Q3 2023 The Estée Lauder Companies Inc Earnings Call
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Speaker 2: Good day everyone and welcome to the Estee Lauder Company's fiscal 2023.
Speaker 2: a lot of companies fiscal 2023, third quarter.
Speaker 3: Conference call.
Speaker 2: Today's call is being recorded and webcast.
Speaker 2: For opening remarks and introduction, I'd like to turn the call over to Senior Vice President of Investor Relations, Ms. Rainey Mancini.
Speaker 2: Ma'am, you may begin.
Speaker 4: Hello, on today's call are for brief deal for a president and chief executive officer and Tracy Travis, executive vice president and chief financial officer.
Speaker 4: 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.
Speaker 4: 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. As a follow up report from a Click
Speaker 4: Unless otherwise stated, all organic net sales growth also excludes the noncomparable impacts of acquisitions, divestitures, brand closures.
Speaker 4: and the impact of foreign currency translation.
Speaker 4: You can find reconciliation between gap and non- GAAP measures in our press release and on the investor section of our website.
Speaker 4: As a reminder, references to online sales include sales that we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailer's 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 Fabrizio.
Speaker 5: Thank you, Rainey, and hello to everyone.
Speaker 5: We appreciate you being with us today to discuss our third quarter results and revised outlook for fiscal year 2023.
Speaker 5: In the third quarter, organic sales fell 8% at the high end of our outlook range and the sequential improvements from the decline of 11% in the second quarter.
Speaker 5: Nearly all developed and emerging markets grew organically and outperformed our expectations.
Speaker 5: to offset an even lower than expected recovery in our Asia travel retail business.
Speaker 5: As we discussed in February , Asia travel retail phased two headwinds in the third quarter.
Speaker 5: The first elevated inventory in Heinem, given retailers' expectation for a more accelerated recovery, proved very challenging, as conversion of travelers to consumers in prestige beauty lagged historical trends, as travels initially gravitated to other categories.
Speaker 5: This led to even lower replenishment orders than we anticipate.
Speaker 5: The second headwinds, the transition in Korea to post-pandemic regulations as traveling consumers gradually return pressured sales meaningfully.
Speaker 5: In China and Korea, the resumption of international flights was subdued. Limited visas were granted and group tours were slow to restart.
Speaker 5: These factors resulted in lower than-espected traffic in airports to other regions, which combined with a lower than-espected conversion further moderated replenishment orders.
Speaker 5: These factors resulted in lower than expected traffic in airports throughout the region, which combined with a lower than expected conversion further moderated replenishment orders. With this said...
Speaker 5: There were bright spots for travel retail in Hong Kong, Macau, Europe and the Americas.
Speaker 5: All told, global travel retail organic sales declined 45%.
Speaker 5: This was partially offset by excellent organic sales growth of 10% in the rest of our global business.
Speaker 5: Our retail sales growth.
Speaker 5: was even stronger than organic sales growth in many markets around the world, including China and the US.
Speaker 5: Encouragingly, retail sales performance is significantly ahead of organic sales results in global travel retail, which gives us confidence that the challenges in travel retail are abating with time.
Speaker 5: Furthermore, this strength had retail, including prestige beauty share gains, in many markets.
Speaker 5: demonstrated the benefits of our continued investment in innovation and building the desirability of our brands around the world.
Speaker 5: Dispositive retail trends are expected to continue in the Ford quarter.
Speaker 5: Adjusted diluted EPS in the fiscal third quarter fell 75%.
Speaker 5: which was also at the high end of our outlook. We invested to fuel markets in various stages of post-mandemic recovery, launching so-after innovation, expanding brands into new markets, and increasing advertising as percentage of sales.
Speaker 5: As the shape of recovery for Asia travel retail comes into a better focus, it is proving to be both far more volatile than we expected and more gradual relative to what we experienced in other markets.
Speaker 5: We are therefore lowering our organic sales and EPS outlook for fiscal year 2023 as we reduce our implied for quarter outlook, primarily for Asia travel retail. For Asia travel retail there are two factors driving our revised outlook.
Speaker 5: tightening.
Speaker 5: Second, the resumption of international travel by Chinese consumers is evolving more slowly than we anticipated.
Speaker 5: having visited Shanghai and Hainan in March
Speaker 5: and witnessed firsthand the optimist of consumers, retailers, partners and our local teams.
Speaker 5: scientists and product development specialists in the state-of-art R&D facility.
Speaker 5: which further bolstered my confidence in the business fundamentals. Indeed, the opportunity for prestige beauty in our brands with a Chinese consumer in the medium to long term remains vibrant in the domestic market, in Heinem and internationally, which remains our focus for the future.
Speaker 5: through this complex phase of recovery from the pandemic.
Speaker 5: profitability significantly.
Speaker 5: There are two factors at play. Beyond the pressure to a big margin-accretive area of our business,
Speaker 5: First, with the rest of the business growing strongly, we will continue to invest to drive the momentum in those areas. Second, strategic and necessary long-term investments in manufacturing, errandy, and information technology capabilities, a pressure in margin with this lower recovery of sales.
Speaker 5: With this said, we are obviously not satisfied by the profitability in our revised outlook for fiscal year 2023.
Speaker 5: For the future, we are focused on a plan to further accelerate our growth in key markets, return to organic sales growth in our Asia travel retail business and skincare category, and to progressively rebuild margin across brands, categories and regions.
Speaker 5: Let me now share more about our third quarter performance as numerous growth engines excelled.
Speaker 5: Looking at regions, each of the Americas and Asia Pacific return to organic sales growth, which complemented ongoing gains in the domestic markets of EMEA. Developed markets from every region contribute, led by the United States, the UK and Hong Kong.
Speaker 5: While organic sales in our emerging markets rose in our standing 17% globally. Impressively, in the domestic markets of EMEA, we realized broad-based trends as every category grew double digits organically.
Speaker 5: The breadth of growth engines by category was matched by the breadth of growth engines by channel, led by specialty multi and online pure player retailers, driven by the successful go-to market strategy as we focus on high potential channels.
Speaker 5: In Western Europe , our brand successfully engaged with consumers to generate, trial, and repeat. The examples are many. For Estee Lauder, Bobby Brown, and Too Faced driving viral success on TikTok, to MAC leveraging Paris Fashion Week for its MAC Locked Kiss Ink Lipstick launch.
Speaker 5: and La Mer hosting dermatologists for a unique event. These collective initiatives, featuring enticing innovation and hero products, drove the company accelerating prestige gains for the quarter in Western Europe .
Speaker 5: Looking at Asia Pacific, it similarly delivered diversified growth. Nearly every market and each category contributed to the region's return to organic sales growth. Fragrance was a standout, rising double-digit, fueled by excellent performance of our luxury and artisanal portfolio led by Jumelon Lander, Le Labo and Tom Ford Beauty.
Speaker 5: This brand's hero franchises welcome new consumers into the category, while locally inspired innovation and enriching in-store services further contributed to the expansion of this promising category in the region.
Speaker 5: Mainland China grew low single digits organically after four quarters of pressure from COVID-19 in restrictions yawn outbreak.
Speaker 5: The beginning of the quarter was impacted by the lingering effects of the COVID cases in November-December. In January , retailers worked through existing inventory. Traffic gradually returned.
Speaker 5: such that organic sales declined steep double digits. As of the reopening progress, organic sales rose double digits in each of February and March.
Speaker 5: Even in this complex quarter in mainland China, consumer desire for high-quality products, elevated experiences and newness was clear, and our brand delivered. Led by Esther Loder and La Mer.
Speaker 5: For Estee Lauder, skincare fuels its growth. Consumer gravitated to the brand's innovation and cherished heroes across franchises, most especially its luxury-oriented re-nutrit as well as supreme.
Speaker 5: La Mer further contributed, boosted by its expert beauty advisor offering differentiated services in the launch of the reformulated moisturizing soft cream, which attracted new consumer with its advanced benefits. Encouragingly, for the third quarter, the
Speaker 5: our prestige beauty share gains in mainland China accelerated sequentially.
Speaker 5: driven by skincare as well as both online and brick and mortar.
Speaker 5: In the Americas, the United States returns to organic sales growth, invigorated by strategic go-to-market initiatives and innovation to engage existing as well as new consumers.
Speaker 5: the ordinary sword owing to its heroes and a winning streak of innovation, with the latest being multi peptide iserum, which is bringing in the new consumer demographic.
Speaker 5: A cellular introduction of the revamped nutritious franchise focused on JetZ with all new skincare products and launched exclusively with Ulta Beauty Realize strong initial uptake.
Speaker 5: Looking at makeup in the United States, MACC Clinic and Two-Phase fueled excellent performance with targeted initiative to serve various consumer demographic across freestanding stores specialty multi and department stores. For clinic it is a case study in successfully leveraging viral success.
Speaker 5: executed with excellence to meet the local needs of consumers.
Speaker 5: The double-digit organic sales growth in emerging markets this quarter extends our fiscally to date momentum with strong contribution from India and Brazil. Globally, our diverse portfolio brands served as a powerful catalyst for growth. Coming up...
Speaker 5: Tom for Beauty, Deordinary and Le Labo each contributed strong organic sales growth and demonstrated the gains to be had across our large scaling and developing brands.
Speaker 5: MAC, with its global reach, expert artistry and service-oriented freestanding stores, continue to realize the evolution of the makeup renaissance as market's progress in recovery from the pandemic. Furthermore, the brand leverages its market-leading EMV ranking with high impact activation and product launches in makeup.
Speaker 5: Consumers also embrace Mac's new hyperreal franchise in skincare, which should represent an incremental growth engine for the brand over time.
Speaker 5: Importantly, IPreal is another example in our portfolio of exciting East-to-West innovation, as it was born in Asia Pacific and launched globally.
Speaker 5: Tom Ford Beauty delivered double-digit organic sales growth, excelling across fragrance and makeup. In fragrance, the new private blend cherry collection was an instant hit, while the brand's extension of Tom Ford Noir Stream into Perfum captivated consumers seeking intensity.
Speaker 5: and the highest quality.
Speaker 5: We are thrilled to have enriched our brand portfolio last week when we acquired Tom Ford, a power player in luxury with promising growth opportunities ahead.
Speaker 5: The deal is a wonderful outcome of our successful journey with the brand, which began when we collaborated to create Tom for Beauty over 15 years ago. The Ordinary's ingredient focus prodded, prospered in its heritage market as well as in new market evidenced by the brand's
very successfully February launch in the Middle East.
rising 60% organically.
percent organically. In closing.
While we are lowering our outlook for fiscal year 2023 to reflect the deeper pressure in Asia travel retail given its extended recovery and related retail inventory tightening, we are encouraged by the strong momentum in the rest of our business.
Looking ahead, we are focused on a strong acceleration of balanced organic sales growth across regions, categories and channels, and progressively rebuilding margin.
Indeed, consumer demand is robust for our diverse portfolio brands in developed and emerging markets globally, evidenced in both organic sales growth and retail sales trends. This drives our confidence in the future.
To our employees, I extend my deepest gratitude for your exceptional dedication to our company and each other. Amid a difficult external environment, you have demonstrated an unwavering passion to exceed consumer desires around the world with our beautiful Portafoglio brands.
I will now turn the call over to Tracy. Thank you, Fabrizio, and hello everyone. Our third quarter organic net sales declined 8% and earnings per share decreased 75% to $0.47.
As Fabrizio mentioned, despite continued challenges in our Asia travel retail business, we experienced accelerated growth across our markets globally, with nearly every market expanding as they progressed through various stages of recovery from the pandemic.
From a geographic standpoint, organic net sales in our Asia Pacific region rose 7%, with nearly all markets contributing, led by Hong Kong, which doubled in size, partially due to the return of Chinese travelers, while Australia grew nearly 50%, and Japan rose double digits.
Mainland China also returned to growth this quarter, showing positive signs of recovery in February and March after the pressure from the increase in COVID cases and slower retail traffic in January .
Throughout the region, markets continued to progress in recovery with fewer COVID restrictions compared to last year, leading to growth in all product categories with the return of brick-and-mortar traffic.
Strong double-digit growth from the region's emerging markets contributed one point to Asia Pacific's growth.
Organic net sales in the Americas rose 6% led by the United States. In North America, organic net sales grew mid-single digits, reflecting growth in skincare, makeup, and fragrance.
The Ordinary, MAC, and Lalibault excelled, each rising double digits in the quarter. Specialty multi-growth, including distribution expansion, drove the increase in brick and mortar, along with contributions from freestanding stores and department stores.
In Latin America, organic net sales grew double digits, benefiting from growth in every country and in all product categories with particular strength in makeup and fragrance.
Organic net sales in our Europe , the Middle East and Africa region fell 24% driven entirely by the travel retail business.
Our global travel retail sales continue to be pressured by our Asia travel retail business, which Fabrizio described.
Outside of Asia, we experienced double-digit sales growth in travel retail as international travel increased throughout Europe and the Americas.
The overall performance in travel retail more than offset the organic net sales growth from the rest of the EMEA region, where we drove strong performance in all product categories and from nearly all channels of distribution. Organic net sales rose across both developed and emerging markets led by the United Kingdom, Germany, France, and the United Kingdom.
Italy, and Turkey as the progression to recovery continued and tourism resumed.
From a category standpoint, fragrance continued its momentum as organic net sales rose 14%.
Strong demand for our products and high touch services, as well as innovation, fueled growth across every geographic region.
Tom Ford Beauty, Lala Beaux, and Estée Lauder each grew double digits in the quarter. Organic net sales in hair care grew 3% and sales were virtually flat in makeup.
Makeup growth in the Americas, Asia Pacific, and the markets in EMEA, excluding travel retail, was offset by the pressures in Asia travel retail.
MAC and Clinique continue to drive makeup recovery, and double-digit growth from Tom Ford Beauty and Too Faced also contributed.
Nearly every market in Asia Pacific realized strong growth in the category, partially offset by softness in mainland China.
Organic net sales in skincare fell 17% due to the pressures affecting Asia travel retail. The declines from La Mer and Estee Lauder were partially offset by standout performance from The Ordinary and MAC.
The ordinary benefited from strong growth in specialty multi-channels, particularly in the U.S., as well as from geographic expansion into India and the Middle East this year, as well as the success of new product innovation. The launch of Max Hyperreal product franchise expanded its offerings in the category and contributed to growth.
Our gross margin declined 750 basis points compared to last year, largely due to the slower than expected recovery in Asia travel retail.
This includes obsolescence charges, higher promotional costs and gift sets to drive increased consumption, excess overhead absorption in our plants due to the pulldown of production throughout the year given higher inventory levels, and less favorable brand and category mix.
Operating expenses increase 570 basis points as a percent of sales, driven largely by the reduction in sales.
We continued our investments to support recovery markets in areas such as advertising, promotional activities, and innovation, which collectively increased 230 basis points compared to last year.
Operating income declined 66% to 316 million and are operating margin contracted 1,320 basis points to 8.4% in the quarter.
Despite the volatility that has significantly impacted net sales, we have sustained certain of our strategic investments to support recovery in select markets and the strengthening of our multiple engines of growth.
We've continued to invest in areas imperative to long-term, profitable growth, including innovation, advertising, the growth of our emerging markets, the geographic expansion of some of our brands, production capacity, and consumer engagement.
Our effective tax rate for the quarter was 43.1% compared to 21.3% last year.
The increase in rate was primarily due to the expected further reduction in earnings related to our travel retail business for fiscal 2023.
Diluted EPS of $0.47 decreased 75% compared to last year.
This was at the high end of our outlook, despite the significantly higher than normal tax rate.
The impact from foreign currency translation and foreign currency transactions in key travel retail locations negatively impacted diluted EPS by 1% and 3% respectively.
For the nine months, we generated $1 billion in net cash flows from operating activities compared to $2 billion last year.
The decline from last year reflects lower net income, partially offset by lower working capital.
We invested $652 million in capital expenditures and we returned $945 million in cash to stockholders through both dividends and share repurchases.
On April 28th, we were pleased to complete the acquisition of the Tom Ford brand. The amounts paid at closing of approximately $2.25 billion were funded through a combination of cash, including the proceeds from the issuance of commercial paper, and $250 million received from one of the licensees of the brand, Marcolin. An additional aggregate amount of $300 million in deferred payments.
at 5% interest per annum to the sellers becomes due from the company beginning in July 2025. We estimate an EPS dilution to the full year of approximately 3 to 4 cents. And now turning to our outlook for fiscal 2023.
Clearly, this fiscal year has proven to be a perfect storm of higher than anticipated volatility from both global external headwinds and uncertainty surrounding the timing and pace of recovery from the COVID-19 pandemic, primarily in China and Asia travel retail. In August , the Lesson magazine published a report of increased volatility in the last quarter.
We expected a gradual improvement throughout the first half of the fiscal year as markets and international travel began to recover from the impacts of COVID restrictions.
the first half of the fiscal year as markets and international travel began to recover from the impacts of COVID restrictions. However,
The actual impacts to our business in Asia Travel Retail and China, to a lesser extent, have been far greater than we anticipated given the prolonged challenges from the pandemic, including a slower than expected recovery of traffic and sales conversion and prestige beauty in these markets.
Further compounding this pressure is the tightening of inventory by retailers in Hainan. We now expect that a far more gradual return to normal sales growth in Asia travel retail is likely to persist into the first half of fiscal 2024.
In addition, higher inflation and currency volatility as well as promotions in certain markets to alleviate high stock levels more than offset our price increases and further pressured our business margins.
In spite of the volatility in Asia Travel Retail that delayed the recovery relative to what we had expected, as well as the macro pressures from inflation and currency, we have been encouraged by the faster than anticipated improvements across many of our markets globally as they progressed through various stages of recovery from the pandemic. While we are lowering our full year outlook to reflect continued decline in net sales in Asia Travel Retail, we have been encouraged by the faster than anticipated improvements across many of our markets globally as they progressed through various stages of recovery from the pandemic.
including the tightening of inventory by certain retailers. We plan to invest in markets where traffic and consumption are returning, and expect to return to overall net sales growth in the fourth quarter.
This reflects double-digit sales growth in the Asia Pacific region, including mainland China as well as in EMEA, excluding Asia travel retail.
The Americas is planned to grow single digit. Quality also continues to pressure margins relative to prior year.
As Fabrizio mentioned, we are certainly not satisfied with our results this fiscal year and will address plans to progressively rebuild the margin accretive areas of our business beyond this fiscal year from the current year's level. When full recovery does occur from the pandemic, we do expect the return to healthy growth of linux.
As our backdrop and using March 31 spot rates of 1.09 for the Euro, 1.239 for the pound, 6.872 for the Chinese Yuan and 12.97 for the Korean Yuan, we now forecast organic net sales for the full year to decline 7-5%.
Currency translation is expected to dilute reported sales growth for the full fiscal year by four percentage points and we anticipate an additional one point of dilution from the impact of certain foreign currency transactions in key international travel retail locations.
The impact of sales from certain designer license exits are expected to dilute reported growth by approximately one point. Full year operating margin is forecasted to be approximately 11.1%, and 860 basis point contraction from the prior year period primarily due to the disruptions from COVID restrictions.
that not only impacted sales in Asia travel retail and mainland China, but also resulted in increased obsolescence charges, discounts, and promotional expenses.
Foreign currency impacts and the strategic investments I mentioned previously are also expected to pressure margin.
We now expect our full year effective tax rate to be approximately 27%, reflecting the change in our estimated geographical mix of earnings for the balance of the year.
diluted EPS is expected to range between $3.29 and $3.39 before restructuring and other charges and includes the expected impact of the Tom Ford acquisition I mentioned previously.
This includes approximately 26 cents of dilution from currency translation. In constant currency, we expect EPS to decline approximately 51%, which includes a negative impact from foreign currency transactions in key international travel retail locations of approximately 4 percentage points.
While this has been a challenging and disappointing year, navigating through many uncertainties, the strength we are seeing in many of our recovery markets gives us tremendous optimism for the future.
Our long-term fundamentals and strategy remain intact, as does our confidence in the long-term growth opportunities for global prestige beauty and our brands with the investments we've made to sustain long-term profitable growth.
On behalf of Fabrizio and the Estee Lauder Company's leadership team, we want to extend our immense gratitude to all of our employees around the world. We recognize that this has been an incredibly challenging year for you and we want to thank you for your extraordinary efforts, your dedication and commitment to the company and your resilience as we continue together on our path to recovery.
And that concludes our prepared remarks. We'll be happy to take your questions at this time. Ladies and gentlemen, at this time, the floor has been open for questions.
If you have a question, you may simply press the star key followed by the digit 1 on your touch tone telephones.
To ensure everyone can ask their questions, we will limit each person to one question. Time permitting, we will return to you for additional questions. This queue up again by pressing the star key and the digit 1.
Our first question today comes from Dara Mohasenian from Morgan Stanley . Please go ahead with your question. AS6 Wu.
Our first question today comes from Dara Mohasenian from Morgan Stanley . Please go ahead with your question. Hey, good morning, guys.
So I just wanted to touch on the three areas of weakness versus prior guidance in terms of Korea and China. You know, taking a step back, the magnitude of changes to your guidance stemming from the areas is obviously severe, and it also looks more onerous than peers. So just as you take a step back and look at the weakness versus what was expected.
How much of that do you think more just the timing of recovery and beauty at the consumer level coming out of COVID or retailer inventory issues, which in theory are more shorter term versus the potential for the longer term recovery in the beauty category is lower in these areas. So really just perspective on.
lower long-term sales potential versus more short-term issues. And I know it's hard to speak relative to peer results and guidance, but it does look like the issues are more severe for Estee versus peers. So just any perspective on Estee's market share or company performance in these areas would also be helpful. Thanks. Okay. Dara, so thank you for the question. In Hainan, as we said in the prepared remarks,
retail sales in the third quarter. So this is the first quarter, the high-end performance for us has been up and down all year. And some of the swings have been quite severe, but we did see a progression to positive retail sales.
You know, I think the thing that gives us more comfort now on a more continuous, steady progression of recovery is the fact that the COVID restrictions have been lifted. And so, you know, what we were experiencing before with our travel retail business is...
you know the volatility related to some of the COVID restrictions and the flow of traffic and travel and people's comfort with travel. So that gives us more comfort that we're going to see a recovery. You know when in terms of you know our experience as it relates to the
Our July results were up strong double digit. Then Heinen went into closure and that extended for longer than we had anticipated. But given the results we had seen in July and actually in some previous month, we had expected that that recovery would happen faster once the lockdown was lifted. And that didn't happen.
And so we ended up with, and our retailers also expected that recovery, we ended up with more inventory in the trade than what was needed, basically, for the level of sales that were being done in Heinen.
Our pullback in inventory right now, given the pace of recovery that we're seeing, again, we're encouraged. But the retail inventory needs to come down, and therefore we are pulling back on our shipments. Korea, we talked about in the last call in terms of what happened in Korea. We basically have a change in the rollback.
benefits from having a lot of organized tour business from Chinese traveling consumers. And that has been slower to come back. So that certainly is pressuring our fourth quarter as well. And again, it's been difficult to predict the timing of all of this recovery, but we do know the recovery is happening.
We don't believe there is an issue at all with prestige beauty. When we look at the recovery we're seeing in the Americas, in other Asia-Pac regions, in the U- in EMEA, we see very strong recovery of prestige beauty and actually are seeing an acceleration of fragrance.
I just want to add that, so as Tracy explained, in TR is real initial inventories versus phase of recovery. In other proof of that is that our retail in travel retails is so much stronger than our net. So you have a minus 45 in quarter three versus a single-digit decline.
in retail, so there is a lot of inventory absorption which is going on with the recovery and a lot of the speed of this absorption will depend on the speed of the recovery that we have in front of us. We are estimating that given the trend in this period in Q4, retail will go positive.
and then the absorption will continue to improve over time and definitely continue in quarter one of next fiscal year. On another encouraging point I want to touch briefly on China that you asked also about. So in China we return to organic growth which is excellent news.
And we expect a double-digit growth in quarter four in China mainland. We accelerated market share gains for the second quarter in a row. And I want to underline that when we- the problem with the volatility in China started in the period where Shanghai got closed.
and we were particularly affected by the closure of Shanghai. At that moment, during these three months of closure, we lost some significant market share. Now, the good news, we are now essentially made up for the lost market share from the low downs. We are back in line with the total market share and we expect in quarter four because also the low base.
to get into a positive market share growth versus also the pre-load down period, which is a story. We said that we would have tried to recover this in one year and we will do that and better than that.
The other important thing to underline that linked to this TR issue there is this skincare issue obviously because there is a high percentage of skincare which is a very profitable category for us. And I want to also underline that skincare is a very profitable category for us.
XTR skin care is growing globally past 6%. So we are growing skin care. We will grow skin care. We are growing skin care in China mainland. Every tail is growing ahead of the market. We are building market share in quarter three. We expect to do even more in quarter four.
and Estelo de la Mer driving this growth, with La Mer growing double digit every day in the quarter in China and loiter single digit.
So the last part of your question is our different situation versus peers. I would see that if you look at a business overall, the answer of the difference is in the level of stocks in the TR and the volatility and the fact that we are bigger in the market.
historically more exposed to this strong accretive channel that in a moment of crisis obviously resulted into a bigger negative. And our next question comes from Chris Carey from Wells Fargo. Please go ahead with your question.
Hi, good morning, everyone. Good morning. I guess just suggesting these results.
and taking to our question, you know, in consideration, you know, I guess it's like, you know, APAC and America's actually exceeded expectations, which in a way,
probably helps combat this dynamic of it's a category or a brand or a structural issue. I think it's also probably not fully understood that L'Oreal and others have much smaller travel retail businesses or maybe it is understood.
But I guess the question is, you know, clearly you have created a unique business where you're much bigger in travel retail than many of your peers. And this has been something that's been growing over the last several years. And, you know, obviously that created a lot of great tailwinds during the up move.
you know, it's just created an enormous amount of volatility. And I think also a lack of visibility as we've come into this kind of downtrend, right. And I hear you on, you know, rebuilding, you know, demand building activities and leaning into the market, but I just wonder, you know, does this market need to reset lower before you can, you know, really talk about stabilization or
Are we really, you know, just, you know, we had one more quarter or two of issues and, and we're really rebuilding from there. Right. And, and I appreciate Korea and China all have different dynamics, but I think the overall context here is certainly that the travel retail business is creating a ton of volatility for your business. And then, you know, just related to that, I apologize, but you know, the fiscal Q4 guidance range is quite wide. And I think that maybe speaks to visibility.
Can you maybe just talk about how you might be approaching the concept of guidance, given the lack of visibility so that perhaps we can maybe avoid some of these resets. Thank you so much for any of that perspective. Very much appreciated.
Okay, let me start. Thank you for the question. Our point of view is that, as you said, this is kind of reset, but then after this reset travel retail will remain a large, very important channel.
because it's an important channel also for consumer acquisition and it's a growing channel.
And so to grow global market share, to be strong in travel retail will remain important. Also in the case of Asia travel retail and China travel retail, it's very important for coverage because in many emerging markets for sure in China.
The coverage of small cities is possible only via online and via the people traveling, because the Greek immortals are not there, are only in a part of the city which is the reason of high productivity in China.
So travel retail is also a great opportunity for discovering products, for the physical experience, for interacting with our products, and it's a very luxury channel, meaning the experience of luxury is very high. So the issue with travel retail has been really that during a pandemic, we have to be able to find the right people.
the volatility of travel and the interest and the possibility of travel is so much impacted by regulation change, the pandemic up and downs, etc. Obviously, in a moment of a pandemic moment, travel retail is being more difficult to predict and is being more volatile to anticipate.
but in terms of the positives of the channel in the long term for brand building, for trial building, for being an accretive and positive profitable channel in the long term remains intact. And so it's a veryantser because there's a lot ofgoing on in the land of tribal lands there,
We believe that out of the pandemic, this will remain important, Shanna. Now, will this be more balanced, the growth? Absolutely. We have a plan and an interest in balancing our growth and balancing the proportion between all our business segments, and we will continue to do that. The other thing I want to underline that
The high inventories, Tracie explained what was the sequence of events and the reason why our retailers and us went for higher inventories at the beginning of the fiscal year and then we encountered this issue of this lower recovery than anticipated.
And remember the important thing, and in a slower recovery, also the retailers want less stock, and so the replenishment gets affected as Tracy explained. So this situation is also impacted by our relatively long supply chain, where you need to order and then after months you receive it.
The relatively long supply chain has an impact on the fact that the retailers, when they decide their stock for us, which is not true for every one of our peers, they need to make a bet several months before when they receive the products. And that issue, obviously, in the middle of the worst volatility we ever experienced, has been difficult for our retailers and for us.
like the manufacturing that we call Sakura in Japan, that will have the new distribution center in mainland China and in the near future in Hainan. All design is investment to shorten the lead time. Now the shortening of the lead time will also reduce the risk.
of being wrong in the choices in volatile moments. And so assuming that a certain amount of volatility will continue, even after the pandemic, we have done investment to reduce our risk and to our ability to manage better in a volatile period. The other thing is let's not under-evaluate the investment in the air and the center of Shanghai.
that will reduce the, will increase the speed of innovation, reduce the timelines of innovation as well and will have another impact of better ability to make the right decision even volatility because fast reactivity. In other words, we have built agility.
and agility is one of the things that will make our future ability to forecast TR in the correct way. So in summary, we count on continue having a strong TR business in the future. There is a reset that our retailers and the market are doing for us, but after that we will continue to grow.
but we will have more agility in our operations. To your question on the fourth quarter and what's in our implied guidance as it relates to travel retail, coming off of the trends that we're seeing in March, the progressive trends that we've seen through the third quarter, we're expecting that our retail sales in travel retail will be up.
double digit and our net sales are down double digit, down double digit more than our retails are up. So again, this is another quarter of trying to whittle down the inventory that's in the trade, hence the impact that you see in the fourth quarter. And as Fabrizio said, much of that.
being our very strong skin care business. So we do expect, as I said in my prepared remarks, that some of this will bleed into the first quarter and perhaps a little bit into the second quarter, but get progressively better until we get to the inventory levels that both we and our customers want in the trade.
We are working with and partnering with our customers on the retail programs also now that traffic is back in airports. We are investing in advertising in airports. We are re-employing some of the sales staff that was not there when the airports were empty.
And we are working with our brands on great programs and promotions for customers as they return to the airport. So our travel retail team has been quite busy working with our retailers to recapture the growth that we're now seeing in particular. particular
I'm just going to, I'm trying to get a sense of how you guys think about the achieveability of getting back to the 20% operating margins in earnings north of seven. So I'm just trying to better understand just how you guys are thinking about the profit recovery.
So thank you for the question. As you know, I said in the prepared remarks, we expect, you know, off of this year, which obviously has been a big setback year for the reasons that we've spoken about, our highest margin category and a very high margin channel being pressured.
You know, we do expect a progressive recovery in margin, but that does mean not back to 19% in fiscal 24. And so, you know, we are taking cost actions as we always do. We certainly have cost control measures in place as it relates to areas like headcount, consulting expenses, other expenses as well.
And we are in the process now of finalizing our budgets for fiscal 24. And certainly we'll have better information for you in terms of what that margin progression looks like for fiscal 24 in our August call. But, you know, it certainly will be more than 50 basis points of margin expansion off of this level.
but certainly not to the 19% level. And our next question comes from Oliver Chen from TD Cowen. Please go ahead with your question.
Hi, thanks Fabrizio and Tracy. I was curious about what you're most concerned about for ongoing risk related to your guidance as we've seen. You called out promos and volatility as well as there are uncontrollable factors regarding the inventory and the channel. As we think more broadly, you called out previously losing share in independent brands. What is your favorite thing about this dog ad?
and opportunities in loyalty as well as customer data programs. Love your take on how that may be an opportunity going forward as well. Thank you. Yeah, I mean, in terms of, in the prepared remarks, Oliver, we talked about the fact that we're not going to be able to get through this. We talked about the fact that we're not going to be able to get through this.
when some of the areas that have been suppressed this year like travel retail, Hainan, and you know in Korea when when Chinese traveling consumers return to Korea. So I think you know those things are quite quite positive. We have strong innovation programs as well to support our our growth for certainly next year as well.
And the fact, again, the biggest volatility that we've seen this year has been in some of the COVID restrictions in certain markets that have been lifted. And so now it's a matter of the timing and pace of that recovery. We feel a bit better, but I'm a bit cautious, obviously, given what we've experienced this year.
But recognizing that that trigger is one that really has created as much volatility for the reasons that we have already spoken about. We are feeling a bit better. There will be still volatility, certainly, in the fourth quarter. And there will be volatility next year. You know, we have.
always been a company that's been relatively good at managing volatility. This year, given the severity of it and the severity in the channel of operation that had happened, and has caused us to have these results. But rest assured, myself, Fabrizio, and the entire management team are diligently working on recovering our profitability and certainly recovering growth, and our brands continue to be.
period. The market share growth in EMEA is very strong. The market share growth in many emerging markets and emerging markets in total is very strong. I said it before, our emerging market are growing 17%. The market is growing, is growing by less than 17% in the summer of emerging markets. In North America, we are growing again, although not in the US, not yet market share, but we are growing.
Here we have La Mer growing, Esteloder doing well also in China. We have double digits skincare growth in Europe and Latin America. We have single digits skincare growth in US, but again back to growth. We have an exciting innovation plan as Tracy said, but let me give you a few examples.
We just launched Clinique, MossoSurge, 100 Hours, SPC, so new, new sun protection thing in the ordinary a multi peptide eye serum. We have launched the ordinary in the Indian and Middle East with extraordinary results, Mac IP real.
mini the skincare market, the skincare Bobby Brown are very strong so all the skincare makeup brands is a new trend that we are leveraging very well with good success and importantly we have our hero upgrades in the high luxury area so La Mer Soft Cream, Renalt Regal, Ultimate Diamond which are going out they are very important for the Asia trends well luxury skincare.
profit pressure created by these in high inventory issue. And we are going to focus on sellout, retail acceleration and profit rebuilding as the next steps. And we have time for one additional question. This question comes from Lauren Lieberman from Barclays. Please go ahead with your question.
Great, thanks. Good morning. So one thing that hasn't come up is just visibility into what's in quote unquote inventory, but outside of traditional retail. And you know, we know that for which you've spoken many times over the years about travel corridor shifting and particularly now when we think about the further development of Asia travel retail broadly, but there's also shoppers that, you know, move around and buy in bulk. And there's been a lot of
But I was curious about what you're doing, A, visibility into kind of untracked retail, if you will. B, anything that you were thinking about changing controls-wise to sort of have a better read on the quality of sales going out the door from some of your travel retail channels. And then finally kind of putting a cherry on all of it.
is do you expect the inventory drawdown dynamic to be completed in the fourth quarter or should we think about there still being a mismatch between sell in, sell in being down, and sell through into the first quarter of 24? Thanks. So Lauren, let me take that last one. Yes, we do expect that.
that our sales will be down again in the first quarter and pick up in the second quarter. And so that's the cadence that we're seeing right now. Again, you know, much depends on retail sales. And again, as we said, we're encouraged by how retail sales have picked up in Hainan, not as much in Korea at the moment, but we remain encouraged that that will.
the activities that we have going on with our travel retail partners, I believe that we'll see a continued acceleration of retail like we started to see in this quarter. Yeah and Lauren to answer the first part to your question, we sell to our authorized retail customers, we do not sell directly to the goods.
However, as you alluded to, during COVID, there have been some temporary government policies, for example in Korea, were put in place to support the travel businesses and the travel retailers in these very tough moments.
where they reached to Gold Bank wrapped because everything was closed.
So now that you are right, there is no complete visibility on that part. There was no complete visibility on that part, what they were doing in that moment, when the policies were allowed. Now these policies are changing. There is an interest of the industry in general, in our retailers, which is the most important actors in this. There is an interest in the industry in general.
in going back to regular travelers as regular travelers they go because by the way this is a more profitable and more interesting business for them as well. So now the airport traffic is gradually recovering. We expect a rebalancing of the total market and because of this we expect an increased visibility on all these areas.
And we are also putting extra focus, as Tracy explained before, on retail sellout, on to regular travelers. With new investment, we are rebuilding the people, the staff in the airports, we are rebuilding the advertising there, or what Tracy already established, that with our interest is to support our retailers in this trans...
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That concludes today's Estee Lauder conference call. I'd like to thank you for participation and wish you all a good day.