KSS Kohls Corporation

By Sharon Terlep 

The declining fortunes of U.S. department stores have Estée Lauder Cos. on the defensive.

As one of the world's biggest beauty brands, the maker of Clinique and MAC has reason to be worried: roughly 30% of its global sales come from department stores. Macy's Inc., which recently disclosed it will close 100 stores by early next year, is Estée Lauder's biggest customer accounting for roughly 9% of its annual revenue.

Chief Executive Fabrizio Freda said the company felt the impact of store closures that Macy's has already carried out this year, but he remains optimistic that his brands will flourish even if the department store footprint shrinks. He plans to help department stores lure in more shoppers by offering new products and services from makeup lessons to makeovers.

"We are working hard to support our partners to go back to increase this traffic at every level," Mr. Freda said. "If the projects we are working on work, department store sales will continue to grow in the U.S."

The New York-based company on Friday provided a lower-than-expected profit forecast for 2017, anticipating slower sales in the coming months. In the quarter ended June 30, the company said sales were hit by declining retail traffic, especially in midtier U.S. department stores. Sales in the Americas rose just 1% to $1.1 billion.

Shares of the company fell 3.5% to $91.73 on Friday.

Analysts fret that Estée Lauder could respond to the department store malaise by chasing sales at less prestigious outlets such as Ulta Salons that would cheapen its brands and irk higher-end retailers.

"Is there a concern that at some point, you're going to get rid of the scarcity," Bernstein Research analyst Ali Dibadj asked on a call to discuss the company's results.

Mr. Freda said branching out to other retailers and online sales is the only way to reach important and growing demographics such as millennials.

"The brands that do not evolve their shopping habits to reach this consumer will basically lose," he said.

Even with the growing popularity of beauty retailers such as LVMH's Sephora and its more value-oriented rival, Ulta, Cosmetics & Fragrance Inc., U.S. department stores remain an important sales driver for the beauty industry.

About one-third of all fragrances and color cosmetics are sold by department stores in the U.S., according to Euromonitor. Online sales are growing but still a small part of the business: 10% for cosmetics and 9% for fragrances.

Department-store sales are growing in other regions, including the U.K., Western Europe and Australia, Mr. Freda said, which helps offset weakness in U.S. chains such as Macy's and Nordstrom Inc.

Coty Inc., whose brands include Calvin Klein and Marc Jacobs fragrances and a number of other department store names, didn't discuss the effect of store closings when it released its financial results earlier this week. Coty's sales fell 6% in its Americas region in the June quarter, excluding acquisitions, divestitures and currency swings.

"Clearly we would like to see more top-line growth," Coty interim CEO Bart Becht said.

Overall, revenue at Estée Lauder rose 5% last quarter over the same quarter a year earlier to $2.65 billion. Its earnings dropped 39% to $93.5 million because the results didn't includes gains from divestitures. The company forecasts sales for the coming fiscal year will rise between 6% and 7%.

Write to Sharon Terlep at sharon.terlep@wsj.com

(END) Dow Jones Newswires

August 20, 2016 02:47 ET (06:47 GMT)

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