Ford Beauty.
Bobbi Brown, each rose double digits.
Among our developing brands Le Labo, helium Pobby, bumble and bumble each achieved outsized growth and showcased their promise.
Our sales rose double digit organically in the Americas and EMEA.
We capitalize on reopening to translate improving brick and mortar traffic trends into outstanding sales growth owing to our high touch services breakthrough innovation hero franchises and operational excellence, our freestanding stores delivered exceptional performance benefiting.
Fleet optimization and expanded omnichannel capabilities and complement the strengths in specialty multi.
We are managing the ongoing complexities from the invasion of leukemia as well as the temporary coffee driven restrictions in China, which impacted performance in Asia Pacific in the quarter in.
In mainland, China, where organic sales fell mid single digits as 25% growth of line was offset by a steep decline in brick and mortar.
After a strong February in mainland China traffic slowed more sharply in march to pressure brick and mortar seats.
For us the distribution centers for our mainland China business in Shanghai and operated with limited capacity.
Tourism to Hainan Island.
It was also curtailed in March after a zebra start off the course there.
There's no doubt that these current limitations in China will prove to be transitory, although they would be a far greater impact on our results in the fourth quarter than they were in the third quarter as Tracy will discuss Luke.
Looking ahead, we are confident in the resilience of the Chinese consumers and untapped opportunity driving our investments in the market. We expect a reacceleration of growth when this moment of Kobe abates.
Debates.
Let me share the progress we made during the third of course to drive these strong results in advance our long term ambitions for our multi play NGL growth strategy.
Innovation excel it to reach nearly 30% of seats, we continue to innovate our ability to lay that out your data and analytics with our best in class creative talent and are ready to successfully anticipates key insect trends there.
The breadth of our innovation wins.
It was far reaching benefits in every category in skin care la Mer upgraded the treatment lotion sword.
As the brand double down on these calls it that east to West project, increasing the scheme recharging medical brewed in transitioning to a recyclable luxurious glass bottles that contains 20% post consumer recycled content.
In Asia Pacific consumer gravitated to the new seed them strengths and anti aging benefits while in the Americas educating on the benefits of hydration and energy proved impactful with consumers demonstrating our expertise in serving multiple needs with one product and communicating with the app.
After a bit local relevance.
For makeup Mac so to grow its muscat of bees, especially across the Gen Z younger millennial and multiethnic consumers and created Mac stock Muscat with breakthrough technology stacks M deals the large Luke.
Mac stock went viral onto talk having now amassed over 153 million views and each sales far exceeded our expectations in the quarter.
Tom Ford Beauty, new private Blaine rose fragrances, fichu locally relevant nodes where roes.
<unk> feature Chinese goes then pony and rose the multi includes Italian bergamot. These launch drove exceptional results globally, including China, where the brand had a very successful volume teens day.
Lastly in hair care Aveda launched a botanical repaid strengthening overnight serum is wrapped in the category by creating our first overnight serum the build new hip bones, while you sleep the product sold key consumer pain points, we quick absorbing technology by leverage.
Genius serum based formula Encouragingly, the product quickly rose to being the top selling product in freestanding store and sold out on Brian Dow Com.
We are excited to build upon this momentum we are a new innovation center in Shanghai opens later this calendar year. This important investment in China will significantly increase our ability to serve the Chinese and Asian consumer with locally relevant and inspired innovation.
Also the new center will further enable our east to west innovation mindset supporting the creation of more successes like la Mers the treatment lotion.
Look at our growth engines by category, the strategic decision to pivot our fry against the portfolio to luxury and a teaser now is benefit both topline growth and profitability.
<unk> performance in the third quarter. It was superb with sales increasing 31% organically impressively sales exceeded the pre pandemic third quarter of fiscal year 2019 by nearly 50% on a reported basis Jo Malone, London, Tom Ford Beauty Le Labo.
All keyed M parties and in.
They passed some say that each month, each delivered double digit sales growth and Este Lauder brand complemented these strengths with eats well received numerous actually collection at <unk>.
Sumit as around the world increasingly express their individuality with sent these brands are delivering outstanding results with strong double digit growth fiscal year to date in every region driven by demand across channels from brick and mortar to online and travel retail.
They are freestanding doors are driving omnichannel experiences while their online businesses had been transformed during the pandemic.
And these fragrance brands I also contributing to our sustainability goals with refillable packaging being a compelling element of the value proposition for Le Labo and <unk> parties.
We are also thrilled to announce that during the third quarter and I. Both became B Corp certified making it the first major fragrance brand and first within our company to receive this certification, indicating a high level of commitment to sustainability and impact.
Turning to makeup it was on this call a year ago, we introduced our expectation for a mid cap Renaissance anticipating it would gradually aboard market by market as social and professional user drove patients began to resume.
We envision a day category with the speed and said he called really driven by both restocking as well as a renaissance rooted in a renewed passion for the joy and clear to you that your makeup after a difficult time.
Even with the rise of the Delphi normally convergence they may cap rate in a sense has delivered very favorable trends and offers great promise for the future.
As usual location expanded in certain markets upon reopening in the third quarter makeup once again delivered double digit organic sales growth in the Americas and EMEA.
Mac and Clinique makeup sales growth accelerated sequentially, while Este Lauder and la Mer businesses in the category of Radiohead premium than pre pandemic levels.
Our brands have been meticulous in executing their merchandising and innovation strategy for the Renaissance, we invested to create the omni artist with meeting the consumer is innovative ways across brick and mortar and online to educate inspire new luxe and offered the best Intel.
<unk> high touch services Mac has been superb in this regard so too has bobbi brown with events like live streams from the largest mall in Manchester, England to Esper group classes to Darwin in China too.
121 zoom sessions in the U S.
Moving to health care.
<unk> bamboo inbound have renovated a growth engines to contribute to the diversified category growth do we expected for fiscal year 2022, impressively, even as these brands grew sales strong double digits in brick and mortar or reopening during the third of course that they also achieve.
Mid single digit online growth.
Lastly, while skincare was pressured by call these restrictions in the east.
The bright spots with still many in the quarter, we continued to advance our strategies across many long term growth drivers from luxury to prestige La Mer performance was extraordinarily which saves the rising strong double digits as I discussed it upgrades the treatment.
Sword, creating a halo effect on the steel new yeah directly infused emotion, while its heroes, we're highly sought after with desirable innovation and coveted icons la Mer is welcoming new consumers, earning their trust and traded them up as each ultra locks.
<unk> de La Mer franchise is booming.
While our high end prestige skincare thrives with La Mer and Este Lauder renewal trip Bobbi Brown is prospering in the heart of the category. Thanks, Dewey strategic focus on threshold heroes like vitamin enriched phase base. We also lots of focused on entry level prestige to reach new.
New consumer notably with.
The old entity as the brand amplifies its heroes to drive repeat we did see ingredient led regime and based approach.
After the quarter close these announced it would be resigning his brand portfolio to focus our resources on the compelling opportunity we foresee for deals.
Neil.
During the quarter. We also improved upon the fundamentals of consumer acquisition engagement and high touch services positioning us well to realize even greater success with trial and repeat our past issue with Tic Toc expanded and we are piloting new innovations on the platform to be at the phone.
The front of social Commerce innovations.
In the U S. Several of our brands launched storefronts on detour seamlessly.
Linking to brand com.
Brands also expanded their capabilities, we instead of gut shopping a launched category powered lenses on snapshot similarly linked to brand Dot com.
We need to realize favorable engagement trends I want to talk any staggering and it featured its back in stock carbon black colony, lipstick and strong recruitment growth with new advertising for most of the surge went onto our featuring they made for social phase of adventure campaign.
The Este Lauder brand entered the met others is connecting with our consumer wherever they are is paramount and we are excited to be testing and learning in this new ecosystem.
It's the Lauder was the exclusive beauty brand passed in it.
The center aligned meta versus fashion week, the first ever large deal dual threshold week.
One Shane met others.
Around the world our brands are increasingly leveraging new campaign management tools to tailor, our communication and drive repeat to board reengage with consumers and foster relationship with new consumers. We are realizing increased reactivation and repeat purchase rate from the UK to France.
Australia and beyond.
In closing.
We delivered very strong performance amid the accelerating headwinds during the third quarter. We also made excellent progress advancing the long term drivers of our multiple engines of growth strategy.
These results and this progress due to the tremendous accomplishments of our employees around the world to whom I extend my deepest. Thanks as they continue to manage complex situation with Grays and ingenuity.
<unk> I'm incredibly inspired by our employees compassion for each other last week marked the two year anniversary of the diversity of the ELC cares employees relief Fund. The fund was created in response to employee increasing desire to support one another.
In times of need since inception over $10 million has been distributed to employees globally from donations and company matches.
Looking ahead, while we are lowering our expectation for the fourth quarter given the impact of the temporary COVID-19 driven restrictions in China, we expect to deliver another record year in fiscal year 2022.
We remain incredibly optimistic about the future of our business. This quarter proved that the vibrancy of prestige beauty its resiliency, even in a difficult macro environment and the strengths of our trusted brands and product innovations as market sequentially recover from the prolonged.
Pandemic I will now turn the call over to Tracy.
Thank you Fabrizio and Hello, everyone.
Our third quarter net sales grew 9% organically despite the increased complexity and volatility caused by the pandemic and the invasion of Ukraine.
Growth was broad based across categories and markets as most regions across the world continue to recover and grow albeit at different rates.
In specialty multi and freestanding retail stores led growth in online sales rose mid single digits being.
The inclusion of sales from the late May 2021, Decime investment added approximately two points to reported net sales growth and currency was a headwind of approximately one point.
From a geographic standpoint organic net sales in our Europe , the Middle East and Africa region Rose 18%.
Growth was realized across most markets channels and brands.
Market growth was led by both the recovery and the largest western markets as well as in key emerging markets like Turkey and India.
All brick and mortar channels grew led by double digit growth in department stores freestanding stores and specialty multi stores.
Organic sales online declined when compared to the prior year quarter, where online sales benefited both from the pandemic driven store closures and reduced store traffic.
All product categories and most brands grew in the region led by La Mer, Jo Malone, London and Mac.
Our global travel retail business again grew double digits. Despite the challenges that arose during the quarter.
Asia is the largest region for our travel retail business and sales in the key markets of China, and Korea were very robust at retail for most of the quarter. However, there was a precipitous decline in Chinese travel in March as the restrictions to contain COVID-19 were increased in China.
We continue to see a sharp increase in travel retail sales outside of Asia as traffic increase throughout Europe and the Americas.
Net sales in the Americas rose, 11% organically with all markets contributing to growth.
All product categories grew with particular strength in makeup and hair care.
The two largest prestige makeup brands in the U S Mac and Clinique outpaced overall category growth to gain share.
Bobbi Brown and Tom Ford Beauty also gained share helping to further drive the makeup Renaissance as more consumers continued their return to the workplace and resumed or social occasions.
Our sales in specialty multi and in freestanding retail stores strongly outperformed this quarter as consumers return to stores for shopping and services.
The inclusion of sales from Duffy I'm added approximately three points to growth and favorable currency movement contributed one point to sales growth in the region.
In our Asia Pacific region, organic net sales fell 4% driven entirely by greater China.
For the quarter net sales in mainland China declined mid single digits.
Following a strong lunar new year in February sales declined in March as additional COVID-19 restrictions impacted many cities, most notably Shanghai, where our distribution centers, serving the entire country are located.
The restriction sharply curtailed productivity at these facilities affecting our ability to both receive product being shipped into the country and to fulfill demand across all channels of distribution. However.
However, shipments should begin to normalize as restrictions ease.
Net sales in Hong Kong also declined throughout the quarter as the city took increasing measures to contain the virus.
Partially offsetting these decreases was strong net sales growth in most other markets, including Japan, Malaysia, Thailand and Singapore.
Online sales in Asia Pacific grew strong double digits as we continue to expand our brand reach across new platforms.
Our gross margin improved 70 basis points compared to last year.
Strategic price increases of approximately 4% combined with favorable currency and reduced obsolescence contributed to the increase in gross margin as well as the favorable impact of Anniversarying last year's under absorption of manufacturing overhead.
This more than offset the impact of increased inflationary pressures in our supply chain, mainly in logistics and materials and increasing startup costs for our new plant in Japan.
Operating expenses decreased 40 basis points as a percent of sale our leverage of general and administrative expense was partially offset by increased shipping costs related to higher freight rates and more air shipments on increased sales volume.
Additionally, as cities throughout China began tightening restriction and traffic the Hainan slowed we reduced certain expenses to correspond with slower retail traffic.
Operating income rose, 15% to $917 million and our operating margin expanded 110 basis points to 21, 6% in the quarter.
Diluted EPS of $1 90 increased 17% compared to the prior year.
During the quarter, we recorded $216 million of impairment to goodwill and other intangibles, primarily related to Doctor chart, reflecting forecast for slower than expected growth in China and travel retail.
We continue to believe in the growth potential of the brand, which has been impacted by the temporary COVID-19 disruptions in Asia, given its strong growth prior to the start of the pandemic as well as the growth seen in recovering markets.
For the nine months, we generated $1 97 billion in net cash flows from operating activities compared to $2. Seven 8 billion last year, which reflects investments in working capital to both support growth and mitigate some of the risk of supply chain disruptions as well as higher cash paid for taxes.
This was partially offset by higher net income.
We significantly increased our capital investment to $658 million.
To support the ongoing construction of our new manufacturing facility near Tokyo investments in our innovation center in Shanghai, as well as investments in online and technology enhancements and.
And we returned $2 six 2 billion in cash to stockholders through a combination of share repurchases and dividends.
Turning now to our outlook.
As you have heard and are aware there have been two significant headwinds that have emerged since we last gave guidance in early February increased COVID-19 related restrictions in China also impacting Hainan and the invasion of Ukraine.
Our current guidance for the balance of this year reflects continued momentum in the Americas and EMEA, excluding travel retail as well as the continuation of Lockdowns and corresponding distribution constraints in China through at least the first half of our fourth quarter.
While we expect continued growth at retail in both mainland China and Hainan the severity of the distribution constraints. We are experiencing are expected to result in a meaningful decline in net sales for these areas for the quarter we.
We are cautiously optimistic that we will be able to fulfill the majority of our orders in time for our planned 618 activities.
The elimination of sales in Russia, and Ukraine has reduced expected fourth quarter sales growth by approximately 120 basis points.
At the same time, we delivered outstanding results for the first nine months of the fiscal year with greater diversification of our growth drivers. Our geographic diversity is a tremendous asset and we expect our multiple engines of growth to continue including the ongoing recovery of the Americas Western Europe and most market.
In Asia.
We expect to also deliver strong margin improvement for the year the.
The benefit of our strategic pricing actions this year, along with the agility in our cost management are helping to offset the initial effects of increasing inflation throughout this fiscal year.
We plan to continue to invest in their recovery support innovation and assuming current disruptions abate seal upcoming key shopping moments in the quarter like 618 in China and mother's day.
With these assumptions as our backdrop for the full fiscal year organic net sales are now forecasted to grow 5% to 7%.
This range excludes approximately two points from acquisitions divestitures and branch closures, primarily the inclusion of <unk> and currency is forecasted to be neutral.
Diluted EPS is expected to range between $7, five and $7.15 before restructuring and other charges.
This includes approximately five cents of accretion from currency translation and <unk> <unk> dilution from <unk>.
In constant currency, we expect EPS to rise by 8% to 10%.
These expectations imply margin expansion of approximately 70 basis points, including dilution of 40 basis points from Daphne them. This year.
In closing.
We managed extremely well through an increasingly complex environment in our third quarter and these complexities are expected to meaningfully impact our fourth quarter. Despite this we continue to expect to deliver a very strong year with above average organic topline growth excellent margin expansion and solid.
EPS growth, we are confident that we can continue to manage through the present temporary headwinds and be well prepared for accelerated momentum when the pandemic effects ease.
And that concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is now open for questions. If you have a question simply press the star key followed by the dish at the one on you touched on the telephone.
To ensure everyone can ask their questions, we will limit each person to one question.
I am permitting we will return to you for additional questions just queue up again by pressing the Starkey followed by one.
Our first question today comes from Lauren Lieberman from Barclays. Your line is open.
Great. Thanks, good morning.
Tracy for retail just hoping to get a little bit more visibility if you will as to like the on the ground.
Inventory dynamic in in China, currently and how Youre thinking about that I guess for the first half of the quarter. So if I were to go on any of the e-commerce sites or to a store what do I see now am I able to place an order online or does it say out of stock.
To a store as their inventory because I'm trying to piece together the comment Tracy that you felt by six to 18.
Caught up.
But knowing that Shanghai is the way kind of in and out and Youre, assuming that constrained for the first half of the quarter I'm just trying to put those pieces together for that that fourth quarter outlook.
Thanks Lauren.
So it depends really on the SKU right.
And you know.
We do have.
You know we've had disruptions now for for the last several weeks as it relates to <unk>.
To supply chain, we certainly have had.
<unk> inventory and trade, but to your point, we have had some some difficulties certainly shipping product to consumers. So in some cases, it is taking longer than what it normally would and in other cases, where we haven't been able to ship at all.
We believe.
That.
Based on some of the things that we're hearing on the ground that the market might open up in mid may, but it's very it's uncertain right now.
So we obviously had to put our assumptions together as it relates to the fourth quarter.
And our assumptions assume that things will start to open up in in mid May.
And then there will be a catch up so we do have the product in and around China.
China for us for six to 18, its a matter of getting it to our distribution center and then obviously getting it out.
Two customers in time.
Your next question comes from the line of Steve Powers from Deutsche Bank. Your line is now open.
Great. Thank you very much.
I'm sure there'll be more questions on China, but I actually wanted to talk about the Americas.
Growth there was strong as you called out but it came in a little bit below our expectations and on a three year basis.
Local currency growth I believe is averaging negative 3% versus pre pandemic levels, which is a deceleration.
In a reversal from what we saw in the first half of the fiscal year.
That's obviously the negative 3% CAGR.
End of <unk>, So I just.
While a little bit more perspective on how you're viewing the recovery in the Americas, what may have caused that the fluctuation and multi year growth first half versus what we saw in the third quarter and just how to think about the progression over the balance of the calendar year. Thank you.
Yes sure.
No actually we believe our North America business is actually exited rating and is in very good.
Trent, obviously didn't deceived by court in May vary for a serious and team including presence of holidays. So presence of specific brands innovations et cetera, but in general.
We had the plus 24% in the last 12 months and plus 10% in course to treat if you've seen that quarter. Three clinique is ranking number one overall brand Mach number one in Mcafee Bobbi Brown, Tom Ford Mach the ordinary Theyre all growing share.
We are doing it we have it.
Executing well the strategy or better covering all U S multi asset and consumer groups. We have improved our distribution mix, which now is more focused on high growth high profit areas in general, particularly we had improved our online penetration during coffee we are maintaining.
Now, we have reestablished strong brick and mortar productivity, which was heavily hit by Covid.
Also closing four freestanding store and exiting a number of our closing department stores doors.
We are rolling out successfully they all try to get to the sephora called new doors, which are proving but a way to reach new consumers.
We have a stronger Mac and Clinique performance business, which in North America frankly, the two key brands.
Driving the overall size of the growth.
We have some strong innovation successes in quarter. Three for example, Mac stocks, which were mentioned in the prepared remarks, which is so far an extraordinary success.
And.
I would underline that we are in a market where prestige is being recovered much faster pace than mass, which is exactly proving also that we are back into sourcing from mass new consumers, particularly with our entry.
Prestige pricing brands like Mac Clinique, let your daily.
We also added with these acquisitions.
The ordinary brand, which is the force number four in prestige U S brands already in skincare.
She is an extraordinary position in ranking first in union to see many of the retail partners, where they're sold.
And ill talk on speaking about distribution one third of our North America business now is in our direct to consumer model with freestanding store render calm and certain online activity really include including social media direct.
Dvds, which gave US a lot of more data consumer data and understanding of the consumer that we ever had in the past so.
It's been years of reshaping, our North America business in a condition. The belief today is strong and easy match more stronger.
Platform for continued growth and continue our market share development of most of our brands in a in the future as well. So we are very positive of our North America trend.
Also very proud of today, having a strong and motivated team, which is inaction and which is driving the business forward.
Your next question comes from the line of Nik Modi from RBC capital. Your line is now open.
Okay. Thank you and good morning, everyone.
I wanted to get maybe an assessment and Mac in the U S.
Prior to the pandemic the brand was under a lot of pressure.
It seems like things are looked.
Looking better now, but I didn't know if that's a function of just improved mobility in the makeup category overall.
An improvement in the underlying fundamentals of that brand. If you could just help kind of frame the situation for us that would be helpful.
Yeah, I know I see Mac is really.
A strong recovery trend and is a first of all the makeup category in general as I explained during the prepared remarks.
He's in what we call the Renaissance many of the use of dual patients.
Makeup of coming back basically back to office that restaurants back to pass this.
Back to vacations, and all what we have seen and gradually coming back with corvid.
The retreating leased up to a certain extent disease. This is working and we didn't use that location coming back in.
Entire category is flourishing again, plus as I mentioned it is important that makeup is also linked to mood, mainly the joy of interpreting personalities in Turkey yourself, so and most positive.
So recovery from Corded is has been developing and in the last several months and this will benefit the category. So Mac is the market leader in the prestige in quarter three and so obviously is benefiting our gilded old category recovered second the brand is now a better mix.
In distribution is made important distribution choices. So he is reaching consumers better.
Refocusing well on the multi acting consumers that always been at the core of this brand.
And has extraordinary new creative power and our ability to speak the Mac values to the consumers in new fresh ways and.
Innovation is back many in not only innovation in <unk>.
Taste style.
<unk> Luxe theres been always through the quarter the brand, but also innovation in R&D, new ideas of performance like Max tax, which is frankly a dec.
Product innovation, as well, which builds on an idea which is so close to the core of Mac, which is mid capacity history, which is the ability to build.
Mascara on your lashes.
In different stacks, and so, allowing a different capacities interpretation or how much how long youre, which locations. So the ultimate customization and MS. Guy that's a big deal they consume that he's answering fast and already is a leading mascara in in North America than in any other market, where it's been so.
<unk> launched.
So Matt.
Mac easy and a strong recovery trend and.
We are very proud of the work of our team there.
Your next question comes from the line of Dara <unk> from Morgan Stanley . Your line is now open.
Hey, guys.
So just returning to China, a just short term detail wise it sounds like hopefully some of the supply chain restrictions could open up in mid may but if that's not the case can you just discuss contingency plans in a bit more detail that Tracy touched on.
Are you comfortable you can meet demand for the June holidays, if the Shanghai restrictions continue is it more top line risk or more a question of profitability. If you have to reconfigure supply chain to get product there and then just be longer term for brito.
Assuming your supply chain issues to end up being outsized versus the peer set.
It sounds like maybe Thats the case based on some of the competitor commentary so far but obviously, it's an issue across the board just any implications to your retailer relationships in China, or where longer term share and how you think about that thanks.
Yeah, Dara, so I'll I'll start.
There are two things going on in the fourth quarter.
That are impacting us.
Given given the pandemic.
<unk> management and.
In in China right now.
There is also a slowdown in traffic to Hainan and so travel retail is being impacted as well in the fourth quarter.
Specifically Hainan.
Along with along with with China, You know as you saw in the third quarter win win traffic slowed in our in our distribution and online.
We pulled back on expenses and we would be prepared to do the same in the fourth quarter.
Our assumptions change.
The other thing that you know that we are looking to do is have a temporary distribution center outside of the area that is most affected.
And hopefully we'll mitigate some of the pressure.
On our Shanghai campus. So those are a couple of the things that we're.
Planning to do as our plan B. If you will if if the market does not open up in in the middle of May but we are encouraged by some recent signs that we've seen in terms of our herd in terms of of some of the cases coming down but it's quite volatile there also.
This is the best estimate that we have at this time of the situation and are and what we could deliver in Q4.
Yeah.
Yes.
Yes, and on your question on <unk>.
Oh, you're asking about retailer relationships.
We are in China for the long term and completely dedicated to continue to develop the market and serve our past tennis that we.
We are going to open soon our R&D center in China, which is a very big event and a very manifestation of long term determination to continue to be locally relevant and sort of in the specific needs of this market.
And obviously, we're going to do to as soon as the Covid restrictions, which will allow us to proceed.
No.
And yet the thing I want to clarify that the China consumer demand underlining this moment takagi restrictions.
<unk> is strong and and now it comes really from a multichannel.
Online, where it's more than 50% of the mainland seats.
We grew double digit in quarter three despite what Tracy explained that in the last 15 days of March we could not cheap existing orders. That's the key point, we couldn't ship orders that we had already in our hands, both from retailers and consumers online and and so obviously that's temporary and is.
These options to us in the past in the United States and Europe during the pandemic Lockdowns. So we know how this works and how this happened we know also how to rebalance when this finishes because he is not about consumer demand is about access to consumers that has changed dramatically in a very.
Sure Peter.
But the online was very very strong.
Very strong February and despite that we grew market share and of course, it tree online, which is extraordinary despite the inability in the second half of March to serve consumers item was strong till mid March but then Hainan.
Very strong.
Decline of traffic, we estimate 60% to 70% in the second part of March and in April we saw 80% traffic reduction in Ireland. So that's what is reflected in our quarter four but also we have seen historically that also the bounce back.
Can be very strong because when these restrictions finish.
People travel domestically very fast and very heavily and so the confidence into hiding in future is unchanged actually increased.
Given the incredible development of the plays in the confidence in online is very strong also because together with the continuous success with Tmall.
Are also now expanding in having good expansion online we J D. We do in digital marketing with Tic Toc Activations.
So many other things which are in the making brick and mortar was the most impacted during the restrictions and that's so as of mid March was Ria and the entire month of April was really impacted in the areas, where the where the restrictions was not everywhere, but it was definitely in Shanghai, where we have a lot.
As we discussed with distribution center so.
Also I want to clarify that the long term fundamentals of global prestige beauty in China and in travel retail China remains very very good actually I personally have never been more enthusiastic about the opportunity when the market rebounds also should be much more.
<unk>.
As we have seen in the U S. Because we because the market will rebound in travel retail.
Line in more productive become master any more productive fragrance business is that in any other region around the world. Because these high end fragrances is a much bigger percentage of the total development with the category.
Also we continue to invest in China as Crazy as.
Clarified and obviously, we will tailor the investment to the level of access to consumer that the restriction will permit but we will invest in the growth in the innovation center, there will be more brands in China coming soon additional cities coverage.
As soon as the permissions then the restrictions will allow Ah.
I spoke already about the strongest plans with our partner Tmall and the further diversification of the coverage in the country.
The category growth expansion beyond skincare and makeup of fragrances coming gaps strongly the supply chain that needs to be further diversify a cheat Tracy has alluded to but we had already planned for fiscal year 2023, or 24 to have more regional distribution.
<unk> centers that we will deploy but in the meantime, we'll we'll look for certain temporary activity high.
China expansion is also has thrown in there are new mega counters that getting expanded in China as we speak.
For not only for us on some of our competition, but at his throat any new opportunities, which widened the mating up temporary.
Obviously in this moment as I said, there is a lethal traffic, but for example in July September period, there would be more of a discount or expanded.
The expectation for <unk>, assuming that the logistics can be resolved today is pretty strong and also I want to underline that we.
We hear that it's very likely that would be more economic steam on US ahead in a country that will further develop consumptions in the next 12 to 18 months so.
I just want to underline I hope was clear that we are really trying to be as prudent and objective as possible in reflecting the COVID-19 restrictions, but we've remained absolutely determined to continue to build our China and China businesses.
Your next question comes from the line of Andrea <unk> from Jpmorgan Your line's now open.
Thank you good morning, Fabrizio mentioned that youre comfortable when to fulfill when youre able to so I was hoping to see what was the impact in volumes of orders that were made online in China for your for your organic growth.
Also just a clarification on <unk> comments on the pricing front with I think 400 basis points impact of pricing in.
In the quarter. So I was hoping to hear what is the rollover impact on the carryover into the fourth quarter and and the mix impact I'm, assuming the mix was a negative given that youre selling less on a relative basis have really lasting skincare, how fish out of all of those thank you.
Yeah.
So let me start.
Andrea with the with the pricing.
My 400 basis points really was for the second half of the year. We we started the year, taking 3.5% of pricing increase and typically we take most of our pricing increases at the beginning of our fiscal year.
We did take a second price increase in January so the impact year over year for our second half is 4%.
<unk>.
Relative to the prior.
Prior year.
And we expect to in our upcoming at the beginning of our upcoming fiscal year in July take additional pricing so.
And that pricing is is strategic between between.
Levels within within the tiers of our of our category. So yeah.
Yes, skincare higher priced skincare might take higher price pricing.
Our lower priced skincare would take lower lower price increases, it's very much dependent on the market. The currency. The inflation. There is a very sophisticated model that we use to determine what pricing for our various our various brands. So.
So yes, we will have lower skincare sales in the fourth quarter, but on average the <unk>.
Reising increases that we've taken will still be around 4% and we do expect that they would cover the inflation that we are experiencing at the moment.
And the answer in the <unk>.
First part of your question, which is.
How much we could not ship frankly, I cannot distinguish the online versus the brick and mortar, but I can tell you that.
As of March 15, when we couldn't for 15 days of the course.
Ship the orders we head.
The <unk> that we had in our hands that we did not ship in that moment, where two five points of growth for the entire course too so a substantial amount of shipments and and then debt.
April also in the beginning of May also we had limited capacity shipments and and also importantly in the courts. The three numbers that youll see the impact of the pandemic was mainly reflected in the mainland China.
Impact why let T. R had a very strong quarter. Despite there was less traffic in the second part of March. So somehow ended up with higher stocks is in our assumptions and and then in the quarter for expectation.
There is a bigger proportion of the input of the reduced traffic in China than there is frankly any input in China and so that's also maybe give you a bit more.
Right now.
Our assumptions in this very difficult situation frankly to interpret.
A detailed level given the very high volatility.
Your next question comes from the line of Bryan Spillane from Bank of America. Your line is now open hi.
Hi, good morning, Thanks, operator, and thanks for taking the question.
For Brito, you mentioned in the prepared remarks or maybe in the Q&A, just maybe an expectation that there could be some stimulus in China and I guess one of the questions. We've got this morning was whether or not.
Any of the softness that you've seen in China is all connected to the consumer.
Feeling the impact of the economy slowing or recession risk. So could you just touch on that a little bit just in terms of whether or not you've seen any.
Sort of impact on demand or any consumer behavior patterns based on the economy slowing in China.
No. So far we have not seen any impact in this area also because.
Not only because as I said the demand remained robust and you can look at the demand and you need to look at the demand in China in this moment.
Since when global cause it started many since when China Chinese started traveling internationally less.
You need to look at it like the brick and mortar in China, the online in China and Thailand.
The combination of these three it's been very very strong even if you look at our cost the tree and you put together the results in TR together with the results in mainland China online as I said before we were growing market share and growing double digit and the brick and mortar very soft moment.
But when you put it all together you see demand growth when you look on the mainland China or on the Hainan in certain moments without.
You may see different patterns by by channel, but the total Chinese consumption has been very very solid for us for the industry for competition in general.
The other important thing to clarify that this is not is not changing also the composition. For example, the most important segment in this moment in the China demand is high end luxury brands.
So both in our portfolio brands like La Mer, Tom Ford or in our competitive portfolio or within our portfolio within a brand I Lauder.
The performance of <unk>, which is the high end part of the brand. So everywhere. The high luxury past is doing better in growth than any other past. This doesn't suggest that the consumers are.
<unk> by the economy does suggest the consumers.
Actually looking for high performance and strong experiences.
More and more in this moment said this there is obviously a lower economy economic than expectation in this moment, but also.
There is a lot of trust in the possibility of economic stimulus and the possibilities of restock stronger economic development. So I believe that the consumer sentiment is still overall solid.
Your next question comes from the line of chlorine Wolf Meyer from Piper Sandler Your line is now open.
Hi, Thanks, so much for taking the question.
Kind of expanding on that last question.
Consumer sentiment more broadly how have the recent developments.
Macro wise effect.
James your viewpoint or impact your viewpoint on the resiliency of prestige beauty as a category.
More broadly geographically both here in the U S and EMEA and in APAC. We've seen these consumer centric numbers start to get a little bit depressed over the past few weeks. So just wondering how youre viewing the resiliency of prestige beauty in these market dynamics.
Yeah, no I have to say that deal that we see the consumer sentiment obviously different level of development by region. So first of all the U S. The consumer sentiment is solid and in the U S is very interesting that you can also read the the results by.
<unk> channel and you see that prestige continues to grow and to accelerate in the post COVID-19 and.
Environmentalist consumer sentiments from our consumer sentiment standpoint.
On the consumer and sort of prestige accelerated much faster than mass that both are growing prestige is growing much more and this is a time again is assigned a consumer feel the confidence to go for well for quality for performance for <unk> and for what they feel connected to.
The more and more and to go back to the to the players or to the joy to the self panting ceilings. We chart overall, a positive consumer sentiment, but positive doesn't mean necessity really trust in the long term economy positive in and what move beauty.
He is a positive consumer sentiment also in the sense of the interest in dedicated to yourself the interesting pampering yourself.
Actually the consumer centered that is better explained by the coming out of very difficult periods, rather than by necessity on the economic trends.
And so that consumer sentiment is the one to push prestige beauty in general around the world in this consumer sentiment is sometimes even stronger in moments of high stress.
Because there is more pantry needs so strong in the U S. A.
I believe still solid in China.
Victor in many other markets like Japan, like UK markets with Saudi.
<unk> mentioned in our second like Japan.
Other markets in Asia, Korea, Singapore, which are all recovering from a tough call it period.
The only area, where the consumer sentiment as you know is going down is Europe and he is not because of economic reasons. Because also in Europe . There is the pleasure of getting out of the pandemic pressure as a sentiment that the war crane is obviously, creating.
Very bad feeling among people and and so people have said and there is this element.
Sentiment that create the mix and mix consumer sentiment at this moment in that in Europe , but that's the only area where the number of such as these by the way the numbers not the business the business in prestige beauty remain very very solid suggesting.
What I was explaining which is the consumer sentiment is a mix of economic external pressure led the already boardwalk, but also.
How they feel in terms of how much they need to take care of themselves to pamper themselves in this very difficult environment. So in that sense prestige beauty is more resilient to these kind of situations. The many of the markets and the only thing I would add to that is even.
As we've commented the fragrance category. During this time has picked up so to <unk> point in terms of self pampering and prestige hair care. So we're actually seeing an acceleration in some categories of prestige during during this time, particularly in the markets that are in recovery. So.
This really is a temporary situation that we're experiencing now and and ended the fourth quarter.
Our team on the ground in China has been working diligently.
To to try to get product to consumers respecting obviously the restrictions.
That are in place and staying are staying healthy and and we are incredibly thankful to them for all of the things that are that they're doing to to make sure that they can as best they can under these circumstances meet the demand of our consumers in China, who really are looking for our products.
And and we will get them as soon as we can get them to them. So.
We have time for one more question. Your last question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is now open.
Morning, everyone.
You think about the categories of makeup and skin care. What are you looking at for skincare going forward. As makeup is recovering so strongly in terms of new product releases and then any expansion of what you're seeing at the new Alta and target relationships and your product expansion there.
Thank you.
Sure.
Skin care will continue to develop actually one of the key thing is that there is the signification.
Many categories, including Macau have cure the skincare key trends are increasing and whats happening in a very broad sense.
On top of anti aging they remain very important, particularly with the growth of the more mature consumers growth in numbers and in interest in the category.
What's happening is that skin care is entering category of instant benefits than in the past, where basically only makeup area today skincare ease about anti aging ease about also instant benefit for Easter benefit I mean, I don't know luminosity.
Even skin tone brightness and there are so many different benefits that today are linked to how the skin luxe in today you use it rather than just overtime and so the category is bigger is there a more usage occasions and there are more.
Usual reasons basically more benefits.
And the industries, providing some amazing technology and some great progress in this area on top of that the penetration of skincare and on different target groups and also younger target groups linked to the better penetration of Easter benefits.
<unk> is increased around the world. So frankly, we have a very positive view in skincare in the long term, obviously skincare is very strong in Asia, and particularly in China and so in a moment of restrictions like in China. Now you will see less less strong growth in skincare, but these again as temporary.
As we explained at the entire situation, but the long term skincare trend remains strong in term of the.
D C.
Our situation off target Kohl's.
Target and called yes target all tangled Sephora.
Stores.
We are pretty happy of the initial results. There. These accounted for the moment on the three points of growth in total.
But for <unk> for the quarter.
And that of North America body.
But.
The most important news is that is bringing new consumers. So is a lot of this is extra and gave us the possibility to access new consumers and our brands are doing very well in those spaces with these consumers. So this also is a good trend in there.
Direction, but is only the beginning of the journey.
That concludes today's conference end today's question and answer session. If you were unable to join for the entire call a playback will be available at one P. M. Eastern time today through may 17th.
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That concludes today's Este Lauder conference call I would like to thank you all for your participation and wish you all a good day.
Yes.
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All right.
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