Estee Lauder Companies F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

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Estée Lauder Companies Inc. (NYSE:EL)

F1Q08 Q1 Earnings Call

October 25, 2007 9:30 am ET


Dennis D'Andrea - Vice President of InvestorRelations

William Lauder - President and Chief ExecutiveOfficer

Richard Kunes - Executive Vice President and ChiefFinancial Officer

Daniel Brestle - Chief Operating Officer


Wendy Nicholson - Citigroup

Bill Smith - Deutsche Bank

Amy Chasen - Goldman Sachs

Ali Dibadj - Sanford Bernstein

Alice Longley - Buckingham Research

John Faucher - J.P. Morgan

Lauren Lieberman - Lehman Brothers

Linda Bolton Weiser - Oppenheimer

Filippe Goossens - Credit Suisse

Justin Hott - Bear Stearns


Good day,everyone, and welcome to the Estée Lauder Company's Fiscal 2008 First QuarterConference Call. For opening remarks and introductions, I would like to turnthe call over to Vice President of Investor Relations, Mr. Dennis D'Andrea.


Good morning,everyone. We have on today's call William Lauder, President and Chief ExecutiveOfficer, and Rick Kunes, Executive Vice President and Chief Financial Officer;Dan Brestle, our Chief Operating Officer is also here, and Dan will beavailable for the Q&A session.

Since many ofour remarks today contain forward-looking statements, let me refer you to ourpress release and our reports filed with the SEC, where you'll find factorsthat could cause actual results to differ materially from these forward-lookingstatements.

Now I'll turnthe call over to William.


Good morning.Thank you for participating in our fiscal 2008 first quarter conference call.Our reported sales for the quarter rose 7% and diluted earnings per share were$0.20. These results came in better than our expectations, because many of ourinternational affiliates didn't spend as quickly as they expected. Rick willdiscuss the financials in more detail a little later.

Once again,our performance is fueled by our international businesses, where we postedsolid growth in all regions. As we stressed before, we see our foreignoperations continuing to provide the greatest opportunities and the firstquarter was no exception.

I amespecially gratified to note that our business in the fast-growing emergingmarkets continues to be vibrant. Sales rose 25% and our presence in thesemarkets keeps expanding. For example, we recently established a corporateaffiliate in the Middle East and Cliniquelaunched in India, with two locations in Delhi

In China, our largest emerging market, each of our eightbrands turned in double-digit gains at retail during the quarter. All of ourbrands combined make us the largest seller in our distribution network. We alsocontinue to make progress in Russia. While Moscow and St. Petersburg are the major cities, we see vast opportunitiesof potential among the country's many different time zones.

We'reinvesting aggressively in emerging markets to expand our share and we expectbig payoffs down the road. The bulk of our most recent investments went towardbuilding stores, adding doors, hiring and training employees and advertising.

Even as weinvest in these promising markets, I am pleased to report that we're alsogetting good growth from important established markets. Japan is our largest market in Asia and our sales momentum has been building over the past year. Thanksto higher sales from every one of our brands and with an improved retailenvironment, our total business rose in the high single digits in localcurrency. This is the best year-over-year quarterly showing in eight years. Asa result, the company's share of Japan's prestige cosmetics business has grown in thelast 12 months.

Skin care is acritical category in Japan, and we started seeing a turnaround in fiscal '07after years of softness. The improvement has continued into fiscal 2008, as thecategory sales climbed sharply this quarter. We're pleased to note that themakeup business also expanded nicely. Overall, our products are resonating withthe Japanese consumer, who is typically younger than her U.S. counterpart.

In the U.K,our business was solid. In particular, online sales were robust, with severalbrands posting 50% gains. We ramped up eCommerce in the U.K last year and we'reexited about the potential. Our affiliate is gearing up for a strong holidaypush in this channel. Last year, our U.K affiliate upgraded its customerrelationship management programs in order to capture additional consumerinformation, giving us better marketing opportunities.

During thefirst quarter, Clinique sent a targeted mailing to specific customers who shopat the British retailer booths. Early results have been positive. Some of ourother brands in the U.K planned holiday targeted offers and we'll be able tomeasure their impact on subsequent sales.

As you know,we currently have 28 brands across 135 countries and territories, sold throughmultiple distribution channels. Much of the growth we're enjoying is the resultof well-placed strategic investments.

To cite a fewexamples, the Estée Lauder brand ran commercials for its nutritious line on TVin 7 major Chinese cities. This is the third time the brand advertised ontelevision in China and each campaign was extremely successful. M•A•Copened 34 doors in the quarter, two-thirds of which were international markets,and we continued to build infrastructure in China and Russia to support a fast-growing sales network.

We alsodevoted greater resources to travel retailing, a thriving channel benefitingfrom more global travelers, who increasingly buy cosmetics while waiting forflights. Estée Lauder's Re-Nutriv and Idealist in Clinique's three step lineshave been best sellers in airport stores.

Our travelretail division spent approximately $6 million more this quarter than last yearto increase the visibility of our brands and it paid off with sales risingsolid double-digits. For instance, large illuminated ads for our products hungin airports worldwide and the exterior of Hong Kong's airport trains promoted Estée Lauder's Idealisttreatment product.

We alsoincreased our brand presence. Travel retail continued rolling out Tom Ford,Donna Karen and Sean John and selectively placed other brands into more than 30new doors.

Turning to ourdomestic business, sales in the period were dampened by a shift in retailers'calendars, which caused approximately $40 million of shipments to be delayedfrom the first quarter to the second.

Our retailtakeaway from the quarter was healthy and our big brands were working toimprove point of sale to stay relevant and compelling. The Estée Lauder brandupdated its counters by investing in new modular display and tester units atall North American department store locations.

With a newcounter look in place to capture consumers' attention, the brand's beautyadvisors turn to their strength, providing quality service.

To simplifythe choices for consumers and advisors, the Estée Lauder brand organized itsproduct line by skin care concerns. The brand continued to reinforce itsauthority of skin care through its technology-driven products and compellingadvertising and promotions.

We areimproving the foundation of the Estée Lauder brand to generate future salesgrowth. Another global power house brand, Clinique, launched a pilot programthat aims to improve the consultant's job satisfaction. The program is designedto keep them employed longer and create a stronger connection with consumers.Early results are encouraging, anecdotal evidence shows that the program's equitation and financial incentives have reduced consultantturnover.

Switching nowto distribution, I would like to update you on developments at our entrepreneurialBeauty Bank division. Overall, the five Beauty Bank brands sold in Kohl'sdepartment stores have shown healthy life through growth this season.

We have awinning product in American Beauty's perfect mineral powder makeup. It's beenon shelves for two months and already is the number one foundation, tappinginto consumer demand for mineral-based cosmetics.

An even biggersuccess is Tri-Aktiline, an anti-aging product from Good Skin launched inJanuary. Its retail sales have skyrocketed, exceeding our projections by 400%and it holds the distinction of being the top beauty SKU at Kohl's.

Based on thesuccess of Tri-Aktiline at Kohl's, we made it our first major internationalrollout, launching exclusively in 523 Sephora doors throughout Europe on September 1st. We sold 100,000 units in two months, far beyondour expectations. Tri-Aktiline also launched exclusively in Cosmed’s 250 pharmacies in Taiwan, our first foray in Taiwan's pharmacy channel. Initial results have beenterrific; it's the best selling beauty product in those doors.

Based on thisgreat response, we're planning to distribute Tri-Aktiline in more countries. Wehave high hopes for another Good Skin product called Smooth 365, which went onsale in Kohl's in July, and there's more in the Beauty Bank pipeline.

In a separateventure, last March, Beauty Bank introduced the Coach fragrance in 250freestanding United States Coach stores. That business is on plan andprofitable and we intend to develop additional fragrances and related beautyproducts with Coach over the next couple of years.

We're verypleased that our Beauty Bank division has achieved its goal of being a creativethink-tank to bring ideas to reality and attract new consumers into our fold.

That's not allin distribution. After three successful appearances, Bobbi Brown will hostregular segments on QVC in the U.S. every other month, which should add incrementalsales. We expect Bobby's shows will build brand awareness and spill over todepartment stores. DIRECTV retailing could become an important component of thebrand's domestic sales. Bobbi Brown products continue being sold on QVC in U.K. where the brand has done well.

To update youon our operations, our SMI effort is proceeding and we expect the North Americanfinancial back bone and indirect procurement functions to be up and running in2008. Those areas involve about 80 legal entities and thousands of users.Forecasting and demand planning for several brands is also expected to go livein 2008. We are proceeding cautiously and deliberately to avoid disruptions inthe flow of our business, but are on track with the implementation savingsprojections.

Looking aheadto the holiday season, we are cautiously optimistic. The national retailfederation projects an overall 4% increase in U.S. holiday sales--slightly less than last year--however,high-end luxury retailers continue to do well. Our brands have addressed theholiday season with compelling gift sets and we're expecting that consumerswill find the Estée Lauder brands annual Blockbuster set a must-have item.

As you know,the majority of fragrance sales occur in the second quarter and we believewe're well-positioned with both classic and contemporary scents, including ourperennial top sellers, Beautiful, Estée Lauder Pleasures, and Clinique Happy.

Two recentadditions, Sean John Unforgivable Woman and DKNY Delicious Night have beenstrong out of the gate. We're also anticipating that some other best sellers, includingDonna Karen Cashmere Mist and DKNY Be Delicious will do well in U.S. prestige distribution.

In most otherplaces around the world, the consumer seems confident and we expect to continueto generate strong sales growth from international markets. Our research anddevelopment strength will be evident in coming months as we introduce somerevolutionary products. To cite a few, the Estée Lauder brand will introduceRe-Nutriv Ultimate Youth Cream, a cutting edge treatment that captures the benefitsof resveratrol, found in red wine, which claims to postpone the signs of aging.

Origins justlaunched Origins Organic, the first complete prestige collection of skin, bodyand hair care products to carry the USDA organic seal. Clinique will unveil aredness relief line. We're optimistic that consumers will be attracted to theseunique offerings.

In closing myremarks, I want to reiterate that our international operations are an importantdriver of our overall growth. This is a direct result of our long-terminvestment strategy. We're backing our winners, our best performing brands,countries, channels and categories, to propel them to greater heights.

We havenumerous opportunities to place our products in untapped markets, findalternative distribution, and spread the word about technology and excitementin our diverse portfolio of brands. We strongly believe that the incrementalinvestments we have made in the last six months will start to pay off in thesecond quarter.

Now, I willturn the floor over to Rick, who will provide more financial details.


Thank you,William and good morning everyone. My discussions today will focus on ourresults from continuing operations. In local currency, sales this quarter wereup 5% over last year within the previously stated range. U.S. dollar weakenedmore than we anticipated, adding 2 percentage points of growth, resulted inreporting sales growth of 7% to $1.7 billion.

Net earningsfrom continuing operations for the quarter were $39.1 million compared with $58million last year, and diluted EPS was $0.20 compared to $0.27 in the prioryear quarter. We exceeded the top end of our EPS range by $0.09.

Let me tellyou some of the areas that contributed to that result. As a multinational andmulti-brand company, there was not one single item to point to, although themajority of the favorability came from our international business.

Specifically,about 20 new door openings we had planned for M•A•C are expected to occur inthe second quarter. Along with the usual structural cost of a new door, ourcosts associated with hiring and training makeup artists, testers, events andcounter amortization. As a barometer, the average cost to open a door for M•A•Cis approximately $150,000. For 20 doors, this equates to $3 million, or about$0.01 per share.

Some of ourfast developing markets, such as Russia, the Middle Eastand Latin America had aggressive expansion plans, but did not spendas quickly as expected. The favorability amounted to approximately $6 million,or $0.02. These markets expect to catch up as the year progresses.

A portion ofthe overall favorability came in from our international businesses in marketssuch as Germany, France, Benelux, Australia and Taiwan. Under spending for advertising, merchandisingand samples, as well as demonstration costs, totaled about $8 million, equal to$0.03.

And lastly,the weak dollar added about $0.01 to $0.02 to our earnings compared to ourforecast. Let me refer you to the press release we issued this morning fordetails of our net sales and operating income by product category andgeographic region. My remarks here will focus on those items that may add somemore color to the information in the press release.

We saw robustgrowth in all categories, with the exception of makeup, which grew less than 1%in constant currency. As William noted, U.S. sales were adversely impacted by the shift incustomer orders from the first to the second quarter.

The makeupcategory in particular saw a greater impact, as it is our largest productcategory in the U.S. Internationally; our makeup artist brands continue to postdouble-digit sales increases. When we look at our geographic results we had anexcellent quarter in Europe, the Middle Eastand Africa, posting double-digit local currency sales gains.

Travel retailgrew more than 20% for the quarter fueled by increases in internationaltravelers and expansion of developing brands. Almost all countries were up,with our U.K. business growing high single digits, led bystrong results from our makeup artist brand and robust sales at our seveneCommerce sites.

Travel retailand the U.K. affiliate represent about half our sales in theregion. Among our developing markets in the region, Russia once again was up sharply, growing more than 30%,and contributed nicely to the region's growth, and Turkey rose nearly 40% off a smaller base.

Asia-Pacificalso had strong local currency sales gains, with every country recordingincreases. Among the top markets in the region, we were particularly pleasedwith the high single-digit sales growth in Japan. Every brand grew in Japan this quarter, driven by share gains and expansionof our developing brands.

Korea, our second largest market in the region, grewlow double digits and Australia rose in the mid-teens. Those three marketsrepresent nearly two-thirds of the region sales. China, our major developing market in Asia-Pacific,jumped over 25%, fueled by robust prestige beauty growth, expanded distributionand increased penetration of our developing brands.

The modestdecline in sales in the Americas reflected the shift in retailer orders ofapproximately $40 million into the second quarter due to the change in theretail calendar. Partially offsetting this decline were strong sales gains inour Internet, salon, company owned free-standing retail store, Kohl's and Coachchannels, as well as Canada and Latin America.

Takentogether, these areas grew nearly 20% in the quarter. The region also benefitedslightly from the addition of two months sales from the Ojon brand, which weacquired at the end of July. Almost all developing brands posted increases,although we continued to experience lower sales in certain core brands.

Moving on togross margin, we had a 20 basis point improvement this quarter to 73.3%.Contributing to the increase was favorable exchange rates of 30 basis pointsand lower promotional costs of 20 basis points. Partially offsetting theseimprovements was an unfavorable change in the mix of our business of 30 basispoints.

As wedescribed on our last conference call, we planned for a high level ofinvestment spending in our fiscal '08 first quarter. Operating expenses as apercentage of sales for the quarter rose to 68.8% from 66.9% last year.Although, not as high as planned, we invested heavily to drive growth, acquiremarket share and expand geographically.

A few keyareas we spent this quarter include increased field sales; demonstration andtraining costs, associated with the opening of 34 new doors for M•A•C,including six retail stores; increased selling costs and samples behind therollout of the new Clinique Experience pilot program in three U.S. cities;higher advertising costs for Clinique's three-step TV spot in Europe and Asia; higheradvertising spend behind the Estée Lauder brand in China, the U.K. and Russia; and incremental spending for informationtechnology and stock-based compensation. As a result, operating income declined22% to $77.9 million compared to $99.9 million last year.

Looking atoperating profit by category, hair care posted a solid increase due to strongsales and the acquisition of Ojon, which added incremental income. Skin care,makeup and fragrance all declined, reflecting the planned impact of the $40million sales shift previously mentioned. While sales shifted, expenses didnot.

At a grossmargin of nearly 75%, this translates to an operating income impact of roughly$30 million, equal to about $0.10 a share. These categories also were affectedto varying degrees by the increase in investments made in M•A•C, Clinique and EstéeLauder brands that I mentioned earlier. And fragrance saw the effects oflaunching the Sean John Unforgivable Woman’s scent, DKNY Delicious Night andTom Ford For Men.

By region,operating profit increased in Asia-Pacific but declined elsewhere. InAsia-Pacific, every country achieved gains, except China. China reported a moderate operating loss this quarter,reflecting the increased advertising behind the Estée Lauder and Cliniquebrands, as well as further expansion.

We expect China to produce positive operating income for the fullfiscal year. The decline in the Americas was primarily caused by the impact of the salesshift, coupled with increased investments. In Europe, the Middle East and Africa, we established an affiliate in the Middle East, resulting in incremental cost in the region. Ouroperating results also reflect increased TV advertising by the Estée Lauder andClinique brands to drive share and develop markets and awareness in developingareas.

Regarding ournet interest expense, we reported $18.4 million this quarter versus $6.7million in last years first quarter. The increase is primarily due to higheraverage debt balances from financing our accelerated share repurchase lastfiscal year. The effective tax rate for the quarter was 35.5%.

Regarding cashflows, our fiscal first quarter always reflects seasonal working capitallevels, as we gear up for the holiday season. As such, cash outflows for thequarter ended September 30, 2007, were $133 million compared with $70 million lastyear.

The changeprimarily reflects seasonal levels of spending and timing of payments relativeto accounts payable balances and the lower net earnings from continuingoperations. Our day sales outstanding were 56 days this quarter, 1 day higherthan last year, resulting from a strong international growth. Inventory daysincreased to 196 days compared to 180 days last year.

The 16-dayincrease is due to expected overall business growth in the second quarter,including the sales shift mentioned earlier, equal to approximately 7 days.Five days resulting from excess stock to support new businesses in emergingmarket and the inclusion of Ojon, and approximately 4 days related to thecombined effect of foreign currency translation and some remaining safety stockin Aveda.

During thequarter we repurchased approximately 1.4 million shares of our stock at a costof $54 million. We spent $79 million for capital expenditures during thequarter, which includes incremental spending for our company-wide systemsinitiative. For fiscal '08, we expect to generate around $700 million of cashflow from operations and to use about $325 million for capital expenditures.

Now, I'llupdate you on some assumptions for the balance of the fiscal year. For theyear, strong international sales are expected to lead growth. We continue toexpect fiscal 2008 local currency sales growth of approximately 7% to 9%.Foreign currency translation is anticipated to add approximately two percentagepoints to growth.

As we've donehistorically, we will take advantage of market conditions around the world andinvest for growth and market share, especially in Asia and Europe. We plan to spend behind our faster growingbrands and markets to continue the momentum that they are experiencing.

We are alsoinvesting more in our IT infrastructure. As a result, our margins are expectedto remain relatively unchanged from the prior year. At this time, we estimateour effective tax rate will be approximately 36%. We continue to be comfortablewith our full year EPS forecast of between $2.28 and $2.40.

Looking at oursecond quarter, we expect EPS for the three months ended December 31, 2007 to be between $1.10and $1.17. Our sales growth for the second quarter is forecasted to come inaround 10% to 12% in local currency and a positive impact of foreign exchangetranslation should add about 3 percentage points.

Our top line growthin fiscal '08 second quarter will include approximately $40 million from theretail calendar shift. As I said earlier, at a gross margin of nearly 75%, thiswill translate to an operating income benefit of roughly $30 million, equal toabout $0.10 per share.

That concludesmy comments for today. And we'll be happy to take your questions now.



(OperatorInstructions) Our first question comes from Wendy Nicholson - Citigroup.

WendyNicholson - Citigroup

Could youexplain a little bit more about the margin weakness in Europe? I'm surprised that that was down as much as it was. Number one, howmuch could the affiliate opening possibly have cost you? And what exactly isgoing on in the U.K. to drag margins down so much there?


Wendy, itwasn't just the affiliate opening, but we spent rather heavily, and we hadplanned to spend heavily obviously based on guidance we had given, in the U.K. and France, in Germany, and also in Russia. And in Russia in particular, it's related to the fast growth inour points of distribution, and so there's spending that associated with that.

In the othermarket, it's just really advertising spending. As you know, we put our businessplans together to achieve a certain result for the year, and at times thatrequires us, or it's advisable for us to spend heavily on one quarter versusanother and that was what we had planned to do and what we actually did.

The results,as you see, are higher than our expectations for the quarter. We actuallydidn't spend quite as much as we had anticipated to spend, but we did spendquite heavily in the quarter.

WendyNicholson - Citigroup

And could youtalk about the travel/retail business. I know that that usually sort ofinsulates the margin in Europe to a certain extent.  How much was that up in the quarter?


Travel retailwas up 20% in the quarter, but we did also, as I think William mentioned in hisremarks, we did spend quite heavily in travel retail. We spent about anadditional $6 million of advertising spending in the quarter versus last yearfor that business in anticipation of hopefully a heavy travel season in thesecond quarter.


Your nextquestion comes from Bill Smith - Deutsche Bank.

Bill Smith- Deutsche Bank

Can we justspend a little bit more time on the second quarter guidance, both in terms ofsales and in EPS growth? Because, I think when you gave your guidance inAugust, it seemed like you were pretty conservative going in to the Christmasseason and kind of what's changed in the last three months? And then also justlike you have the 10% to 12%, -how do you get there?


Well, I don'tthink, Bill, that we've changed our outlook for the Christmas season here in North America, in particular in the U.S. If you exclude the $40 million of sales that’sjust shifted from quarter one to quarter two, we're not anticipating atremendously strong Christmas season here in North America.

But offsettingthat is terrific results internationally, as we had said when we came into thisyear, and continue to be borne out through the first quarter. We have somevery, very strong growth internationally, and it's the benefit, if you will, ofsome of that spending that we're doing in the first quarter.

Bill Smith- Deutsche Bank

Okay. So it'saccelerated internationally versus what you told us in August in the internationalmarkets.


I think internationalbusiness is quite strong. I don't know if it's really a lot stronger than wethought it was going to be for the year. We came in knowing that we were goingto have a great year in international and we still feel that way.

Bill Smith- Deutsche Bank

Okay, and thenjust a follow-up on the department store side, can you just give me some datapoints on sell-in versus sell-through? Kind of like where the inventory levelsare? What you're thinking for the holiday season; is there going to be de-stockingin January, that kind of thing?


This floatthat we're talking about obviously with the October receipt date, for Christmasgoods was October 8th versus last year October 1st, so that's sort of throwingoff the calendar. We're investing heavily. We've put more sets into thebusiness, more value into the business. We think you're going to need value tocompete.

Obviously, thereturns in January are going to be predicated on how well the consumer reactsto that, but I think we're prepared for a pretty good season. Not a greatseason, but a pretty good season, and all the brands have stepped up andincreased the value to their Christmas programs.


Your nextquestion comes from the line of Amy Chasen - Goldman Sachs.

Amy Chasen- Goldman Sachs

Can you justgive us an update on cost savings on how much you reaped in the quarter andwhether you're still on track for the year?


Sure, Amy. Theprogram that we had actually implemented a year or so ago was all around peopleand that program is happening. If you're referencing the SMI savings, the $80million that we intend to achieve with the implementation or roll-out of SAP ona worldwide basis, we are beginning to see some savings at Aveda, which was thefirst site that we installed, but obviously that's more than offset by thecontinued cost of implementation as we begin to roll that program out aroundthe world.

We still feelcomfortable with that $80 million number, but as I think we said at ourinvestor conference, that results in a net cost, if you will, for the next yearor two and then it begins to kick over to a savings after that.

Amy Chasen- Goldman Sachs

Okay, and youmentioned this special gift you're doing for Estée Lauder and your high degreeof confidence in the success of that. Can you just tell us what's so specialabout it? Because I know you've had some issues with your gifts in recentyears.


The remarksreferred to the Blockbuster. And last year we had a sellout of the Blockbusterearly in the season and we were a little naked coming into the last 10 days ofthe selling season. This year, we've invested more in the Blockbuster. We thinkit's a great looking piece and we put more quantity into the store, so we havesomething through those critical last 10 days to entice the consumer.


Your nextquestion comes from the line of Ali Dibadj - Sanford Bernstein.

Ali Dibadj- Sanford Bernstein

I want tounderstand your implied guidance for the back-half of the year. So, if youassume guidance is right for the second quarter here, that would suggest thatback half is about $1, call it, in terms of EPS. But if you look at consensus,it's about $0.20 above that.

Just trying toget a sense from you all that the level of conviction you have in your guidancein the back-half of the year, understanding the oft-repeated remark that youdon't really manage on the quarters, but just trying to get a sense from youabout your level of conviction there?


Sure. You arecorrect. We do run our business on an annual basis and that's the way we lookat it. Are we more comfortable today with the balance of the year than we wouldhave been, let's say, coming into the first quarter because our results werebetter than we expected? I think the answer is yes.

But, do recallthat we've only just finished three months, so we have a ways to go. But we arecomfortable. We wouldn't give the guidance if we weren't comfortable. It's arange of $2.28 to $2.40 and we're comfortable with that.

Ali Dibadj- Sanford Bernstein

I'm not tryingto be rude, but why do you even give guidance?


(Laughing) Well,that's the best answer I can give you, Ali, is a laugh. We used to not to, andthe whipsawing of indifferences of what was going on was worse than givingguidance.

Ali Dibadj- Sanford Bernstein

You're not tooterribly doing a great job now either, right, to be fair.


Well, I thinkon an annual basis, quite honestly, Ali, we do a pretty good job. We continueto remind everybody that our business can get affected on a quarter-by-quarterbasis.

For instance,this quarter, with the timing of opening doors of M•A•C, which we had every goodintention of opening during the quarter, it actually got moved into the secondquarter. Some of that is completely out of our control, quite honestly, butthat moves expenses from one quarter to another.

So, on anannual basis, we're quite good. Differences versus consensus, when we haven'teven given any guidance for the second half of the year, we really can'tcomment on, but we can comment on what we say for the full year and we arecommitted to that number.

Ali Dibadj- Sanford Bernstein

Okay. I justhave a quick question somewhere related, you did a very judicious job of notmentioning in your remarks--I think even in the press release--departmentstores. But you are talking about taking Clinique, for example, and how that'srolling out in Sephora, the Boots experiment that you've done with directmailings in the U.K.

How has yourattitude, if at all, changed about the mass channels, or as you guys call it,the popular channels, and what should we think about going forward on thatfront?


Our attitudesreally haven't changed much, Ali. We've been in Boots, and Boots is our largestcustomer in the U.K. for years, so that hasn't changed. We have taken the Clinique branda little more aggressively into some other distributions like Sephora, becausewe think they have customer bases used to draw a younger customer of Clinique.

We are totallycommitted to the U.S. department store business. We have a big share of that market. Weunderstand it's going through some difficulties. We're committed to help fixit. We're going to continue to drive those businesses, but we're not going tobe naive and stay exclusively in those businesses, and I think we've done agood job in last years in looking for alternative channels.


Your nextquestion comes from Alice Longley - Buckingham Research.

AliceLongley - Buckingham Research

Hi, goodmorning. Also on North America, if I adjust forthat $40 million shift in sales it looked like your first quarter sales wouldhave been up 4.3%, in the first quarter. Should we expect any deceleration oracceleration from that adjusted growth into the second quarter?

I'm justwondering fundamentally, if the North American business is accelerating orslowing, after adjusting for the $40 million shift?


I think, Alice, a better way to look at it is you're seeing anormalization in the businesses. I think that the major mergers for which wewere experiencing some indigestion from last year, you're seeing somenormalization in the retail pattern. So, you're seeing some leveling of thebusiness, where in prior years you were not.

AliceLongley - Buckingham Research

Okay. And onthat line, you've commented before on the gap between same-store sales results.From your perspective between the old Macy's and the new Macy's, are you seeingany narrowing of that gap?


Yes, we haveand we were sitting here, calls before talking about a 7% swing between theacquired versus the legacy doors and I might add it's just not with Macy's.It's with virtually all of our partners who had major acquisitions this pastyear.

We're seeingthat level. The growth isn't where we want it, but it is level. We'reexperiencing the same type of businesses in the acquired and the legacy doors,so there's not that gap that was for the first 18 months.


Your nextquestion comes from John Faucher – J.P. Morgan.

JohnFaucher - J.P. Morgan

Yes, goodmorning, everyone. Wanted to follow-up a little bit on the second quarterguidance. Just I understand the calendar shifted issue, but if I remembercorrectly, you benefited from extra retailer buying towards the end of thequarter.

And so whenyou take a look at the calendar shift and then look at the offsets in terms ofthe spending that didn't happen in the first quarter and then the impact as youcycle that sort of late buying. Can you talk a little bit about how thoseoffset each other in the quarter?


Well, John, you'rewondering if our second quarter seems aggressive, as far as its guidance. Wehave terrific sales growth in the second quarter, in particular frominternational. And when you add into that the benefit of exchange, which isabout 3% that we're anticipating in the second quarter, our numbers are prettygood. Plus part of it is around the timing of our spending and we spent heavilyin the first quarter; we said that would happen and that's part of our plan.

And then thesecond quarter, that spending is, if you will, maybe more normalized in natureand that, plus the $40 million shift in sales has given us a pretty strongoutlook for the second quarter.

JohnFaucher - J.P. Morgan

Okay. Can yougive us an idea maybe in terms of what the late buying represented in thesecond quarter of last year? So I mean, do we figure out a normalized numberand just add the $40 million, or do we have to factor that late buying in lastyear's second quarter into our revenue estimates for North America?


Well, John,the $40 million shift is part of our guidance. So that 10% to 12% comparablecurrency growth over last year and the 3 percentage points from exchange, thosenumbers are all inclusive, if you will, as compared to last year.

The growthlast year, as you'll recall was that, we had said late in the holiday season orleading up to the holiday season, that the department stores were buying fairlyheavily in anticipation of a stronger Christmas than actually resulted.

And whathappened was that we saw a little bit of that softness then come into our thirdquarter of last year from our sales perspective here in the U.S. But, I mean, all of that is factored into ourguidance that we've given for the second quarter.


Your nextquestion comes from Lauren Lieberman - Lehman Brothers.

LaurenLieberman - Lehman Brothers

Thanks. Thereare a lot of moving parts here with the timing of spending and currency, andfull year expectations staying the same. I just wanted to clarify a couplethings. One, are your intentions still to spend through the full year, what youintended to spend this quarter, so it's truly a timing issue?


At this pointin time the answer to that question is yes. But if you're asking are we morecomfortable with achieving our full year after our first quarter results, theanswer to that question is also yes. We did give guidance of $2.28 to $2.40, soa fairly wide range for the year and we've only finished three months, so let'ssee how the rest of the year starts to progress.

LaurenLieberman - Lehman Brothers

And then there'salso a currency benefit, which if you assume, you said, I think, it was $0.01to $0.02 this quarter, so it seems like you expect a pretty comparable level ofcurrency benefit to the top-line through the year, so we can say it's maybe$0.06 to $0.08 of currency benefit that's now in your expectations that wasn'tthere three months ago?


Yes, $0.08 isprobably a little bit high, but $0.05 to $0.06 anyway, yes.  At least the forecast that we're using we areanticipating the dollar to slightly strengthen, as the year progresses afterthe second quarter.


(OperatorInstructions) Your next question comes from Linda Bolton Weiser -Oppenheimer.

LindaBolton Weiser - Oppenheimer

Thanks, just abigger picture question. Ulta, the rapidly growing cosmetic chain that's comingpublic here, is carrying a lot of Estée Lauder-branded fragrances. Yet I don'tthink they are carrying any of your cosmetic brands. Can you discuss that and isthere a margin differential for you that makes it attractive to supply yourfragrances to them, but not your cosmetics? Can you just talk about that alittle bit?


Linda, thefragrance market is a bit more scattered than the makeup and skin care markets.We talk about popular distribution; we talk about multiple points of sale. Wehave been more aggressive with our fragrances across the board, not just withUlta, but with Sephora and other retailers, shoppers up in Canada. The makeup and skin care is a differentproposition, and realize one of our major selling features is the demonstrationthat Clinique consultant, the beauty advisor for Estée Lauder.

Thosechannels, like Ulta, offer some opportunity and we're experimenting with someof those opportunities with our brands to see if our brands work within thatstructure and they can provide that kind of level and service within thatstructure.

So, Ulta is onour radar screen. We're looking at it and I think we have one experiment inplace as we speak.

LindaBolton Weiser - Oppenheimer

Is Cliniquebeing sold in Asda in the U.K.?


No, notlegitimately. If they have their hands on gray markets, good, certainly notbecause of us.


Your nextquestion comes from Filippe Goossens - Credit Suisse.

FilippeGoossens - Credit Suisse

Yes, goodmorning, gentlemen. Question here on the international side. You mentioned inthe press release, as well as in your prepared comments, William, some softnessin the U.K. and in Germany.

To what extentis this driven by either the competitive environment, stronger year ordifficult comps versus a year-ago, company specific issues, or in the case of Germany I was reading something about some capacityconstraints at the airports, given the demand for more air travel.

Can you justgive a little bit more color on that? And then maybe contrast that with howtravel retail is doing?

William Lauder

Well, Filippe,just to be specific in the U.K. and Germany, the U.K. was up 7% to 8% and Germany was up 3% to 4%.

Now, if youlook at historical context, the Germany up 3% to 4% is historically very good for whathas been an extremely soft German retail trend over year-on-year, whereas inthe U.K. the 7% to 8% uptrend is historically on the lowerend of the range over the last few years.

So, while onabsolute value we like 7% to 8% in the U.K. in our largest market outside the U.S. very much, and we're pleased with Germany's 3% to 4%, both of those numbers lag our overallinternational growth.

I wish I couldcomment more specifically about airport capacity constraints in Germany. Germany is not one of the larger travel retail markets.However, German travelers throughout the world are meaningful players, but asyou know, there’s probably only two major gateway cities in Germany for the airports.

We've investedin both of these markets very heavily. We're getting a very tremendous returnover time. We have the dominant share in the U.K. and we're estimating the full year in Germany, for example, to go up 6%, which again,historically is a very high rate for what has been a very long-term anemicretail market in Germany. We also expect to be going back to historicalgrowth levels in the U.K.

Now, let's notforget. In the U.K., virtually all of our department store retail partners,with the exception of Harrods and Harvey Nichols have been through an ownershipchange in the last two to three years, many of which House of Fraser and Debenhamsin particular have been through privateequity buyouts, IPOs and whatnot, and Selfridges has been acquired by a Canadian retail colossus. There's only onegroup that's been stable, which is the John Lewis partnership.

So, the resultis that many of our retail partners in the U.K. have been through some significant ownershipchanges with perhaps some changes in shifts in strategies. And even still,despite that, we have a meaningful commanding share and what would beconsidered very good growth.

FilippeGoossens - Credit Suisse

Just tofollow-up on the U.K. side, in the fourth quarter last year when you provided guidance foryour current fiscal year, you were more cautious as it relates to the U.S. market because of the macroeconomic environment.

Now, we haveall heard some news about the banking sector in the U.K., a potential decline in the housing market. Any concernsat this moment with regard to the U.K. market from a macroeconomic perspective,particularly given such a large market for you guys?


It doesn'tappear to be affecting the consumer retail market in the upper-end in the U.K. yet. I was just there two weeks ago. They seemedto have a relative level of confidence and in the consumer sector.

I don'tbelieve you have the same linkage in consumer buying patterns between housingmarket and consumer spending as you do here in the U.S. largely because Ibelieve if you were to look at it, home ownership as a percent of the totalconsumer population in the U.K. is not the same as it is here.

So, I'm not asmart enough economist to be able to tell you that there is truly a cause andeffect link, but there doesn't seem to be that same tight link as there is inthe United States. In that regard, the United States, and perhaps to a certain extent, Canada, are unique in the world to thosecharacteristics.


Your nextquestion comes from the line of Justin Hott - Bear Stearns.

Justin Hott- Bear Stearns

William, following-upon that question. In the past you’d mentioned how you thought the U.S. consumer might be on a hair trigger, especiallywith gas prices rising and housing. Are you seeing any evidence of tradingdown, or are we seeing actual trading up going on in your business now?


Well, wecontinue to see extreme strength in the upper end of the luxury business, Justin.And when we look at our business at the very top of the pyramid, Neiman’s,Nordstrom’s, Saks Fifth Avenue,Bloomingdales, we see tremendous growth in those areas. Those stores aregrowing at a far greater rate.

You see theresults that are announced, obviously for those that are independently traded,and our brands in those stores in particular, are growing much faster, andthose brands which are more premium priced are growing much faster. So weobviously see strength at the very top end of the market to a degree thatdoesn't seem too correlated to the far broader department store business, whichwe do.

I think thebroader department store business is, first of all, bigger on an absolute basisby a significant measure, number one, and far more dependent on consumertraffic. Just the number of people walking through the stores, and we still seethat there are fewer people walking through the stores that we do business inevery day than there were perhaps two years ago.

I, perhaps,would assign a certain amount of that to marketing and programming related toall of the transitions and acquisitions to so many of our retail partners, andwould also assign some macroeconomic or individual multimillion microeconomicbehaviors to consumers also. I don't know how I would weight one to the other.

Justin Hott- Bear Stearns

And can youjust maybe give us a little more detail on what you're doing at the beautycounters and how they are being remodeled, how you are changing the training?

Dan Brestle

If you couldlook at some of the issues, Justin, we really felt that we really needed afacelift at the Lauder counter. The testers are easy to sell from; I think itmakes skin care purchasing much more easy to understand.

Clinique istaking another interesting approach. If you remember in the March conference,we talked about beauty advisor turnover, consultant turnover. When you lookedat our structure, we had an entry level and a counter manager with no abilityto promote people throughout the counter, so Clinique is putting in levels ofcompetency, which will increase pay levels, trying to slow down the historicretail turnovers.

So they arereally needed, they are brick and mortar type of basics that we're getting backto, as we additionally support our promotional activity, but both of the brandsare focused every day on maximizing their effort with the consumers that arethere.


Your nextquestion comes from Lauren Lieberman - Lehman Brothers.

LaurenLieberman - Lehman Brothers

Thanks. I justwanted to follow up on two questions, one on fragrance and one on Macy's. Theone on fragrance is that in the press release, there was a comment about stayingcautious on fragrance, even though we had a good revenue quarter. And then inyour prepared remarks, it was sort of the opposite, talking about having theright mix of products for Q2. So can you just tell me how I should be thinkingabout that?


Well, we stillhave a fundamental structural issue in the fragrance business, which we'restill working our way through and it's a longer-term issue, which is that ourmix of brands are predominantly Anglo-American oriented brands, with a verysmall componentry in our brand mix of European-oriented brands.

The vastmajority of the profitable fragrance business in the world is done in Europe orin European-oriented brands through the travel retail sector and Anglo-orientedbrands just don't do as well on a global basis, number one, and number two, theAnglo fragrance markets are not nearly as profitable for a number of dynamicreasons than the European fragrance businesses.

So we have asignificant multi-hundred million dollar business that is under-performing largelybecause of our brand mix. Where we are confident is that we know in the fourthquarter in most especially the Anglo markets in particular, fragrance is asignificant component of the total, and our second quarter, fourth quarter ofthe calendar year, the holiday season.

Our fragrancemixture, which is a very high component of the total, is very well positionedto do a good deal of business, and we've invested heavily in that quarter wherethere's consumer consumes a significant portion of the total category.

LaurenLieberman - Lehman Brothers

Okay, great.So it's a long-term versus near-term discrepancy.



LaurenLieberman - Lehman Brothers

The otherquick thing was just on Macy's recently, I guess they put out two pressreleases in the last couple of months about diversifying their suppliers totheir cosmetics department. I can't imagine they are going to be taking muchshelf space from your brands, but if you can just talk to anything about whatyou know, what you're seeing from them, anything about the motivation for that;are they are planning on expanding the size of the department? Or will there,in fact, be a shelf space reserve?


I'm not awareof any conversations our brands are having specifically to a reduction incosmetic space in total in the departments. We're working with Macy's and withsome different types of formats in some of their newer stores. But no, ourbrands are not experiencing any type of pullback from Macy’s at all. In fact,they are excellent partners and in trying to find solutions to get the businessmoving in the right direction.


(OperatorInstructions) That concludes today's Estée Lauder conference call. I would liketo thank you all for your participation and wish you all a good day. Thank you.

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