Q1 2023 Estee Lauder Companies Inc Earnings Call

Good day, everyone and welcome to the Este Lauder companies fiscal 2021st quarter Conference call.

Today's call is being recorded and webcast for opening remarks, and introductions I would like to turn the call over to the senior Vice President of Investor Relations Ms. Brittany.

Please go ahead.

Hello on todays call are Fred Brachial, 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 organic net sales growth, excluding the non comparable impacts of acquisitions and divestitures 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, references to online sales include sales, we make directly to our consumers to our brand dotcom sites and through third party platforms and also includes estimated sales of our products to a retailer's websites. During the Q&A session. We ask that you. Please limit yourself to one question. So that 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. It is good to be with you today.

Since we spoke in mid August the headwinds of COVID-19 restrictions in China high inflation globally, and the strong U S dollar intensified significantly.

I mean, the increased complexity, we deliver organic sales down 5% in line with our outlook and adjusted diluted EPS higher than expected.

Even in these conditions, our multiple engines of growth strategy empowered us to seize prevailing growth opportunities. Indeed, we realized outstanding performance in many developed and emerging markets around the world to partially offset the impacts of COVID-19 restrictions in Asia trial.

<unk> and domestic China, as well as tighter inventory management by some retailers in the U S.

To reflect these prolonged and heighten it sternal pressure, we are reducing our outlook for fiscal year 2023, most notably for the second quarter.

While traci will discuss our revised outlook in detail. There are three primary drivers. The first is the impact of ongoing COVID-19 restriction in Asia travel retail, particularly China. The restrictions are leading towards lower return of tourism versus what the retailers.

Had anticipated, resulting in tightening of inventories.

While it is significant these near term temporary pause does not diminish our deep conviction in China for the long term.

As it is among the best brand building destination for new consumer acquisition.

The second driver is the tightening of inventory by some retailers in the U S and the third is the far stronger U S dollar.

Encouragingly beyond these headwinds consumer demand is robust in markets, which are emerging from the pandemic evidenced in the underlying fundamentals of our first quarter results and retail sales growth.

Our optimism in the long term growth opportunities for our brands and for prestige beauty is intact.

During fiscal year 2023, we plan to continue investing in our brands, including four innovation advertising strategic entry into new countries and expanded consumer reach to grow profitable prestige beauty share, we expect a gradual sequential improvement.

To low double digit organic sales growth and high teens adjusted EPS growth.

Of course the basis in the second half of fiscal year 2023.

These pressures began to abate the momentum in other areas of our business builds and our ongoing investments to drive growth.

Let me now share some insights from our first quarter.

While we had headwinds we also had many bright spots they give us confidence in the second half and beyond.

We realized double digit organic sales growth in many large developed and emerging markets around the world.

Japan, and the U K grew strongly alongside Brazil, India, the middle East in Thailand to name just a few.

Brick and mortar prospered in these markets as we welcomed consumers with high touch services, engaging activations and newness domestic China delivered sequentially improving organic sales trends.

<unk> single digits.

Driven by excellent growth online a better performance in brick and mortar our luxury brands La Mer and Tom Ford Beauty contributed to online growth as indeed, Vida and Bobbi Brown among others. We are very encouraged by the terrific results of our expanded consumer reach.

Reach on JD and <unk>.

From a retail sales perspective in the online channel we grew nearly twice as fast as prestige beauty in China to gain share.

In the U S. Our freestanding store excellent benefiting from both enhanced omnichannel capabilities and greater demand for our high touch services be eat artistry at Mack, our personalization and Jo Malone, London and Le Labo.

Specialty moves the also performed especially well powered by traditional store and enhanced by the partnership of Ulta beauty at target and Sephora at Kohl's.

Clinique, Mac and Bobbi Brown led growth.

Even excellent results in Ulta beauty over the last year, Mac and Bobbi Brown are further expanding their presence.

We continue to see promise in the U S evidence in its overall retail sales growth in prestige beauty, despite the recession risk and the strong performance our brands delivered in freestanding doors and specialty multi.

We remain committed to investing in innovation advertising granular consumer acquisition strategies as we aim to best capture the market growth opportunities.

Looking at brands globally.

13 brands rose organically collectively increasing high single digit to represent over half of our organic states.

Among the 13 Mac excelled in makeup la mer in luxury skin care.

Jo Malone, London in fragrance and Aveda <unk> Kim.

While the ordinary our newest brand appeal to consumers, we did out anticity, an innovative approach to ingredient transparency.

But I got on sales growth and outstanding 18% organically and expanded in every region.

Tom Ford Beauty, Jo Malone, London, Le Labo, Kilian parties and it is showing the profound Friedrich mouse all contribute it driven by sort after innovation and heroes is our luxury and artisanal portfolio adults from strength to strength for example, Jo Malone London momentum.

Continue with gains balanced across the regions innovation served as a catalyst for growth in.

In China, the New night collection ratio Nathan beautifully as did the limited edition REIT collection globally, the brand brilliantly leveraging its hero strategy creatively reimagining the power of English P. A M freezer in a can.

<unk> to recruit new consumers.

Demand for fragrance was even stronger as ongoing supply issues of glossing componentry constrains this still excellent sales growth.

Profitability for fragrance improved despite the significant currency headwinds further evidence of the benefits derived from our strategic pivot to the higher end of the category.

Hair care double digit organic sales growth was fueled by increasingly diverse growth engines, we were thrilled to launch a leader in mainland China, marking our entry in prestige hair care in the market.

In the U S Bumble and bumble realized gains from strong results in Ulta beauty at target and expansions into Macy's.

In skincare.

The Este Lauder Doctor draft, and origins brands, where most pressured by reduced retail traffic and travel in China. Several brands still prosper La Mer Bobbi Brown and the ordinary grew organically driven by covered that heroes and newness.

To showcase the gains to be had from entry prestige true luxury.

Innovation also resonate strongly in skincare, which bodes well for the future when these transitory pressures abate.

In China, Este Lauder luxury oriented renewed trip was highly sought after and the launch of renal III altima diamond transformative brilliant serum boosted overall demand for different size.

Clinique smart clinical repay gained momentum in China and also in the U S and its numerous third either complemented the regime is popular serum and ice cream, which launched last year.

The Clinique Smart franchise benefited from <unk> 360 degree marketing campaign of these three products featuring powerful scientific credentials and claims.

Makeup Renaissance was evident as markets, both reopened and evolved in recovery the category growth in emerging market was especially striking a broad based from Latin America to the Middle East, India and Southeast Asia. While makeup also grew in most developed markets in Western Europe .

Along with Japan and Korea.

<unk> had a remarkable quarter fueling passion for makeup around the world are growing high single digits organically.

Consumer embraced its unparalleled artistry and the brand's innovation proved captivating, especially powder keys Velvet blowers lipstick.

For the lipstick finished and elevated packaging as well as Mac stock Muscat.

Max Creative marketing Activations further contributed to growth in Southeast Asia, and Latin America. The brands keep talk challenges realized standout results driving significant new consumer acquisition on Lazard is Super brand day strong double digit volume growth across Latin America as well.

We've got 400 content creators contributed to the campaign.

Before I close I'm also pleased to share that today, we will release, our fiscal year 2022, social impact and sustainability report.

It features exciting progress made possible by the extraordinary efforts of our employees around the world.

Our ESG areas of focus and previously stated goals.

The report also details new goes for electric vehicles water reduction and responsible sourcing.

Finally on the last few earnings calls I discussed actions, we were taking to make more progress in our commitment to Rachel equity as well as women advancement and gender equality, which are also reflected in the report.

In conclusion the.

The current external pressures are many.

Heather.

As we look ahead, we remain confident in our focus on advancing our long term growth strategy.

Further balancing diversifying our multiple engines and fully leveraging the long term promise of prestige beauty.

We aim for fiscal year 2023 to be another year of progress on our strategy. Despite the headwinds.

In the first quarter alone, we set the stage to expand our luxury portfolio, having announced a deal to create value men beauty with a couture fashion house, we extended our consumer reach in productive distribution in high growth channels to match success across the regions continuing to step.

D G will expand brands into new countries with a beta launch in domestic China.

We also welcome colleagues into our new China and no additional labs in Shanghai amplifying our ability to best create for the Chinese consumer and we began limited production for skincare in our new manufacturing facility near talk here.

I would like to close with my deepest thanks to our employees for their exceptional commitment and the complexity of the environment your creativity wisdom and passion are beyond compare.

Thank you.

And I will now turn the call over to Tracy.

Thank you Fabrizio and Hello, everyone.

Our first quarter organic net sales declined 5% and earnings per share was $1 37.

Net sales were in line with our expectations and earnings per share exceeded them.

Even with incremental headwinds in the quarter.

While sales overall met expectations, our mix of sales was different than we expected.

In August our outlook anticipated that first quarter sales will be negatively impacted by continued COVID-19 restrictions in China in Hainan with gradual improvement throughout the first half of the fiscal year as the restrictions lifted however, the impact on our first quarter sales was greater than we anticipated in Hainan is.

Stores were closed for most of the quarter and as they reopen traffic remained quite modest which resulted in lower shipments due to the anticipation of a slower pace of recovery.

Our outlook also reflected the comparison to the prior year in the U S. When certain of our retailers secured shipments earlier for holiday due to supply chain and concerns in Stark contrast to the tightening of inventory by retailers. This year due to concerns about slower traffic.

Our actual results for the quarter reflect even tighter than expected inventory management with certain retailers in the U S.

These additional headwinds were somewhat offset by a faster pace of recovery in other parts of Asia Pacific and in EMEA as well as the benefit of strategic pricing actions, we took in July and August .

From a geographic standpoint organic net sales in the Americas declined 3%, reflecting the timing of shipments in the prior year as well as the tightening of inventory this year.

The timing of shipments in the U S contributed six percentage points to the overall regions prior year growth.

In Latin America, nearly all markets grew double digits fueled primarily by the strong recovery of makeup.

In our Europe , the Middle East and Africa region organic net sales declined 5%, primarily due to continued challenges in travel retail in APAC, including the negative impact from foreign currency transactions in key international travel retail locations of 2%.

Our global travel retail business declined as the ongoing COVID-19 restrictions in China curtailed travel to Hainan stores. There were closed for most of the quarter and traffic has been slow to return, resulting in lower shipments as we support stricter inventory management with certain retailers, Conversely travel retail sales in European <unk>.

And in the Americas Rose Triple in double digits, respectively.

<unk> by increasing resumption of professional and personal travel.

Net sales in the United Kingdom increased with double digit growth from the ordinary elsewhere in EMEA, the lifting of Covid restrictions and the return of tourism in the region drove growth in many markets led by India, The Middle East and Turkey and resulted in double digit growth in brick and mortar.

Organic net sales in our Asia Pacific region fell 7% due to the ongoing COVID-19 restrictions impacting brick and mortar sales in greater China and travel retail in Korea.

In Korea double digit growth from nearly all brands was more than offset by the decline from Doctor John its travel retail business. The rest of the region delivered strong net sales growth led by Thailand, Malaysia and Japan.

Many markets in the region continued to recover as restrictions lifted and traffic returned to stores.

From a category perspective fragrance led growth with organic net sales rising 18%.

Strong consumer demand for our brands and innovation drove growth our luxury and artisanal brands continue to thrive led by Tom Ford Beauty, Jo Malone, London, and La Belle net.

Net sales from Clinique rose strong double digits, winning across all regions with the Clinique happy product franchise.

Our hair care net sales rose 11% organically.

They don't lead category growth driven by double digit growth in Europe , the middle East and Africa.

From hero products, and strong innovation, including the launch of the color control product line.

Organic net sales in makeup declined 6% driven by the Covid restrictions in China as well as a difficult comparison to the prior year period due to the timing of shipments for holiday in the U S. Net.

Net sales rose strong double digits in southeast Asia and in the emerging markets of EMEA due to strong performance from Mac, Bobbi Brown and Este Lauder Mac.

Mac continues to be an overall top performer driven by the success of both hero products and strong innovation across the foundation lip and eye subcategories.

Organic net sales in skincare declined 11%. This category has been the most impacted by the Covid restrictions in Hainan, where skincare accounts for a majority of our business.

Our gross margin declined 190 basis points compared to the first quarter last year, the positive impacts from strategic pricing were more than offset by higher costs due to promotional items and inflationary pressures in our supply chain.

Operating expenses increased 250 basis points as a percent of sales driven by the reduction in sales.

Operating income declined 29% to $668 million and our operating margin contracted 440 basis points to 17% in the quarter.

Diluted EPS of $1 37 decreased 28% compared to the prior year slightly better than expected as a result of effective cost management.

The impacts from foreign currency transactions in key travel retail locations and the exit of certain designer licenses negatively impacted diluted EPS by 4% and 3% respectively.

During the quarter, we utilized $650 million and net cash flows from operating activities, reflecting increased working capital primarily due to the timing of payments and higher inventory levels as well as lower net income.

We invested $152 million in capital expenditures for supply chain improvement online capabilities and distribution expansion.

We returned $325 million in cash to stockholders through both dividends and share repurchases and Additionally, this morning, we announced a 10% increase in our quarterly dividend.

So again, we delivered our overall quarter one results as we anticipated now, let's turn to our outlook for the remainder of fiscal 2023.

While we believe the headwinds that impacted our first quarter results are largely temporary. It is also apparent that both the timing and speed of the stabilization of inflation.

And recovery from both the pandemic and currency challenges are uncertain.

As retailers and Hainan, we're prepared for a faster recovery of traffic to the island with their inventory levels of our products. We have further modified our shipments to be more in line with a slower retail environment.

And although we expect the adjustment to inventory by certain of our retailers' corresponding with potentially lower traffic to continue into the second quarter, particularly in Hainan. We believe this adjustment will subside in the second half as COVID-19 restrictions ease and consumers begin to travel with less safety restrictions in China.

Until that happens ongoing restrictions are expected to result in lower net sales in these areas.

We also anticipate that tighter inventory management in the U S to abate in the second half given the still strong demand for our products at retail.

We expect the remainder of our first half performance to be pressured as we navigate through these uncertainties. Despite the headwinds to net sales we remain confident in the strength of our business strategy and expect to sustain our investments to drive long term profitable growth.

We plan to continue to invest in the areas of advertising innovation production capacity consumer engagement as well as new consumer reach and continued strategic entry into new countries for some of our brands.

For the second half, we anticipate trends to improve sequentially as restrictions are lifted travel throughout greater China, including Hainan progressively resumed and the tightening of inventory subsides in Asia travel retail and in the U S.

We expect continued recovery in various markets in EMEA and Asia Pacific for the balance of the year.

Currency is also projected to be a significant drag on our reported results in the second quarter and for the full year as the U S. Dollar has continued to rapidly strengthen against key currencies.

As we enter fiscal 2023, we took strategic pricing to mitigate higher than normal inflation, both the magnitude and speed of currency movements experienced thus far combined with inflation have further suppressed our expectations for the balance of the year.

Specifically based on mid October spot rates of <unk> 97, eight for the Euro 1.1 to two for the pound seven point to not to nine for the Chinese one and $14 36 for the Korean won currency translation is anticipated to continue to negatively impact reported sales.

And diluted EPS growth for the second quarter and for the full year.

We expect organic sales for our second quarter to fall, 11% to 9%, primarily reflecting the continued risk of disruption in Hainan, leading to further tightening of inventory and continued tightening of inventory by certain retailers in the U S.

Currency translation is expected to be dilutive to reported net sales by seven points with an additional two points due to the impact of certain foreign currency transactions in key international travel locations.

The impact of sales from certain designer license exits are expected to dilute reported growth by approximately one point.

We expect second quarter, adjusted EPS of $1 19 to $1 29 for a decline between $60 to 57%.

Currency translation is expected to be dilutive to EPS by <unk> 20.

Such that constant currency adjusted EPS is expected to decline between 54% and 50%.

This includes the negative impact from certain foreign currency transactions in key international travel retail locations of approximately seven percentage points.

For the full year.

We expect organic sales growth to range from flat to up 2%.

Currency translation is expected to dilute reported sales growth for the full fiscal year by six percentage points and we expect an additional two points of dilution from the impact of certain.

Foreign currency transactions in key international travel retail locations.

The impacts of returns associated with restructuring and other activities and sales from certain designer license excess are each expected to dilute reported growth by approximately one point.

We expect full year operating margin to be approximately 16, 1%, a 360 basis point contraction from the prior year period, primarily due to the geographical mix of sales foreign currency impacts and the strategic investments I previously mentioned.

We now expect our full year effective tax rate to be approximately 25%, reflecting the change in our estimated geographical mix of earnings and less benefit from excess tax benefits related to share based compensation.

Diluted EPS is expected to range between $5 25, and $5.40 before restructuring and other charges.

This includes approximately 44 cents of dilution from currency translation.

In constant currency, we expect EPS to fall between 21% to 19%.

Which includes a negative impact from foreign currency transactions in key international travel retail locations of approximately 10 percentage points.

In closing we remain confident about the long term prospects for global prestige beauty and in our multiple engines of growth strategy.

Despite the temporary external challenges we plan to continue to invest selectively in strategic priority areas to support the ongoing growth of our amazing brands now and into the future and to gain profitable share globally.

That concludes our prepared remarks, we'll be happy to take your questions at this time.

Thank you the floor is now opened for questions.

If you have a question simply press the star key followed by the digit one on your telephone keypad to ensure everyone can ask their questions. We will limit each person to one question.

Permitting we will return to you for additional questions just queue up again by pressing the star key and the digit one.

And our first question today will come from Dara <unk> with Morgan Stanley . Please go ahead.

Hey, good morning.

So.

Okay.

How are you.

Obviously, a large cut to topline expectations in terms of organic sales growth for the fiscal year today, but you still sell they're pretty enthusiastic about underlying demand for retail in your comments. So can you just give us more detail on how much of the fiscal 'twenty three top line revision.

Is more related to the temporary issues in terms of COVID-19 or or inventory issues you highlighted its primary reasons.

The second bucket in terms of underlying demand.

Related to the greater macro pressure et cetera would be helpful to know how much from each of those buckets as driving the top line revision.

And then can I just also ask a similar question in regard to <unk> 24 earnings how much of sort of the 23 earnings degradation versus your prior guidance might extend longer term is your view that it's more temporary and I just asked that.

In relation to what you've talked about recently, which is greater flexibility that's been more agility to respond to market conditions.

Just trying to sort of understand how that plays into the longer term earnings outlook beyond this year and what we're seeing this year. Thanks.

Yeah.

It is a complex question so there's a lot to say.

I will start and then Tracey will join me in particularly in the second part of your question. So.

We are very confident in our retail trend globally and the growth of our of our business even in these very difficult external Ah.

Complex times.

So just to give you. An example of this in North America, our retail was growing in the quarter at mid single digits and and I could I can explain later all the many things which are going well in this direction. For example is a quarter, where our market brand really.

<unk> demonstrated it is back to growth with a 22% growth and therefore, our North America business to see market retail coming back. So strongly is great news because as you know clinique <unk> Mac and a big part of the growth potential of our North America, particularly business.

So great news to have Mac back into growing our market share growing brands in our top brands portfolio.

Then when you look at China, and you look at Chinese consumers combined what was the retail in travel retail and the retail in mainland in domestic business.

We grew mid single digits the retail despite the inventories tightening issues that we have explained in the prepared remarks and in the press release. So there is an underlying strength then when you look for example to the.

China domestic recovery from the difficult moment of the Shanghai closure, where we Couldnt ship for some time and we have spoken in the last quarter to the fiber will be gradually recovering days and now the brick and mortar.

<unk> remained debt with less traffic, but we gradually improve the trend and the decline has been stellar declined by less much less than in the previous quarter and online where there was no issue of the restrictions we have been growing.

Bob the market double than the market growing again market share.

Your line in China than we spoke about the fact that we are very encouraged in general by the stronger than early progress in the fragrance business now we have taken the strategic decision to focus on the luxury artisanal fragrances and they are growing they're profitable and theyre growing.

More than double digit as you heard from the numbers.

Even in presence of the complex.

Supply chain for particularly for glass globally, which reduce the ability to get to the maximum potential in this moment to fully fulfill demand. So more to come also because these supply constraints will abate over time gradually.

So we have now our hair care business is also in the double digit growth, which is the other engines that we are activating in our effort to balance the growth across the different engines and the launch in China or whether it's been a big step of these but also there is a growth in the west very strongly.

In our business. The other interesting indication is the makeup makeup globally, except the lockdowns situations scene in China and travel retail issues that we have described but wherever there is markets. Reopening makeup is doing very well and is continuing to recovery as I see.

Said with Mac four months at the center, which make us very very happy because that's a very important step forward and then we had extraordinary skincare innovation pipeline admittedly the majority of it will come in quarter, three and in quarter four but we will continue on our strong.

<unk> innovation in skincare and then when you look at distribution globally. There are many good news of the expanded productivity distributions. So the Darwin start in in China is very very promising and this reflects also in a promising start of 11 11 D.

Distribution in the North America specialty multi is becoming more and more productive and we are expanding the productive part of it in the next in the next year will continue. This these expansion and there is also the important concept of it.

Expanding our brands in new countries, which technically is new distribution of our brands to new consumers and obviously a bit in China is the big but he's not the only one in court and three of course, the true with water for Saudi will continue with these expansions so <unk>.

Just few examples to give you the sense that we.

We have strong buy category strong <unk> strong in fragrances strong in makeup wherever there is reopening and so strong in the future in the market. They will reopen in the future and in skincare. The larger majority of the issue that we had in country is linked to the lockdown and very strong.

Innovation plan to restart growth there so.

We remain very confident on the long term growth move up that last point is that in the second semester.

If you look to our outlook, we are assuming to go back in total in the semester two double digit growth, but obviously as we explain gradually in quarters, three and then more stronger in quarter four.

Tracy, Yes, and so Dara and you know obviously, what's impacting us at the beginning of this year are significant unanticipated.

You know impacts to the business starting you know in the third and fourth quarter of last year and continuing into into the first quarter.

With disruptions as it relates to some of the Lockdowns and key parts of our business.

As we think forward and for the outlook that we've provided today.

We are expecting some easing as Fabrizio said in the second half of the year.

And in the fourth quarter, we're expecting.

Further easing.

As we think about the construct of the business heading forward and assuming you know more stabilization of some of these matters.

You know our business is intact in terms of the leverage that we can get the margin expansion that we can get in.

And the growth that we can get as well as Fabrizio said consumer demand is strong it has been disrupted.

Disrupted.

We are mindful as everyone else is that there could be you know, Russia recessionary pressures in some of our key markets and we are taking that into account.

But the flexibility that we've created in our cost structure over the last few years remains intact and certainly positions us well in the future. Once there is more stabilization in the in the macro environment.

Four continued strong topline growth and also continued strong <unk>.

Margin expansion and EPS growth.

Thank you and the next question will come from Chris Carey with Wells Fargo. Please go ahead.

Hi.

Good morning.

Good morning.

I am sure Chi.

Anna.

Recovery will will get plenty of focus.

On our call today, so perhaps I'll just actually.

A bit more of a medium longer term angle here fabricio.

Can you just comment on the willingness of the Este Lauder organization.

Take some of your brands beyond.

Historical channels or.

The types of interactions with retailers I think you called out.

Specialty multi expansion in the U S.

Clearly in China, you've extended with J D.

Chinese Tech target it feels like the organization is certainly becoming more and more comfortable working with.

With different kinds of channels.

And I wonder just in the context of a broader recovery certainly theres going to be a big debate on what is the true earnings power of this organization I Wonder if you could just comment on that.

Whether this is true this concept of sort of expanded comfort with new opportunities.

Whether you see additional opportunities ahead, and why and where those might be.

Yeah, No I think we've been.

Very much focused on.

Uh huh.

Having the right level of distribution and focus.

The consumer preferences are evolving over the last years you know we operate in 12 channels now versus basically went one China's 15 years ago and so is our discomfort is there and you can see these first of all in our online.

Expansion that continues to be strong we have obviously, our brand comp that continuing to be expanded to more brands to better sites to more services and besides you have our <unk>, meaning the tmall model, which is expanding around the world Australia by buys is present in different countries.

And we are collaborating with them.

Finding the model in different countries that are being probably the most evident example at this point to this expansion.

We are playing with pure play more and more and we have many examples particularly in Europe of these and obviously our retail dot com continued to be expanded.

Then in term of our comfort with specialty multi I believe this is not only do we are very comfortable and there is.

Specialty multi we are doing well we are growing we have increased our market shares in the channels well in North America, but not only in North America and many other parts of the world and this is progressing very very well the other important news in the sense is that it to consumers so our freestanding stores.

<unk> had a tremendous quarter and we see the model of freestanding store coming back really strongly.

Wherever there is a reopening in wherever the consumers are really enthusiastic to go back to the brick and mortar and today, our freestanding stores are more efficient and more effective for the many air force of cost management and deep expertise in retail we have brought in the company in the last is so rich.

Turn off traffic to freestanding stores.

<unk> is very promising just to give an example, our freestanding stores in the U S for fragrance brands were plus 33% in the in the course, so very very strong sign are remaking and so we will get Spansion. You said you spoke about J D. But I spoke also about the when exactly the Chinese stick talk and.

And this is a more recent expansion and the interesting thing is not only we are more comfortable with playing in these channels, but we.

We are winning when we play in this China look at what happened in <unk>, where we are.

When we enter we enter really really well with the with a great partnership great great results. So.

We are.

Definitely continue to manage our distribution in.

In line with consumer preference here with evolution of where the consumers. We serve go. However, we will keep in mind that our distribution has to be with high touch services has to be a distribution, which serve the consumer not only with the availability of product and pricing that serve the consumer.

With our educational customization care services and they are focused on building brand equity building experiences and they're focusing on building. The unique elements of luxury we are a pure play in luxury so is not only about distributing wherever there is massive consumers is about.

Building with quality branding and services and so that focus has not changed but we have become better in creating these environments.

And we're in places, where there is more and more consumer traffic.

Tracey do you want to add anything.

And last question.

We will be from Steve powers with Deutsche Bank. Please go ahead.

Great. Thank you and good morning.

Maybe following up on <unk> question.

Your comments were helpful.

But for Visteon Traci, but is there a rates of overall consumption of retail sales growth that you anticipate across your portfolio on the year. Just so we can compare to the flat to 2% positive organic growth that you've assumed in your outlook. That's the question.

A follow up and then I guess I'd also if possible like a little bit more context around the retailer destocking that you've called out broadly, but particularly in the U S. As it's not something that I think I don't think we've heard that from from your peers.

But certainly a dynamic we've seen across all the categories, but so far beauty hasn't been a focal point for that so just again a bit more detail on what you've seen how much do you think maybe specific to your portfolio.

And what the outlook is through the holidays into the second half. Thank you.

So let me let me start on retail it's hard to do an average retail across all of our markets as you might as you might well imagine.

Would tell you that in all of our markets as we look at the projection for the year, our retail is positive.

It varies by market, but you know obviously given given some of the disruptions and you.

And slowness in certain markets, but.

But but it's positive in every market in some markets its actually double digit positive and so so again the gap between retail and net in many of our markets certainly in our recovery markets is is not very big at all in.

In markets, where we've had more disruption or we have the anticipation of a slowdown that's where we're seeing some more of the disconnect between retail and net.

Yeah.

Thank you and the next question will be from Dana Telsey from Telsey Advisory Group. Please go ahead.

Good afternoon, or good morning feels like afternoon already.

Everyone. As you think about what was embedded in your prior guidance in terms of pricing is there any change that you're making in any of the categories of pricing that.

That youre looking at and then in the U S are you seeing any difference whether it's your freestanding whether it's specialty multi or department stores is there a difference in performance and how you're thinking about inventory go forward. Thank you.

So I'll start with the pricing.

We are looking at so there's no change in terms of the pricing that we took at the beginning of the year, we talked about pricing at about five 5% on average across our markets and that was taken in the July August timeframe.

We also anticipated in the prior guidance.

Secondary price increase and we are looking at that in light of some of the inflation pressures.

And looking at taking slightly more pricing in certain markets not across all markets and that would be in the January February timeframe.

As it relates to our channels channels that have have had slower traffic.

Are the ones that we're most focused on in terms of obviously slowing our shipments to those channels. So they they don't end up overstock. So we can bring down some of the stock levels.

In in those channels so.

We talked about if you just think about the first quarter, we called out the channels that performed strongly for us in the first quarter. So our specialty multichannel performed strongly in our first quarter online in China performed strongly in our first quarter. So those are the channels that you know continue to.

Two to perform strongly for us other channels. You know we are a bit more cautious freestanding stores performed strongly for us in the in the first quarter and we expect and recovery markets that freestanding stores will continue to perform well. So we will continue obviously to supply our freestanding store network.

We're both ourselves as well as our retailers are a little bit more cautious on on some of the traffic trends that are being anticipated we are being a bit more cautious in terms of how we supply those retailers.

Okay.

Thank you. The next question will be from Bryan Spillane with Bank of America. Please go ahead.

Hi, good morning, Thank you operator.

Thank you operator.

Tracy.

Maybe just to follow up on the pricing and inflation question can you just give us a little bit more detail on some of the sources of inflation and whats been incremental I guess since the start of the fiscal year end.

And maybe a little bit of an expectation.

You see it today as you continue to see that rising is that going to be.

A factor as we go into fiscal 'twenty four just.

Trying to get a sense of how we should be thinking about.

Inflation as we go through the balance of the year.

Yeah.

I think we you know, we certainly have seen quite a bit of inflation in in our supply chain, particularly as it relates to transport.

We do see that.

Continuing in and parts of our supply chain and other parts, we actually see it moderating.

We've seen wage inflation as well and and you know again that has been incorporated in some of.

The pricing that we've anticipated this this year.

We have seen advertising rates stabilize a bit and so we're not seeing as much media inflation as a as we were seeing previously so those are I would say the biggest areas of inflation that we're that we're watching.

But the supply chain area is one that you know is a particular focus for us going forward and again, we one of the great things about our category, we do have pricing power and and so we have have certainly.

Exercise that where are we where we see the the inflationary impacts.

And just want to add that we continue to remain or what we know at the same point of view we are spreads in the last quarter, which is we are in a position to offset most of the inflation with pricing and we are doing that are either think however wishes emerge stronger in this.

Last quarter well is the currency. So the dollar has become even stronger and so now we are also looking at with the next consideration and possible price increases in January February to see if in selective markets, where the results would be pressure on currency and not only of inflation. We can also makes them.

Selective adjustments in these areas, but our goals remain to offset most of the.

The price most of the inflation with pricing and then the rest we are doing things like for example, our innovation is being a higher price on average and focused well on protecting gross margin our cost savings and many of our costs at TVT or contributing to.

Covering the overall in total installations. So we we believe we are and we will be in good shape in that sense.

Okay.

Thank you and the next question will be from route Cache Creek from Oppenheimer. Please go ahead.

Good morning, Thanks for taking my question. So on China I was curious if you can just give some additional color in terms of what you're seeing on the ground today in both the mainland and the Hayne on corridor and then if you think about the China recovery.

Essentially assume a return to more normal conditions by Q4 is that the way to think about it.

Yeah.

In China, our our our assumption as I said before is that there will be a gradual recovery from the restrictions and with the gradual recovery with the restriction, we will see increased traffic in heinen.

And in the brick and mortar in domestic China. So those are the two key things that needs to evolve because retail growth.

Overall is positive.

And it is interesting that retail growth overall is stronger than the economy and the way the economy is being communicated so that the phenomenon that is story Kelly proven that.

Beauty prestige.

Industry grows on average more than the economy and then we grow on average more than the beauty industry is that trend is what we believe will continue to happen in the future and and is happening as we speak however, the traffic movements.

Very different and again two to clarify what I think the prepared remarks should have clarified in detail, but but take take the Hainan situational Hainan traffic. The lost time Hainan traffic was if you want regular with January February last January February where it was full normal traffic than after the first law.

Down went down 80% and then in July .

Covered and went to minus 30, and there was the assumption that this strategy over time, we would continue to go well, but then on the contrary now is in October was still minus 70 again. So basically is the is the expectation of future traffic they make the inventories presence to her.

Hi for that level of traffic and the need to be readjusted and the second factor is that traffic in nine of 17 is obviously much less than what originally was expected and also internal consumption, but on the other side. There is more consumption online there is more growth online there is <unk>.

People are going to China. So in total we have seen as I said before a mid single digit growth even in this tough situation with reduced traffic levels. So when the traffic will recover.

In brick and mortar Bose, both in travel and in domestic when this will happen in.

The retail should should further improve further increase and be and be pretty positive and we do assume that this phenomenon will be more visible in our quarter. Four so in the April to June period is when we assume there will be a rebuild of traffic and.

Between now and then as we explained would be we don't see a lot of improvements in quarter two but we then see a start to gradually improvement also in quarter. Three that's the dynamic we are seeing.

Yes.

Thank you. The next question will be from Jason English from Goldman Sachs. Please go ahead.

Hey, good morning folks thanks for Slotting me.

Im going to rapid fire a couple of questions.

First to put a fine point on the answer to that last question.

<unk> rate for the year are you assuming the Hainan is like back to bright running that normal normal traffic down 30 down 50, if you can clarify that I guess sequentially improvement, but to what level is still uncertain.

Question is Europe , the next shoe to drop because of Destocking and then lastly, I am sure you have multi year plans I'm not asking for a multi year guidance, but as you think about like what you thought your earnings are maybe in fiscal 'twenty for fiscal 'twenty five.

Has that changed in light of all the dynamics that youre discussing today. Thank.

Thank you.

So let me start.

Jason in terms of Hainan No. We don't anticipate that high end will be fully back to normal in Q4, much improved but not fully back to normal and so you know we are now looking at fiscal 'twenty four.

For for traffic to recover and again, it's a guesstimate at this point in time so.

So the recovery, obviously has been slower than I think all of us have anticipated, but we do know that there is a commitment by the retailers in Hainan and certainly the the area in general to get back to a fantastic growth. They just opened a new mall.

So it is still an exciting travel destination.

And and <unk> and we look forward to to the recovery, but it has not fully recovered in our Q4.

Thoughts right now more fiscal 'twenty four.

In terms of Europe , Europe as a as we said in our prepared remarks is recovering and so we have seen strong growth in Europe , particularly in emerging markets in Europe .

We are seeing a makeup recover we're seeing strong fragrance growth.

And and the one category that has been a bit slower really in all of our markets has been skincare.

But we've got strong innovation in the second half of the year and certainly into fiscal 'twenty four.

That we believe will accelerate our skincare growth, but right now we do not believe that there are any reasons to be concerned about Europe . Obviously, everyone has been talking about a European recession, but you know I think as many have talked about and we would say the same we're not seeing it yet.

So so that's.

That's Europe .

As it relates to fiscal 'twenty for when you think about this year really the biggest one of the biggest impacts we've had outside of the disruptions in terms of travel retail has been currency and so our fiscal 'twenty four is dependent on you know in terms of what we thought before we will.

Impacted by you know what happens with currency.

And one of the things that we talked about as well in the prepared remarks, some of our currency impact is adjusted out in our constant currency.

<unk> results.

And guidance and some of it is not as it relates to travel retail in particular and that's a that's a big amount so as you're looking at our margins you know and and the significant impact on our margins currency is an impact on our margin so depending on what happens with currency rates.

That influences our outlook for fiscal 'twenty, four, but most importantly, Jason as it relates to the fundamental health of our business.

Once these disruptions are behind US we still are feel very strong.

About obviously, the the strategies that we executed throughout the last couple of years this temporary impact.

And how we have prepared the business for future growth.

We're opening.

New production and an R&D facility in Asia.

That will reduce some of the transport issues Oh by the way it will reduce some of the currency issues as well and so there are many things that we've done over the last few years that have really strengthened our business. Once we emerge from from the disruption that has been extended unfortunately this year end and our teams are managing through.

With fantastic, our resiliency and we're as Fabrizio indicated incredibly proud of all of them and what they've been doing to support the business.

Okay. Thank you very much ladies and gentlemen, this concludes our question and answer session.

You are unable to join the entire call a playback will be available at one P. M. Eastern time today through November 16.

To hear a recording of the call. Please dial 870 73447 to nine.

Pass code number 998 fives score zero size.

That concludes today's Este Lauder conference call.

Thank you all for your participation and wish you all a good day take care.

Yeah.

Okay.

Okay.

Yes.

Okay.

[music].