Q4 2022 Estee Lauder Companies Inc Earnings Call
Good day, everyone and welcome to the Este Lauder companies fiscal 2022 fourth quarter and full year 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 Nancy.
Sure.
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.
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 all net sales growth numbers are in constant currency and all organic net sales growth excludes the non comparable impact of acquisitions divestitures and branch closures.
And the 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 third party platforms. It also includes estimated sales of our products or our retailers' websites. During the Q&A session. We ask that you please limit.
Yourself to one question. So we can respond to all of you within the time scheduled for this call and now I'll turn the call over to appropriate scale.
Okay.
Thank you Rainey and Hello to everyone I'm grateful to be with you today to reflect on our record results for fiscal year 2022, and discuss the drivers of our outlook for fiscal year 2023.
We leverage our strengths Amit the prolonged pandemic the invasion of Ukraine, and the onset of higher inflation, our multiple NGL growth strategy flexible financial model and exceptional talent enabled us to deliver record performance at the same time, we invested for the long term.
Growth, reflecting our confidence in the vibrancy of prestige beauty now and in the future we achieved better than expected results in our fourth quarter, leading to a Bob guidance organic sales growth of 8% for fiscal year 2022.
Reported sales rose, 9%, despite heightened at foreign exchange pressure to end the year.
Adjusted operating margin expanded 80 basis points to an all time high of 19, 7%.
We realize these greater profitability, even as our growth engines diversified beyond our highest margin categories.
Fragrance makeup and hair care delivered double digit sales growth on a reported basis to complement our robust skincare business.
Impressively nine brands contribute to double digit organic sales growth for the year. Despite the significant pressure from COVID-19 in Asia Pacific in the fourth quarter, La Mer Jo Malone, London and later, both showcased the strength of our portfolio across our large.
Catering and developing brands, respectively, Mac Este Lauder and Clinique powered makeup emerging Renaissance.
With double digit gains in the category.
As Jo Malone, London, and Tom Ford Beauty elevators fragrance to new heights with striking growth.
Our geographic diversity as being a distinct benefit during the pandemic, allowing us to create and capture growth opportunities presented themselves around the world.
Asia Pacific led growth in fiscal 2020, one as markets in the west were more negatively impacted by COVID-19.
While the Americas and EMEA drove growth in 2022 is the east confronted renewed pressure from the virus.
Today, our 17 $7 billion in annual reported revenues tops pre pandemic levels by 19%.
Fueled by organic sales growth and enhanced by our acquisitions of total chart and Dalian.
Adjusted operating margin expanded 220 basis points over the three years.
Our trusted brands with their hero products and sought after innovation have thrived.
Our increasingly flexible cost structure has served us well.
Our focus on hero products have been a winning strategy. These high repeat loyalty in using products have grown significantly as the mix of our business since fiscal year 2019.
Throughout we have continued to innovate to propel our he a strategy for the years ahead.
They should serve as a powerful catalyst for growth this year, representing over 25% of stage once again.
Our newness exceeded consumer desires due to our exceptional data analytics and Randy and creative capabilities.
La Mers hydrating infusion emotions.
Este Lauder renewed retirement serum <unk>.
Mac stock Mascara are among our breakthrough launches this year driving favorable earned media value and strong new consumer acquisition.
Turning to category performance fragrance grew at 10, 32% organically for the year Jo Malone, London, Tom Ford Beauty, Le Labo helium parties, and ADC don't detract from Frederic Malle, each rose strong double digits and expanded in every.
Region, including excellent results in travel retail in EMEA.
Yes, the Lauder brand launched the luxury collection and Erin contributed double digit gains.
Outstanding performance of our luxury and artisanal portfolio affirms our strategic pivot to these accretive segment of the category.
Consumers' behaviors during the pandemic reinforced fragrance as part of self care and solidified online as the destination for the category to explore learn and purchase.
Our brands stepped up to create and leverage these new dynamics, we capitalize on the recovery in brick and mortar in many markets realizing high levels of engagement in freestanding stores, we don't while online continue to prosper for the category.
Makeup they needed a powerful growth engine in fiscal year 2022.
Strong double digit organic sales gains in the Americas, and EMEA more than offset a double digit decline in Asia Pacific.
As markets in the West Reopens.
Leading to more social and professional user applications. The makeup Renaissance emerged.
Our brands excelled with innovative artist as well as new products with which focused on performance ingredient narratives and signification of makeup.
We leveraged increased traffic in brick and mortar, which allowed us to reestablish our well loved services in store to realize the refill growth in services.
Hair care.
<unk> to be a valuable growth engine contributing double digit organic sales growth.
The unique value proposition and go to market strategy for each of Aveda, and bumble and bumble resonated with consumers, we increasingly have sped the benefits of quality products and performance based ingredients.
The skin care category was the most impacted from the resurgence of COVID-19 in Asia Pacific in the second half of the fiscal year as the restriction reduced traffic in brick and mortar as well as travel retail and also temporarily curtailed our distribution capacity in Maine.
China.
In this context, we delivered solid results as excellent performance from La Mer, Clinique, Bobbi Brown offset pressure from other brands La Mer had a remarkable year consumer around the world gravitated to its icon and blockbusters innovations embracing.
Eunice like Dehydrating infused with emotion.
And the upgrade to the treatment lotion to expand their regimens.
<unk> de La Mer lifted sales further as consumer trade up to the brand ultra luxury franchise for its a seasonal quality unparalleled efficacy and high curated experiences.
Clinique Bobbi Brown success is skincare demonstrated the execution of our sophisticated hero strategy to drive strong repeat and consumer loyalty.
Clinique heroes across subcategories from makeup remover to see room to most of the riser provided it with a winning formula while Bobby brands globally Regional hero philosophy is driving is mix of business in skincare much higher.
Looking now at channels, both brick and mortar and online served as growth engines for the year.
We pushed exciting initiative to amplify our omnichannel capability, let me share a few of the highlights brick and mortar rebounded strongly in the Americas, and EMEA, especially multi freestanding stores and department store all contributed.
Our first carbon business acceleration program enabled us to improve the productivity and sustainability of our brand building experiential brick and mortar footprint as intended.
Online grew mid single digits organically led by double digit growth in Asia Pacific.
<unk> high online penetration boosted reported sales growth in the channel to double digits.
Our online channel encompassing Brando Com third party platforms pure play retailers and retail Dot com is now far more than twice as big three pandemic fiscal 19.
China, and the U S, which already high online penetration have expanded further.
While markets in EMEA have seen a surge in online penetration is there are now able to realize the benefits of scale.
During the year, we diversified and high growth channels globally to expand our consumer reach Este Lauder Clinique and origins initially launched on <unk> in China, and given the insights gained as well as new consumer acquisition trends, we introduced more brands Andre.
D.
Jo Malone, London, and La Mer launched on Lazard that in Southeast Asia, and many brands participated in the emerging Ulta beauty target and safer I Kohl's partnership in the U S. Both in store and online.
We continue to innovate across the online ecosystem to generate trial and repeat in Latin America, which has historically been a strong market for direct selling we leverage whatsapp and drove social selling to represent 30% of online sales in the region.
Around the world our beauty advisers and makeup artist became content creators for always on creation across social media platforms like tick tock.
This showcases the power full evolution of the reach and scale of our expert advice, which now extends well beyond brick and mortar.
We also advanced our omni channel strategy meaningfully this year.
North America, most of our freestanding stores and now it keeps with fulfillment capability. We also began to stand up. These features in EMEA and Asia Pacific. These new capabilities are driving higher average order values and convincing upsell trends.
At the same time, we extended the reach of our loyalty programs globally, introducing programs in Japan, Italy, and Mexico, and expanding offering in other markets across EMEA and Asia Pacific here too. The results are compelling we are realizing greater purchase frequency higher level of retention.
From consumer engaged in loyalty programs.
During the fiscal year, we also progressed, our ESG goals and commitments, we continued to make strides on our climate action strategy, including the expansion of our renewable energy portfolio across our direct operations globally, and we are recognized by a leading NGO for.
Our commitment to source, 100% renewable electricity.
In packaging, we set a more ambitious goal to increase the post consumer recycled content of our packaging to 25% or more by the end of 2025.
And set a new goal to reduce the amount of Virgin petroleum package into 50% or less by the end of 2030, we expanded employee resource groups, a great social community and unity, our network of Black leaders and executives launched in Brazil, while.
<unk> Com, our group of LGBTQ I E plus employees launched in EMEA.
We created a group four hour ageless employees have continued to scale, our reverse mentoring program globally.
The more junior talent with senior leaders to share insights and perspectives on trends to drive better business decision and foster cadre of development.
We brought our unique senior women leadership program open doors to our international markets with continued great success in promoting our next generation of women leaders.
We analyzed important progress.
With that from every chair leadership development program. Its in our class has already achieved high level of career mobility in the forms of promotions and new rules for black employees.
We are encouraged by these initial results and look forward to continued success from the sponsorship program, which we created for equitable advancement and professional development of our black talent.
Before I talk about the year ahead, let me conclude on fiscal year 2022 by speaking about Asia, which complemented our organic sales growth.
The ordinary Dave Simmons ingredient based brand diversified in exciting ways over the last few months the brand launched in India, and Malaysia expanded its healthcare offering and also introduce multi peptide lash and brow serum to extend its authorities in treatment.
From its innovation exceeding expectation to standing initial results in Nike in India, the ordinary enter fiscal year 2023 with promising opportunities.
Now for the future.
We refreshed our 10 years campus to help steer our ambitions and investment for the next decade.
Campus reinforced our confidence showcasing the abundant growth opportunities ahead.
The drivers are mainly led by a growing middle class globally, and most especially in emerging markets expanding usage across consumer segments, including ageless and men and online expansion fostering consumer access and reach.
From the campus with distilled our three year strategy as we look across the next three years, we expect to deliver more balanced growth across categories and regions near term the pandemic and macro factors will likely lead to more valuable growth by category and regions.
We are very confident in the strength of our company and in the vibrancy of prestige beauty for.
For fiscal year 2023, we expect to deliver strong organic sales growth fueled by our diversified growth engines, and enticing innovation and to take the opportunity in a volatile year to continue investing for our exciting future to build global share.
While the external challenges are many including inflation geopolitical uncertainty and currency headwinds the enduring desirability of our brands with their hero products a high repeat rates is powerful.
Additionally, our more effective cost structure pricing power and strong cash generation should afford us the flexibility to successfully navigate the ongoing complex environment.
Innovation is poised to be a catalyst for growth.
And we began the year with exciting news, let me share insights about two skincare launches.
Este Lauder upgraded advanced night repair eye supercharge gel cream addresses the signs of agents reflects consumer modern lifestyles of long screen times and environmental stresses offering notable incremental benefits from the original product. This.
Launch demonstrates the pricing power of innovation.
Clinique Smart clinical repay line extended its fiscal 2022 innovation straight with the launch of smart clinical repaired wrinkled correcting cream. The most the riser is coupled with a powerful new claims for smart clinical repair serum to drive gains in this year.
Franchise.
This year, we expect to reignite growth engine in Asia Pacific as the pressure of COVID-19 debate, we anticipate in store traffic levels to gradually improve in mainland, China, allowing brick and mortar to return to growth to complement ongoing strength online and for tourism trends.
Two heinen to ultimately accelerate from the most recent polls, which began last week.
We are confident in the long term growth opportunity mainland China, evidenced by our expansion into almost 100, new doors and three additional cities in fiscal year 2022, as well as our introduction of the data last month, we are thrilled to enter the healthcare.
Category with Aveda.
Which is vegan and lithium Bonnie approved as the brand launched on Tmall and opened its first freestanding store in the market.
Fiscal 2023 is set to be a monumental year for us as of our Shanghai innovation lab opens advancing our ambition to best create for the Chinese consumers and we begin limited production in our new manufacturing facility near Tokyo.
Which is our first ever in Asia Pacific.
With these two strategic initiatives, we expect to benefit over the next few years from increased speed to market and by further expanding our momentum with our standing locally relevant innovation in this vibrant region.
For the Americas, and EMEA, we anticipate ongoing strengths from our growth engines across categories and channels.
Well as across developed and emerging markets given the broad based gains of fiscal year 2022.
For makeup which is a vital category in both regions. The emergence of the makeup Renaissance give us great confidence going into fiscal year 2023.
In North America, and particularly our focus turns to granular consumer growth opportunity as we have refined our distributions.
To close.
We delivered excellent performance in fiscal year 2022, achieving record results, while advancing initiatives for consumer acquisition engagement and high touch services and experiences to drive trial and repeat levels even higher today.
Today, our business is not only a bigger and more profitable than the pre pandemic fiscal year 2019, but our growth drivers are more diversified our R&D and innovation capabilities are more robust and our cost structure is more flexible why.
The year ahead, more certainly has its external challenges.
Our company is poised for a bright future as the best diversified pure play in prestige beauty with the most talented and passionate employees to whom I extend my deepest gratitude.
I will now turn the call over to Tracy.
Thank you Fabrizio and Hello, everyone.
I will briefly cover the fiscal 2022 fourth quarter and full year results followed by our thoughts on the outlook for fiscal 2023.
Our fourth quarter organic net sales fell 8% a bit better than we expected, reflecting the disruptions in China related to COVID-19 restrictions, including travel retail in Hainan as well as the suspension of our commercial business in Russia and Ukraine.
These matters more than offset continued growth from the recovery in the Americas and the rest of the EMEA region.
Reported sales growth included approximately one percentage point from the addition of sales from DSM Wildcat.
While currency translation negatively impacted growth by approximately three percentage points.
From a regional perspective net sales in the Americas Rose, 9% organically led by double digit increases in makeup and fragrance consumers continued their return to brick and mortar leading to strong growth in freestanding retail and specialty multi stores.
We grew sales in nearly every market in the region with particular strength in Canada and across Latin America.
Net sales in our Europe , the Middle East and Africa region decreased 9% organically driven almost entirely by the disruptions and travel retail in China, and the suspension of business in Russia and Ukraine.
The remaining markets in the region, Ken Rose double digit.
As tourists returned to the region and consumer traffic in brick and mortar retail thrived.
Makeup fragrance and hair care categories rose strong double digits in EMEA, while the decline in skincare reflected the soft travel retail sales in Asia.
Global travel retail, which is primarily reported in this region declined in Asia due to the Covid restrictions in China.
Hainan in particular was impacted as stores were closed a portion of the quarter travel was curtailed for the island and Courier services for online deliveries were disrupted however.
However, travel retail and European markets and in the Americas Rose Triple digits as airport traffic returned and doors in the channel reopened.
Net sales in the Asia Pacific region fell, 19% organically greater China and Korea net sales were the most impacted by the Covid restrictions.
Hardest hit with Shanghai, where the citywide lockdown lasted two months impacting our distribution capacity, serving all of China through the end of May.
Overall, our brands performed well for the important 618 holiday festival and maintain top rankings across the beauty space on both Tmall and JD.
Elsewhere in Asia, there were some other bright spots, Malaysia, Japan, the Philippines, and Vietnam continue to recover and have begun to reopen to tourism.
Looking now at net sales by product category fragrance led organic growth with net sales rising 22% versus prior year.
The fragrance category grew double digits across all regions.
Luxury fragrances continue to resonate with consumers looking for indulgence, and our brands, including Tom Ford Beauty, Jo Malone, London, and Lala Bell were once again star performers.
Net sales in makeup rose, 8% organically driven by the continued recovery and increased usage occasions, and western markets, where makeup is generally the largest category.
Mac and Clinique, where top brand performers driven by hero products like Max studio fix and the newly launched Mac stack mascara as well as clinique, almost lipstick and black honey.
<unk> success and expansion in specialty multi doors is also aiding category growth.
<unk> care net sales grew 5% organically.
Excellent performance from Bumble and bumble in specialty multi contributed to growth.
The launch of our latest vegan hair color in EMEA and a successful activation around the brands hero and body franchise in Korea.
Also aided category growth.
Net sales in skin care were the most impacted by the Covid related restrictions in China affecting greater China Asian travel retail in Korea.
Skincare continues to represent approximately two thirds of our business in the Asia Pacific region.
Net sales fell 21% in the quarter due to the disruption of the Shanghai distribution center with the greatest impact felt by Este Lauder and La Mer brands.
Skincare growth benefited from the addition of <unk> sales in the quarter by approximately three percentage points.
Our gross margin declined 370 basis points compared to the fourth quarter last year, driven primarily by factors affecting our supply chain.
Global transportation delays port congestion labor and container shortages and higher costs for both Ocean and air transport is increasingly pressured our cost of goods.
Unfavorable category mix from softer skincare sales also contributed to the decline.
Operating expenses decreased 9% driven by the curtailment of spending this quarter as COVID-19 restrictions sharply reduced store traffic in China, including Hainan.
We delivered operating income of $207 million for the quarter compared to $385 million in the prior year quarter.
Diluted earnings per share of 42 <unk> <unk>.
Included <unk> <unk> dilution from the acquisition of <unk>.
Shifting now to our full year results.
Given the volatility experienced throughout the year the results reflect the benefit derived from the diversification of our topline growth as well as the incredible agility of our teams and their ability to effectively manage costs, while also simultaneously investing selectively for future growth.
Net sales rose, 8% organically with double digit gains in three out of four product categories and two out of three regions.
Sales of our products online continued to thrive, even as brick and mortar recovered rising 11% for the year and representing 28% of sales.
Among brick and mortar retail most channels grew double digit while department stores ended the year down slightly as pressure from Covid restrictions in Asia offset growth in other regions.
And our business in travel retail also grew ending fiscal 2022 at 27% of sales.
Our gross margin fell 60 basis points to 75, 8%.
Favorable pricing and currency were more than offset by higher supply chain costs, which were more pronounced in the back half of the year.
The impact of the acquisition of <unk> and higher costs for new products and sets.
Operating expenses declined 150 basis points to 56% of sales.
Disciplined expense management, and general and administrative costs was the largest contributor to the decline the.
The changes in our channel mix continued to reduce selling costs.
And Additionally, we continue to drive more effective resource allocation in our advertising and promotional mix. These favorable trends were partially offset by increased shipping costs.
During the year, we continued to create more flexibility in our cost structure to absorb inflation in wages media and logistics.
We achieved significant savings from our cost initiatives, including the post Covid business acceleration program.
This has enabled us to realize greater expense leverage while also reinvesting in areas that support profitable growth, resulting in an overall improvement in our operating margin.
Our full year operating margin was 19, 7%, representing an 80 basis point improvement over last year.
This improvement includes the absorption of 60 basis points of dilution from <unk>.
Our effective tax rate for the year was 21, 3% a 260 basis point increase over the prior year, primarily driven by a lower current year tax benefit associated with share based compensation in the prior year favorable impact of the U S government issuance of final guilty tax Reg.
<unk> that provided for a retroactive high tax exception.
Net earnings Rose, 11% to $2 6 billion and diluted EPS increased 12% to $7 24.
Earnings per share includes <unk> <unk> accretion from currency translation and <unk> <unk> dilution from the acquisition of <unk>.
The post Covid business acceleration program is wrapping up with final estimated restructuring charges of $500 million to $515 million at the top end of our original projections.
We are pleased with the progress we achieved from this program.
We realigned our brand portfolio by exiting four designer fragrance brands as well as the Becker and Rodin brands and we are streamlining our market distribution for smashbox and glam globe to improve their long term viability.
We optimized our brick and mortar distribution network, we have been and will continue to close under productive freestanding retail stores as we rebalance our distribution network.
By the end of fiscal 2023, we expect to have closed nearly 250 freestanding retail stores under the program.
We have also rationalized department store counters and other retail locations, improving our ability to focus our efforts on driving more profitable omni channel opportunities and our remaining distribution.
We also approved initiatives to optimize our organization across regions and throughout global functions to reduce complexity leverage our scale and enhance our go to market capabilities.
When we are finished executing the program we expect a net reduction of between 2500 3000 positions globally.
We expect to execute the remaining projects to achieve estimated annualized gross savings of between 390 and $410 million before taxes beginning in fiscal 2024.
Portion of these savings have been and will continue to be reinvested in capabilities that sustain our long term growth, including data analytics online and advertising.
Turning now to our cash flow, we generated $3 billion in cash from operations, a 16% decrease from the $3 6 billion in the prior year period.
The primary driver was higher working capital due to the end of year disruptions related to the pandemic. The past few years as well as inventory to support future growth and to help mitigate the supply chain challenges, we have faced in certain raw material and component tree areas.
We utilized 1 billion for capital improvements and increase of approximately 400 million over last year.
We continue to invest in capacity and other supply chain improvements, we increased consumer facing investments to support in store experiences and recovery markets. We renovated office space and we continue to invest in information technology.
We also returned cash to stockholders at an accelerated pace this year as the need for more stringent cash conservation subsided with the progression of the recovery.
During the year, we repurchased seven 4 million shares for $2 $3 billion, and we paid $840 million in dividends, reflecting the 13% increase in our dividend rate that became effective in our fiscal second quarter.
All in all we delivered a strong year, despite significant disruptions, including continued outbreaks of COVID-19 higher inflation supply chain constraints and the invasion in Ukraine, and we also continue to invest in foundational capabilities for the future, including new production capacity and innovation to support.
Growth.
Now looking ahead to fiscal 2023, we believe that the prestige beauty category has ample opportunities for continued strong growth.
Global prestige beauty is expected to grow mid to high single digits driven by the continued recovery in the gradual reopening of the remaining markets impacted by Covid restrictions.
Additionally, we look forward to the continued resumption of international travel, especially in Hainan and the rest of Asia.
We are concerned however that the recovery this fiscal year, we'll once again not be a smooth one.
Record inflation and the threat of recession or slowdown in many markets could temporarily dampened consumer enthusiasm and is causing some retailers to be more cautious regarding inventories.
The strengthening dollar is putting pressure on our international earnings.
Additionally, heightened geopolitical tensions could prove to be disruptive.
With that backdrop in mind for the full fiscal year organic net sales are forecasted to grow 7% to 9%.
We discontinued for designer fragrance licenses at the end of fiscal 2022. These brands generated $250 million in sales in fiscal 2022.
In fiscal 'twenty, three we will sell some remaining inventory to the new licensees, primarily in the first half.
Sales from both years will be excluded from our organic growth figures.
At current levels currency is projected to be a significant drag on our reported results in fiscal 'twenty three as the U S dollar strengthened against key currencies.
Based on July 31 spot rates at 1.018 for the Euro one point to one five for the pound.
6746 for the Chinese one and 13 O three for the Korean won we expect currency translation to dilute reported sales growth for the full fiscal year by three percentage points as well as an additional one point due to the impacts of foreign currency transactions in <unk>.
Key international travel retail markets.
There are a few other items impacting our sales growth in fiscal 2023.
Our list price increases are expected to add approximately five five points of growth, helping to offset inflationary cost pressures.
We take most of our pricing actions at the beginning of our fiscal year.
New distribution, including new doors in existing markets, new markets for certain brands and expansion on new online platforms could add another two points.
Conversely, the loss of sales in Russia, and Ukraine are expected to trim about one percentage point from sales growth. We plan to continue to drive margin expansion through operational efficiencies and cost savings, while fueling additional advertising investment where appropriate.
Our full year effective tax rate is expected to be approximately 23%.
Diluted EPS is expected to range between $7 39, and $7.54 before restructuring and other charges.
This includes approximately <unk> 20 of dilution from currency translation.
In constant currency, we expect EPS to rise by 5% to 7%.
The impact from foreign currency transactions in key international travel retail market is also expected to negatively impact adjusted diluted earnings per common share by growth by six percentage points.
At this time, we expect organic sales for our first quarter to four 4% to 6%.
The impact of sales from certain designer license exits.
Our expected to dilute reported growth by approximately one point and currency is expected to be dilutive by approximately three points.
Our first quarter sales are expected to be negatively impacted by continued COVID-19 restrictions in China in Hainan as you may recall last year, we mentioned that some of our retailers in North America secured holiday shipments earlier due to supply chain concern contributing one five points to our growth in the first quarter of fiscal 'twenty.
'twenty two.
This year retailers in the U S have been tightening their inventories, causing our net sales to trail retail sale, we expect China and travel retail in APAC to gradually improve throughout the first half of the fiscal year as COVID-19 restrictions lift and comparisons should ease in the back half of the year as we lap the invasion.
Of Ukraine, and the significant impact of Covid restrictions in China.
We expect first quarter EPS of $1 22 to $1 32.
Currency translation is expected to be dilutive to EPS by <unk> <unk>.
The impact from foreign currency transactions in key international travel retail markets is expected to negatively impact adjusted diluted earnings per common share growth by five percentage points.
In closing we remain confident about the long term prospects for global prestige beauty and in our strategy to outpace industry growth.
Our multiple engines of growth delivered in fiscal 2022, and we anticipate this more diversified growth can continue in the coming year and.
And importantly, we continue to reinforce the fundamental drivers of our business that both enable and contribute to continued strong future sales and EPS growth.
I would like to close by extending our heartfelt gratitude to our employees around the globe for continuing to deliver our results during this challenging macro environment.
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 digit one on your Touchtone telephone to ensure everyone can ask their questions. We will limit each person to one question time permitting we will return to you for additional <unk>.
Question, just queue up again by pressing the star key in the digit one.
Our first question today.
Comes from Dara.
Amongst any end of Morgan Stanley . Please go ahead.
Hey, good morning.
Good morning.
Sure.
A two part question on China first just on the detail side can you just give us a bit more of a sense of what you factored in.
Both Q1, and the full year guidance on Covid Lockdowns are you assuming the city restrictions that are in place today continued throughout Q1, and then what do you assume post Q1 and the balance of your in terms of the legwork shutdowns.
And then the second.
Very hard for us to judge externally your underlying market share performance in China ex supply issues I'm sure. It's difficult for you also but just any perspective on underlying market share trends as supply returns to normal perhaps so far in fiscal Q1.
That'd be helpful.
And if you expect any of the supply issues recently to have an impact on your forward share at all thanks.
So I'll start there are regarding regarding China, and what we've baked into our assumptions.
Clearly the first quarter.
We are seeing some intermittent disruptions our distribution center is open were actually and opened in June as we mentioned so we were well prepared for the 618 Holiday Festival as I mentioned in our prepared remarks.
We are still seeing some intermittent shutdowns not whole city shutdowns in China at a at the moment. So that is still disrupting broke in brick and mortar retail. So we have factored that in certainly to our our Q1 expectations for the China market.
As it relates to Hainan as we mentioned also in our prepared remarks and I'm sure you all have seen.
Hainan is Ah is experiencing a locked down right now so all of the doors are closed career.
Carrier services as well have been have had been suspended for online orders.
We're obviously monitoring that day by day, but that is something that began in the month at the beginning of the month of August .
Right now we're expecting that to continue through the end of the month of August with some resumption in September .
But not full resumption and September recognizing that.
As the situation continues to.
Impact the market.
There will be some level of reticence for consumers to travel, but we certainly expect.
That that will improve in the upcoming months. So I think you know first quarter and first half we are expecting some level of muted performance in the region related to these issues, we do expect second quarter to be better than first quarter.
And then in the second half, obviously, where we're anniversarying quite a bit of disruption in the fourth quarter, some of which began in the third quarter for both Hainan as well as China and we do expect.
That are that we will see strong growth in the second half for the full year, we do expect China to grow double digit and so again. We are you know it is a market that we know there is very strong demand for our for prestige beauty and for our products and and the same with with Hainan as well so.
So we're just navigating through these are these first few months of of the year.
Until we get until we get on the other side in the second half.
And I'll comment on market share as Tracy just said, we do expect for the full year, China to go back growing double digit we expect strong recovery. He nine nine in the second part in the second semester of the fiscal year for sure and gradual recovery before that.
Our our assumption, which obviously is going to give US also results in market share. So speaking about the last quarter four to be clear the market in China was down 10% Este Lauder company was down 13%. So we lost one point of market share. We are now at 23.
Percent, so very strong market share I would like to argue that given the low down of our distribution center at the impossibility of serving for almost two months, our consumers, losing one points of market shift temporary is actually showing that already in June we started recovery with an outstanding.
Six to 18.
Rent and in the management of these and then to speak about where we are going to do further in the next six months to recover the market share we lost because of the distributions are down first of all strong brand portfolio of brands.
We are going to reinforce it with the launch of our Vida. The dress started which is a very important launch entering the hair care big and growing category the luxury haircare bigger growing category.
In China, we're going to double down on T mall, and entering new successful online distributions that we started with D, where we still have opportunity to deploy more brands in other in other areas, where we are testing or or distributing.
We have very strong innovation, starting with what we discussed in the in the remarks, which is the Este Lauder advanced night repair eye product, which is one of the most important categories in China.
And to be clear is one of the most important recruitment strategies is eye products in the market.
As you know we are opening.
R&D Center this year and so we are investing and getting even stronger innovations in the future.
We are getting a great strategy to win in key shopping moments I think that while we have demonstrated the ADC in June for the 18 six event is extraordinary in our team we're coming out of 40 days of Lockdown in Shanghai and they were able to operate successfully a very complex and important.
And we're going to do the same with 11 11, hopefully now in the in the second quarter.
We are also improving our distribution and brick and mortar we are opening new cities and new doors in the existing fast growing cities. We have a new distribution center that we are we have open actually we open this Friday in Guangzhou.
To mitigate risk of future distribution disruptions and then this will turn into a definite ongoing new second distribution center in the beginning of 2023, we believe the Hainan. Despite the current low dam.
Which is obviously painful in the short term but is superb.
Super strong opportunities for the long term the power of high end and in the future remains intact and we have a strong presence and market share in this operation and I want to say.
We have an amazing local team and local team they've been able to manage through these difficulties extremely web and <unk> and we believe that our strengths on which we can count in the future to continue building market share overtime.
Thank you for the question.
The next question is from Lauren Lieberman of Barclays. Please go ahead.
Great. Thanks, good morning, everyone.
I was struck by the mentioned that pricing this year expecting to be north of 5% and if I then layer in what you suggest it could be a contribution from from distribution. It suggests very limited let's call. It like for like door volume growth and so I was just I was curious if you could comment on that.
Because thinking about you mentioned appropriate have recruitment youre talking about launching a veda. It just feels like there's a lot happening that should still be driving unit growth.
I was curious if you could comment on that thank you.
Yeah, Lawrence I'll I'll start good morning.
We did call out obviously in our prepared remarks and in the press release, a couple of adjustments in our revenue numbers. This year. So we did exit our prestige designer licensed our businesses basically we are we ended those those licenses our focus is on luxury fragrance.
And our Tiznow fragrance.
And so we did let those those licenses expire that is about one point of growth.
The other point is related to the suspension of our operations in Russia and Ukraine.
And so that is also contributing another point if you will to.
<unk> adjusted growth and enter the suppression of growth.
That you're that you're referring to.
And then lastly, the currency impact on revenue.
Also impacts us in terms of in terms of our growth algorithm. So if you adjust for all of those items.
It's about six points of difference between what we've guided for the full year and and where we expect where we expect where we would expect to end if if none of those events that happen. So so that is the reason why the growth looks a bit muted even with the with.
The five 5% pricing the other thing I would say again is you know we are starting the year with a fair amount of disruption as we just spoke about and in some of our very important markets and we are assuming a more gradual recovery in that two impacts are around our unit growth.
The next question is from Nik Modi of RBC capital markets. Please go ahead.
Yeah. Thank you good morning, everyone I just wanted to revisit China, just given some of the economic data that we've been seeing recently I'm curious have you witnessed any evidence of any economic pressure impacting consumption and I know, it's hard with all the noise of Covid and the and the shutdowns, but perhaps maybe some of the markets, where you haven't seen a big covenant.
Pat.
Maybe you can share what trends have looked like any perspective would be helpful.
Yeah, Hi, Nick No actually we don't do we don't feel this is probably the the prestige.
The prestige cosmetic luxury cosmetics segment is more protected because of the big portion of consumer for this category and as you know the than the clear preference for.
The Chinese consumer for the prestige solutions.
Which is growing very fast for years now and the percentage of prestige for the to the market keeps improving so we don't see this.
Prove I can give you is that the top of the ranges are growing the fastest also on our brand La Mer is one of our fastest growing brands and as an example, so did and importantly, the the market is very active when there are no.
Restrictions and when there is no no issues.
So we don't see any side. Obviously, we are we are prudent in the assumptions, we're making on the China economy development in the short term as everyone is.
But we don't see a very big impact on our business in absence of the Covid restrictions situations.
Okay.
The next question is from <unk> Parikh of Oppenheimer. Please go ahead.
Good morning, Thanks for taking my question. So Tracy I was wonder if you guys can provide more color on the interplay between gross margins and SG&A for the year.
Yeah, obviously, we experienced some gross margin pressure in Q4, it was related to some of the activity that we had to manage through in terms of in terms of getting product to market and in some of the disruption that's in general in the supply chain. So.
And as we think about the first quarter and the guidance that we've provided we do expect gross margins to be down as well in the first quarter not to the same extent as they were in the fourth quarter and that will gradually improve throughout throughout the year as we're anniversarying some of our.
Some of those those disruptions so.
For the full year, we're expecting gross margins to be around flat at a at the moment.
But you know the beginning the first it's a tale of two halves in terms of the first half and in some of the things we're anniversarying and some of the pressures that we're seeing on our on the business, but we do expect for the full year gross gross margin to be flat.
In terms of SG&A again, we expect that we will continue to get good SG&A leverage I think we're incredibly proud of what our team was able to deliver this past fiscal year in fiscal 2022 in terms of the expense leverage that we were able to deliver.
It's something that we are keenly focused on while also focused on <unk>.
Investing in the important areas that drive.
That drive our long term growth algorithm. So so those are things that we continue to manage throughout the year and we will get continued expense leverage this year.
The next question is from Mark extraction of Stifel. Please go ahead.
Yes. Thanks.
Everybody I wanted to follow up sort of Directionally on the last question on gross margin. If you take a look at it even.
Pre COVID-19 pre supply chain.
Placing any pressures.
Just for some of the accounting changes kind of going back.
Three or four years ago.
Still kind of down over the last five years and your expectations for flat. This year I guess kind of the puts and takes that you're taking a lot of price.
You've got the post Covid business acceleration plan. So your productivity there is a mix shift in the business towards direct to consumer I guess, maybe you could talk directly about kind of what he has led the progression down but more importantly, kind of where do you think it can go over time, you know, it's that high seventy's level achievable again, why why or why not.
Thank you.
Yeah, I think we've seen over the timeframe that you are speaking about and yes, we definitely had accounting changes that impacted the gross margin between expenses and and gross margin.
But we've seen differences in the business in terms of our mix of business and so you know fundamentally and I know, it's important to understand what's going on in gross margin, but really what we focus on is operating margin.
And and as we have seen channel shifts and market shifts et cetera, those have impacted the gross margin, perhaps in some cases and some of those cases.
More negatively but they have impacted the operating margin quite positively. So at the end of the day, we're focused on delivering operating margin and profitable growth.
In terms of whether or not we expect that we will get back to higher levels of of gross margin. It is something that we are working on with our supply chain so between our.
Direct our procurement programs between some of the things we're doing in transportation the opening of our our Japanese plant, which which should allow us to be not only closer to the consumer but even to some of our to some of our suppliers.
For inbound.
Freight should also help us from a gross margin standpoint, I'm not going to commit that we're going to get back to the gross margins that we were at five or six years ago.
But do know that you know there are things that we see that are opportunities that are that we're also working on and very close partnership with our supply chain.
The next question is from Steve powers of Deutsche Bank. Please go ahead.
Thank you and good morning, I wanted to focus on makeup if if I could.
Obviously the trajectory there is promising you've been talking about the makeup Renaissance for awhile. It directionally is seems to be taking shape.
But were still below 19 levels by a fair degree. So I guess really the question is sort of what's your expectation.
For that recovery to continue the progress you expect to make over the next 12 months.
It's almost like when do you expect to be able to kind of a converged where those pre pandemic levels.
As we talk about that.
Most of the focus on the topline, but but obviously profitability comes alongside that and.
Your thoughts on on rebuilding profitability and make up alongside the top line would be helpful. As well. Thank you.
Okay. So let me I'll start.
In terms of makeup we are we continue to be quite bullish on the makeup category.
Did see a recovery, particularly in our western markets. So part of the strength that we saw this year. This past fiscal year in terms of the growth in makeup and the improvement in margin that we saw in makeup was related to the recovery in particular in brick and mortar.
In our western markets, so in the Americas as well as in as well as in Europe . We.
We are still challenged a bit and makeup in our eastern markets because of some of the disruption that's going on in particular in brick and mortar.
And but we expect makeup to gradually improve as the the disruption in those markets improve and similar to western markets as consumers resume their normal they're normal social and professional occasions.
So that that is our expectation in terms of when we will get back to fiscal 19 levels for for makeup you know depending on the disruptions this year.
It.
It may take another year or so but that our makeup brands have fantastic innovation for this year in particular, and particular, the Mac brand, but but but others as well.
And so we're very encouraged in terms of makeup as it relates to the margin. The makeup category has been particularly hit by the pandemic that is now going on for three years.
Cause of the brick and mortar distribution of makeup and in particular with you know a few of our makeup brands where services in store are very well loved by our consumers.
And in the in store experience.
You know that that took a that was a bit of a challenge with with doors closed and with traffic down and traffic is still down in brick and mortar even in the in the markets that are in recovery traffic has not recovered to.
The prior prior levels, but it's well on its way to do so.
So I think you know one of the reasons why we took some of the actions we did with the post Covid business acceleration program is take a point of view to your point of what that will look like when things are stabilized and what the mix between brick and mortar and online should be and took proactive measures to to close.
Some under productive doors.
And largely that will help the makeup category. Most many of those doors were makeup doors. Some of them were origin stores. Some of them were Bobby doors actually so so that should continue to help. The makeup category as you know as a as volume returns to in particular in particular brick and mortar.
Yeah, and just want to add that deep makeup will continue to follow the usage location on makeup. So the normalization from a consumer standpoint. This is happening, but it is not yet up to the levels you used to be so it is going there and we'll be there. So a lot of benefits are still in front of us.
And not behind US. So we will see further progress over time, particularly in the east where the coffee and Lockdowns are still creating a clear the issues not only in distribution, but also in consumers in consumer usage.
Of makeup the other.
Important thing is that makeup is really as Tracey explained is linked to services and so to have the proper experience you need critical mass per store and the critical mass per store is depended on traffic that Tracy said. So this also getting better the Renaissance is if you want at the beginning so.
More progress is in front of us and that progress and particularly with also impact positively the bottom line and the profitability of the category. So we are in the right direction and we have not yet done on this.
Okay.
The next question is from Bryan Spillane of Bank of America. Please go ahead.
Thanks, operator, good morning, everyone. Thanks for taking the question.
So I just wanted to ask I think you mentioned in the prepared remarks, you talked a bit about.
Product innovation for 'twenty, three and I think also in the press release you talked about.
Targeted.
Uh huh.
Distribution opportunities. So can you just give us a little bit more color on those two items and I guess one of the things I'm interested in is just.
Yes.
Is it sequentially, especially on the product innovation is there sequentially do we expect I guess more of a contribution from new products or product innovation in 'twenty three versus what we've seen in the last two years, just because the environment a little bit.
Maybe more accepting of that.
Some color on those two items would be helpful. Thank you.
Yeah I'll start on the project in Nevada product innovation is was it 25% already last year. This is a very good number and we believe is an efficient and number now can be 25, or 30% depending by quarter, but thats anyway very power innovation.
The thing we have improved also the victim of innovation, we have innovation really.
Gradually per category per quarter per brand.
In a very sophisticated market by market to make sure that we can leverage it and innovation is strongly supported by sufficient media and our advertising in total is increasing in fiscal year 2000 to in absolute level.
That's at least in the in the current assumptions that guidance and in these advertising. Some part of it is guiding the innovation engine only show results, but also a lot of our innovation is subtracting earned media value in a fantastic way a good example of this has been Mac stacks.
In the last fiscal year. So he is not only paid media, but he's also earned media that is attached to high quality innovation and so some of the high quality innovation is also efficient from a spending standpoint for immediate simponi for for that reason.
And then finally innovation is driving pricing because innovation many times is about improving product improving product performance or entering benefit areas.
More important for the consumer they're willing to pay more and so we can invest in outstanding progress to deliver these results and price for these results as well. So it's a combination of factor why innovation is and will continue to be a very strong driver.
And if you assume more or less the same percentage of innovation on a growing business. So innovation in absolute will also increase year after year in absolute level.
On distribution.
We have opportunities still to increase distribution and we are doing it particularly online.
Where there are a lot of new online ways to access consumers in efficient and productive way is also important to understand that the distribution.
280 at the end is about consumer coverage is about covering consumers to have desire today, they're not covered the best example of this is for example in emerging markets starting from China. As an example, where we are covering 148 cities.
But demand come from 600 cities or more and we serve the cities where there is no physical distribution via online. This is up and at the same in India is up and in Brazil is up and in Mexico is happening in many of the emerging markets. So the new distribution online is covering new consumer in the law.
The majority of cases and is very efficient there is a lot of opportunity. There is some which are already in this fiscal year. The fiscal year 2023 assumption and there are many in the medium and long term that we are starting and prepared to do.
The next question is from Olivia Tong of Raymond James. Please go ahead.
Great. Thanks, a lot.
I asked you a little bit more about the price increases that youre planning realizing of course, it's not clear what the name of CPG, but by tier you know sort of super luxury entry prestige.
Your prices will compare to your peers, especially given that more and more sales are happening and multichannel or online where you'll be closer to other brand or or consumers can see multiple brands on one screen and then if I could just sneak in another question sort of piggybacking on Brian .
About the distribution.
The targeted expansion of distribution to retailers that provide broader consumer reach.
Fairly certain I know what isn't included but if you could talk a little bit about what that might entail.
Globally, and how that the channel mix progression as a result, thank you.
Yeah, So I'll start Olivia Hum on the pricing piece, we have a very sophisticated algorithm for pricing. So we do look at price and by SKU actually by brand by SKU relative to what the brand has defined as the.
<unk> set for that particular SKU.
When we consider what pricing we're going to take for instance on whether it's on a pricing increase on an existing product or even when we introduce we introduced a new product. So that's very much taken into consideration. We also depending on because we have a very broad priced here, obviously of our products from la Mer and Frederick Mall.
And.
And Tom Ford too to Clinique and Mac in the ordinary.
We also look at for our entry level prestige brands.
The GAAP to they are comparable.
Closest mass brand.
And so we are also cognizant of that that has served us quite well in those multi specialty accounts that youre referring to.
We're you know our goal continues to be trading consumers up from mass to prestige and.
And and that has worked quite well for us in in those particular accounts.
Okay.
And then you had a follow up question on on distribution I think.
That's right just understanding when you say you're expanding your distribution to provide a broader consumer reach what you know.
I think we all know what that does not entail, but what that does entail globally and what that what the implications might be both for sales and profit.
Is.
Frankly is what I was explaining in the answer to the previous question.
Is that there are for example is Hugo.
Online in a new.
Part and with a new partner in line with the new.
<unk>, we cover cities and we cover areas, which are not covered by brick and mortar. So these reach consumers that we're not reached before and that's why expand our reach that's the key thing so in other words.
Doesn't.
We tried to avoid duplication in distribution as much as possible and maximize consumer coverage and the key strong benefit that we're getting as I said, particularly in emerging markets, but that's true everywhere in the world.
Is the thought that we are getting new consumers into our business and sourcing new consumers from mass into prestige Tracy Yeah, and Olivia. So you know we mentioned in the prepared remarks, we are introducing a veda into China, that's expanding distribution for the brands. So one way we are.
And distribution is introducing products into a new market as Fabrizio was indicating you know other emerging markets, we introduced the ordinary into into India via NYCHA.
So that's one way that we expand distribution, particularly in a market where consumers had not had that opportunity to purchase that product before unless they traveled we also expand with our existing retailers. So here in North America, you know as Ulta, and Sephora open new doors or any other REIT.
Taylor opens new doors, you know it is our consideration of without being over retailed from a brick and mortar standpoint.
Expanding in those doors as well and that's an expanded you know expansion in terms of distribution. So if if our retailer opened 20, new doors. This year, you know and we will open those doors with them and so we include that in our distribution I think I said in my prepared remarks that we expect around two points of growth this year.
Year from distribution and largely it's those types of distribution.
Fabricio talk as well about pure place pure place has been a fantastic way for us to actually a selective pure print place we're very selective.
To actually read reach new consumers in particular younger consumers.
And you know who are shopping more online and maybe shopping on an apparel site online that are that we have an opportunity to introduce beauty products to and and get a new.
Our new consumer as well as a new shopping occasion as they're shopping for their apparel products. So so it's a very you know thoughtful way that we think about distribution.
Distribution and and expanding distribution right.
Right now really to focus on reaching new new consumers.
We have time for one more question from Andrea Teixeira of Jpmorgan. Please go ahead.
Thanks for squeezing me in and good morning, everyone. So my question is on the cadence of the quarter.
Your guidance.
Order.
None of our customers are more cautious to travel.
You mentioned retail inventory on the quake and I Wonder if you are embedding some adjustments so we're getting there.
And if so the magnitude of that in fact that would give us more cost recovery for the remaining like Love's and and just a clarification about how much you expect sales to decline in China are equally behind that in Q1.
Thank you.
Yeah, So I'll start with Alaska, Andrea we don't give specific market information. So it's embedded in our guidance you can certainly.
As you if you.
Think about what we have said previously in terms of the size of those those businesses you can probably back into a little bit in terms of what that impact would be in terms of the retail inventory situation. We do expect that to improve in the second quarter that was very specific.
To the U S actually the Americas, but specific to the U S.
We do expect that to improve in in the second quarter.
As a as the holiday season approaches and we do ship those holiday sets in Q2 that we shipped last year in Q1.
Okay.
I think the other part of the question was heinen and in <unk>.
Hang on in this moment they are not ordering so there is no no inventory sold there they are still what they're selling they're selling from existing inventory. So there is there would be the possibility in the future to rebuild a normalize inventories when coffee debates.
And the only other thing I would add and you didnt ask about this but currency. So you know as you saw in our and our guidance currency is a big impact for us. This year, obviously, if currency rates change that will improve.
But right now if currency rates remain where they're at and hopefully it won't get worse.
Then about about 70% of the impact of currency the year over year impact of the currency depreciation that we've experienced is in the first half.
So that should moderate and we really saw the currency depreciation.
Getting in the currencies that I mentioned that are the most impactful to us in the second half of our year really starting in the March April timeframe.
So we'll be anniversarying that in the second half so again as I mentioned, it's a bit of a tale of two halves.
And given given some of the macro things that are impacting us in in this fiscal year.
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Okay.
Yeah.