Release Date: August 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Estee Lauder Companies Inc (EL, Financial) returned to top-line growth in the second half of fiscal year 2024, with organic sales growth accelerating from 6% in the third quarter to 8% in the fourth quarter.
- The company delivered an adjusted operating margin of 11.6% in the fourth quarter, higher than the first half and expanded from the second half of fiscal year 2023.
- The Ordinary brand saw over 20% organic sales growth in fiscal year 2024 and is expanding into new product categories and emerging markets.
- The Estee Lauder Companies Inc (EL) is focusing on high-growth channels like Amazon and specialty multi-retailers, which showed promising results.
- The company is implementing a Profit Recovery and Growth Plan (PRGP) to restore sustainable long-term organic sales growth and rebuild operating profitability.
Negative Points
- Organic sales for fiscal year 2024 declined by 2%, and adjusted operating margin contracted by 120 basis points to 10.2%.
- The prestige beauty industry in China and Asia travel retail experienced further softening, impacting overall performance.
- The fiscal year 2025 outlook reflects continued declines in the prestige beauty industry in China and Asia travel retail, with a lower pace of operating margin expansion than previously expected.
- The company recorded $471 million of impairment charges related to Dr.Jart due to lower-than-expected growth and profitability.
- The Estee Lauder Companies Inc (EL) expects fiscal year 2025 organic sales growth to range from a decline of 1% to an increase of 2%, reflecting ongoing challenges in key markets.
Q & A Highlights
Highlights of The Estee Lauder Companies Inc (EL) Earnings Call
Q: As you look ahead at the priorities facing Estee Lauder, how are you thinking about the most important attributes for your successor?
A: Fabrizio Freda, President, Chief Executive Officer, Director: The successor should be a great leader who understands brand building and global growth. They should also be able to reshape the cost structure for better leverage with future growth. The Board has been working on this for some time and has developed strong options.
Q: How much has the change in trend in China affected earnings power in fiscal '25?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: China and travel retail are high-margin areas. With Mainland China expected to be flat to down high single digits and travel retail Asia down double digits, there's significant pressure on earnings. Despite this, EPS is expected to be up due to the profit recovery and growth plan (PRGP).
Q: How do you ensure there isn't too little investment in '25, given the competitive environment?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: We are funding consumer-facing investments from the gross savings of the PRGP. Fabrizio Freda added that the strategic reset aims to invest in key areas to leverage growth momentum and improve marketing effectiveness.
Q: Can you give us a sense of the inventory levels exiting the year and the expected decline in travel retail for fiscal '25?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: Inventory levels were higher than desired due to deceleration in Q4. We are managing this in Q1 to keep inventory levels optimal. Fabrizio Freda added that better stock normalization and a new distribution center in Hainan will improve this process.
Q: How do you see the distribution channel shifts and margin impacts, particularly in North America?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: Travel retail will be a lower percentage of the mix in fiscal '25. Faster growth channels like Amazon and specialty multi are margin accretive due to new consumer recruitment. Fabrizio Freda added that online channels are efficient and help improve the cost of recruitment.
Q: What is a realistic category growth expectation in China and Asia travel retail long-term?
A: Fabrizio Freda, President, Chief Executive Officer, Director: The global prestige market historically grows mid-single digits. The current 2-3% forecast reflects the decline in China and travel retail. Long-term, we expect the market to return to mid-single-digit growth as China stabilizes.
Q: What are you seeing in the North America market, and are you expecting further moderation?
A: Fabrizio Freda, President, Chief Executive Officer, Director: We are reflecting the current moderation in our guidance, but the market is still growing mid-single digits. We are seeing progress in retail growth and are focused on stabilizing and aligning with market growth in the US.
Q: How do you plan to leverage the strengths of your brands and categories in fiscal '25?
A: Fabrizio Freda, President, Chief Executive Officer, Director: We are focusing on leveraging our strong brand equity, high repeat rates, and innovation. We aim to lower exposure to declining markets and channels while improving marketing effectiveness and recruitment.
Q: How are you managing the volatility in the global prestige beauty market?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: We are executing the PRGP to deliver margin expansion and create fuel for growth. We are also simplifying processes and enhancing agility to better navigate the dynamic market environment.
Q: What are your expectations for fiscal '25 and beyond?
A: Tracey Thomas Travis, Executive Vice President, Chief Financial Officer: We expect modest sales growth in fiscal '25 with margin expansion driven by the PRGP. We anticipate a more sustainable sales and profit growth algorithm in fiscal '26 as global prestige beauty accelerates.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
