– Fourth Quarter Reported Net Sales
Increased 9%; Up 11% in Constant Currency –
– Full Year Reported Net Sales Rose 5%; Up
7% in Constant Currency –
– Full Year Reported EPS Increased 13%;
Adjusted Constant Currency EPS Up 11% –
– Momentum Continues in Fiscal 2018
–
The Estée Lauder Companies Inc. (NYSE:EL) today reported strong
financial results for its fourth quarter and fiscal year ended June
30, 2017.
Fabrizio Freda, President and Chief Executive Officer, said,
“Throughout the fiscal year, our momentum accelerated, culminating
in an outstanding fourth-quarter performance that completed another
year of strong net sales and earnings per share growth. These
results reflect our success in pivoting our business to the
fastest-growing areas of prestige beauty to align with consumers’
changing shopping preferences. With our leading brands, quality
innovations and the acquisition of two makeup brands, we attracted
new consumers globally. Our business accelerated in our online
direct-to-consumer and retailer e-commerce sites, as well as in the
travel retail and specialty-multi channels, and we built momentum
in key geographies, like China and Italy, aided by enhanced digital
and social media communications. Additionally, we began to further
improve our organizational efficiency and effectiveness through our
Leading Beauty Forward initiative. Importantly, we delivered this
performance in the face of external global volatility and one of
the biggest moments of change in our industry.”
Mr. Freda continued, “We expect the great momentum we built
throughout the past year to continue in fiscal 2018. We are
well-positioned to deliver strong profitable growth as we deploy
our prestige brand portfolio to new consumers globally through our
hero product franchises and robust new product pipeline, new
digital-first marketing approach, and focused expansion for our
smaller to mid-sized brands.
“In our 2018 fiscal year, we expect to see initial net benefits
from our Leading Beauty Forward initiative and we will continue to
focus on increasing the efficiency of our operations, eliminating
non-value-added costs and generating sales leverage, while
strategically reinvesting to support strong and sustainable growth.
Our full-year outlook in constant currency reflects net sales
growth of 7% to 8%, including incremental sales from our fiscal
2017 acquisitions, and 9% to 11% earnings per share growth. Looking
out over the next three years, we continue to target constant
currency net sales growth of 6% to 8% and double-digit EPS
growth.”
For the three months ended June 30, 2017, the Company
reported net sales of $2.89 billion, a 9% increase compared with
$2.65 billion in the prior-year period. The recent acquisitions of
Too Faced and BECCA performed ahead of plan with incremental sales
contributing approximately 3.5 percentage points of the reported
sales growth. The Company posted sales growth in most brands and
across-the-board sales gains in all geographic regions and product
categories, except hair care. Fiscal 2017 fourth quarter sales
benefitted from innovative new products and double-digit growth in
several developed and emerging markets, particularly China. The
Company also generated double-digit gains in its travel retail,
online and specialty-multi channels.
Net earnings for the quarter were $229 million, compared with
$94 million last year, and diluted net earnings per common share
was $.61, compared with $.25 reported in the same prior-year
period. These results include the effect of restructuring and other
charges, and other adjustments described below.
Excluding the impact of foreign currency translation, net sales
increased 11%. For the quarter, the negative impact of foreign
currency translation on diluted net earnings per common share was
$.01. Adjusting for the restructuring and other charges and the
adjustments noted below, diluted net earnings per common share for
the three months ended June 30, 2017 was $.51, and in constant
currency rose 25%.
For the year, the Company achieved net sales of $11.82
billion, a 5% increase compared with $11.26 billion in the prior
year. Incremental sales from the Company’s recent acquisitions of
Too Faced and BECCA contributed approximately 2 percentage points
of the reported sales growth. Net earnings for the year were $1.25
billion, a 12% increase, compared with $1.11 billion last year, and
diluted net earnings per common share rose 13% to $3.35, compared
with $2.96 reported in the prior year, including the effect of
adverse currency translation, restructuring and other charges and
adjustments described below.
Excluding the impact of foreign currency translation, net sales
increased 7%. The negative impact of foreign currency translation
on diluted net earnings per common share was $.12. Adjusting for
the restructuring and other charges and the adjustments noted
below, diluted net earnings per common share for the fiscal year
ended June 30, 2017 was $3.47, and in constant currency rose 11%.
Information about GAAP and non-GAAP financial measures, including
reconciliation information, is included in this release.
During the fiscal 2017 fourth quarter, the Company recorded
restructuring and other charges of $78 million ($55 million after
tax), equal to $.15 per diluted share, in connection with its
previously announced Leading Beauty Forward initiative.
Additionally, in the fiscal 2017 fourth quarter, the Company
recorded adjustments related to fiscal 2015 and 2016 acquisitions
and recognized a net gain of $27 million ($19 million after tax),
equal to $.05 per share, reflecting changes in fair value of its
contingent consideration and charges for the impairment of goodwill
and other intangible assets. The Company also recorded a $75
million benefit, equal to $.20 per share, resulting from the
reversal of a deferred tax asset valuation allowance related to
previously non-deductible advertising and promotional expenses in
China.
During fiscal 2017, the Company recorded restructuring and other
charges of $212 million ($143 million after tax), equal to $.38 per
diluted share, in connection with its Leading Beauty Forward
initiative. For the full fiscal year, the net gain recognized for
the changes in fair value of the Company’s contingent consideration
and charges for the impairment of goodwill and other intangible
assets was $26 million ($21 million after tax), equal to $.06 per
share.
During the fiscal 2016 fourth quarter, the Company recorded
charges of $100 million ($68 million after tax), equal to $.18 per
share, in connection with its global technology infrastructure and
Leading Beauty Forward initiatives. During fiscal 2016, the Company
recorded charges of $134 million ($90 million after tax), equal to
$.24 per share, in connection with these initiatives. Additionally,
during the 2016 fourth quarter and full year, the Company recorded
adjustments of an $8 million gain (equal to $.01 per share) and $8
million of expense (equal to $.02 per share), respectively, for
changes in fair value of its acquisition-related contingent
consideration. See tables on page 13.
Reconciliation between GAAP and
non-GAAP
Three Months Ended June 30, 2017
Three Months
Ended June 30
Net Sales Growth Diluted EPS Growth
Diluted Earnings
Per Share
(Unaudited)
Reported
Basis
Constant
Currency
Reported
Basis
Constant
Currency
2017 2016
Results including restructuring and
other
charges and adjustments
9 %(1) 11 % 100 +%(1) 100 +% $.61 (1) $.25 (1)
Non-GAAP
Restructuring and other charges .15 .18 Contingent consideration
(.11 ) (.01 ) Intangible asset impairments .06 —
China deferred tax asset valuation
allowance reversal
(.20 ) — Adjusted results 9 % 11 % 21 %
25 % .51 $.42
Impact of foreign currency on earnings
per share
.01 Constant currency earnings per share $.52
Reconciliation between GAAP and
non-GAAP
Year Ended June 30, 2017
Year Ended June 30
Net Sales Growth Diluted EPS Growth
Diluted Earnings
Per Share
(Unaudited)
Reported
Basis
Constant
Currency
Reported
Basis
Constant
Currency
2017 2016
Results including restructuring and
other
charges and adjustments
5 %(1) 7 % 13 %(1) 17 % 3.35 (1) $2.96 (1)
Non-GAAP
Restructuring and other charges .38 .24 Contingent consideration
(.12 ) .02 Intangible asset impairments .06 —
China deferred tax asset valuation
allowance reversal
(.20 ) — Adjusted results 5 % 7 % 8 %
11 % 3.47 $3.22
Impact of foreign currency on earnings
per share
.12
Constant currency earnings per
share
$3.59
_________________________
(1) Represents GAAP.
Amounts may not sum due to rounding.
Full Year Results
by Product Category
Year Ended June 30 (Unaudited; Dollars in
millions) Net Sales Percent Change
Operating
Income (Loss)
Percent
Change
2017 2016
Reported
Basis
Constant
Currency
2017 2016
Reported
Basis
Skin Care $ 4,527 $ 4,446 2 % 3 % $ 1,014 $ 842 20 % Makeup
5,054 4,702 7 9 713 758 (6 ) Fragrance 1,637 1,487 10 13 115 87 32
Hair Care 539 554 (3 ) (2 ) 51 52 (2 ) Other 69 74 (7 ) (7 ) 11 5
100 + Subtotal 11,826 11,263 5 7 1,904 1,744 9
Returns and charges associated
withrestructuring and other activities
(2 ) (1 ) (212 ) (134 ) Total $ 11,824 $ 11,262 5 % 7 % $ 1,692 $
1,610 5 %
Net sales and operating income in the Company’s product
categories were unfavorably impacted by the strength of the U.S.
dollar in relation to most currencies. Total operating income in
constant currency, before charges and other adjustments, increased
11%.
Skin Care
- Net sales increased, with strong
double-digit gains from La Mer, driven by the success of new and
existing products, as well as targeted expanded consumer
reach.
- The Estée Lauder brand delivered solid
sales growth, primarily in travel retail and China, due, in part,
to gains in the Advanced Night Repair and Revitalizing Supreme
franchises. Outstanding double-digit sales growth from GLAMGLOW
reflected additional product assortments and targeted expanded
consumer reach.
- Several other brands, including Bobbi
Brown, Origins and Aveda, each posted solid gains. These increases
were partially offset by lower skin care sales from Clinique.
- Operating income increased sharply,
primarily from La Mer and Estée Lauder, reflecting higher sales.
Estée Lauder also benefitted from a favorable comparison to higher
spending behind launches in the prior-year period. Skin care
operating income reflected the favorable year-over-year net impact
of the changes in fair value of contingent consideration and the
impairment of goodwill and other intangible assets, as previously
discussed. Despite lower sales, Clinique had higher operating
income, reflecting disciplined expense management.
Makeup
- Makeup sales increased, primarily
driven by incremental sales from the Company’s fiscal 2017 second
quarter acquisitions of Too Faced and BECCA, exceptionally strong
double-digit increases from Tom Ford in every region, and
double-digit gains from Smashbox, La Mer and Estée Lauder.
- The increased sales from Tom Ford were
driven primarily by its lip color franchises, including new product
offerings, such as the Tom Ford Soleil Color Collection. Sales
gains at Smashbox reflect the strength of the makeup category in
specialty-multi. La Mer’s sales increase reflected the continued
success of the SkinColor Collection. At Estée Lauder, higher sales
were fueled by the Double Wear and Pure Color product lines.
- The overall increase in makeup sales
also resulted from M•A•C growth internationally, as well as our
brands’ expansion in specialty-multi to reach new consumers.
- These increases were partially offset
by lower makeup sales in the United States, primarily from Clinique
and M•A•C, due to slow foot traffic in some U.S. brick-and-mortar
department and freestanding stores, particularly in smaller malls
and certain tourist-driven doors.
- Makeup operating income declined.
Strong growth from Tom Ford and Estée Lauder, primarily due to
higher sales, were more than offset by declines from Clinique and
M•A•C, mainly reflecting their lower sales in the United States.
Also contributing to the lower results were transaction costs
related to the Company’s fiscal 2017 acquisitions.
Fragrance
- Net sales increased, primarily due to
strong double-digit gains from luxury brands Jo Malone London, Tom
Ford and Le Labo, and incremental sales from the recent acquisition
of By Kilian.
- Jo Malone delivered outstanding
double-digit sales increases in every region, reflecting strong
growth from existing fragrances, brand expansion and the recent
launch of Basil & Neroli.
- Increased sales from Tom Ford reflect,
in part, the continued success and growth of existing fragrances,
as well as new product launches.
- Le Labo benefitted from growth in
existing products and new launches and targeted expanded consumer
reach.
- Fragrance operating income increased
sharply, reflecting higher sales from Jo Malone, as well as
disciplined expense management in certain designer fragrances. The
increase also reflected the favorable year-over-year net impact of
the changes in fair value of contingent consideration and the
impairment of goodwill and other intangible assets, as previously
discussed.
Hair Care
- Hair care sales decreased slightly,
primarily due to a difficult comparison with several product
launches in the prior year.
- Hair care operating income decreased
slightly, reflecting the lower sales, partially offset by effective
expense management.
Full Year Results
by Geographic Region
Year Ended June 30 (Unaudited; Dollars in
millions) Net Sales Percent Change
Operating
Income (Loss)
Percent
Change
2017 2016
Reported
Basis
Constant
Currency
2017 2016
Reported
Basis
The Americas $ 4,819 $ 4,710 2 % 2 % $ 284 $ 346 (18 )%
Europe, the Middle East & Africa 4,650 4,381 6 10 1,203 1,027
17 Asia/Pacific 2,357 2,172 9 9 417 371 12 Subtotal 11,826 11,263 5
7 1,904 1,744 9
Returns and charges associated
withrestructuring and other activities.
(2 ) (1 ) (212 ) (134 ) Total $ 11,824 $ 11,262 5 % 7 % $ 1,692 $
1,610 5 %
Net sales and operating income in the Company’s geographic
regions were unfavorably impacted by the strength of the U.S.
dollar in relation to most currencies.
The Americas
- Sales in North America benefitted from
incremental sales from the recent acquisitions of Too Faced, BECCA
and By Kilian.
- Many of the Company’s brands generated
sales growth, led by double-digit gains from Tom Ford, Smashbox and
Jo Malone, and strong gains from La Mer.
- Sales in the Company’s online and
specialty-multi channels grew strong double digits.
- The growth in these areas was partially
offset by sales decreases, primarily attributable to the decline in
retail traffic in some U.S. brick-and-mortar department and
freestanding stores, principally for M•A•C, Estée Lauder and
Clinique. A decrease in tourist spending also adversely affected
sales in certain U.S. M•A•C stores.
- Sales in Canada were flat for the year,
and in Latin America, sales increased double-digits.
- Operating income in the Americas
decreased, primarily reflecting lower sales of M•A•C. Partially
offsetting this decrease was the favorable year-over-year net
impact of the changes in fair value of contingent consideration and
the impairment of goodwill and other intangible assets, as well as
disciplined expense management in certain heritage
brands.
Europe, the Middle East &
Africa
- As reported, most markets recorded
sales growth, with many posting double-digit increases, led by
Russia, Italy, the Balkans, Israel and India.
- Foreign currency translation reduced
reported sales by 4%, with the largest impact from the
deterioration of the pound sterling.
- In constant currency, sales in the
region grew solid double-digits, with virtually all countries
generating sales gains. Double-digit growth was posted in several
markets, including Italy, Russia, the Balkans, Central Europe, and
India, as well as strong growth in the U.K. and Germany.
- In travel retail, exceptionally strong
double-digit sales growth was generated across most brands, led by
Tom Ford, Jo Malone, La Mer, M•A•C, and strong gains from Estée
Lauder. Growth in global airline passenger traffic, solid new
launch initiatives, and targeted expanded consumer reach
contributed sharply to the sales gains.
- In constant currency, lower sales were
posted in the Middle East, driven by retailer inventory
rebalancing, reflecting the impact of the macro-environment on
consumer purchases.
- Operating income increased, led by
strong double-digit operating results in travel retail and
Switzerland and solid gains in the U.K. Operating income in the
region also reflected the favorable year-over-year net impact of
the changes in fair value of contingent consideration and the
impairment of goodwill and other intangible assets. The higher
results were partially offset by lower results in the Middle East,
France and Turkey.
Asia/Pacific
- All markets recorded growth, except
Hong Kong. On a reported basis and in constant currency, sales
increased, led by strong double-digit growth in China.
- The higher sales in China reflected
strong double-digit gains in most brands. Estée Lauder, La Mer and
M•A•C contributed sharply to the sales growth. Sales benefitted, in
part, from targeted expanded consumer reach and reflected
double-digit online sales growth in every brand, including the
launch of M•A•C on Tmall in China. Sales in department stores
posted strong gains, while freestanding stores generated
double-digit growth.
- Strong sales growth was generated in
Japan, Korea and Taiwan. The Company’s business in Hong Kong
continues to stabilize and returned to growth in the fourth
quarter.
- Sales in the region grew strong
double-digits in Tom Ford, Jo Malone, La Mer and M•A•C.
- In Asia/Pacific, operating income
increased, primarily due to higher results in China, Japan, Korea
and Taiwan driven by higher sales. Operating results were lower in
Hong Kong and Indonesia.
Cash Flows from Operating
Activities
- For the twelve months ended June 30,
2017, net cash flows provided by operating activities were $1.80
billion, compared with $1.79 billion in the prior year.
- The improvement primarily reflected an
increase in net earnings, partially offset by unfavorable changes
in certain working capital components, as well as the impact from
the payments related to the implementation of the Company’s Leading
Beauty Forward initiative.
- Before the impact of Leading Beauty
Forward, the Company’s net cash flows provided by operating
activities increased 7%.
Reconciliation between GAAP and
non-GAAP
Net Cash Flows Provided
By Operating Activities
Year Ended June 30
Percent
Change
(Unaudited; Dollars in millions)
2017
2016 Results as reported $1,800 (1) $1,789 (1) 1%
Non-GAAP
Impact of Leading Beauty Forward 106 — Results excluding Leading
Beauty Forward $1,906 $1,789 7%
_________________________
(1) Represents GAAP.
Outlook for Fiscal 2018 First Quarter
and Full Year
Global prestige beauty remains vibrant and is estimated to grow
approximately 4% to 5% during the year. The Company’s annual growth
has consistently outpaced global prestige beauty and is expected to
continue to grow at least two percentage points ahead of the
industry for fiscal 2018. The Company expects sales growth to
benefit from high-quality products, strong innovation, outreach to
new target consumers and growth from recent acquisitions, while
continuing to pivot to a digital-first marketing approach and
fast-growing markets and channels as consumer preferences
evolve.
We are mindful of risks related to social and political issues,
geopolitical tensions, terrorism, currency volatility and economic
challenges affecting consumer spending in certain countries. The
Company is also cautious of the decline in retail traffic,
primarily related to some brick-and-mortar department stores and
certain tourist-driven doors in the United States.
Full Year Fiscal 2018
- Net sales are forecasted to increase
between 8% and 9% versus the prior-year period.
- Foreign currency translation is
expected to positively impact sales by approximately 1% versus the
prior-year period.
- Net sales are forecasted to grow
between 7% and 8% in constant currency.
- The Company’s fiscal 2017 acquisitions
of Too Faced and BECCA are forecasted to contribute approximately 2
percentage points to the Company’s overall sales growth. These
acquisitions are estimated to be accretive to earnings per share by
approximately $.01.
- Reported diluted net earnings per share
are projected to be between $3.60 and $3.70.
- The Company expects to take charges
associated with previously approved restructuring and other
activities in fiscal 2018 of approximately $135 million to $155
million, equal to $.24 to $.27 per diluted common share.
- Diluted net earnings per share before
charges associated with restructuring and other activities are
projected to be between $3.87 and $3.94.
- The positive currency impact on the
sales growth equates to about $.09 of earnings per share. On a
constant currency basis, before charges associated with
restructuring and other activities, diluted earnings per share are
expected to increase between 9% and 11%.
First Quarter Fiscal
2018
- Net sales are forecasted to increase
between 9% and 10% versus the prior-year period both on a reported
and constant currency basis.
- The Company’s fiscal 2017 acquisitions
of Too Faced and BECCA are forecasted to contribute approximately 4
percentage points to the Company’s overall sales growth. These
acquisitions are estimated to dilute earnings per share by
approximately $.01.
- Reported diluted net earnings per share
are projected to be between $.85 and $.89.
- The Company expects to take charges
associated with previously approved restructuring and other
activities in its fiscal 2018 first quarter of approximately $45
million to $50 million, equal to $.08 to $.09 per diluted common
share.
- Diluted net earnings per share before
charges associated with restructuring and other activities are
projected to be between $.94 and $.97 for an increase of 12% to 15%
over the prior-year period.
Reconciliation between GAAP and
non-GAAP
Three Months Ending September 30, 2017 (F)
Three Months September 30 Net Sales
Growth Diluted EPS Growth Diluted
Earnings Per Share (Unaudited)
Reported
Basis
Constant
Currency
Reported
Basis
Constant
Currency
2017 (F) 2016 Forecast / actual results
including charges 9-10 %(1) 9-10 % 8-13 %(1) 8-13 % $.85- $.89 (1)
$.79 (1)
Non-GAAP
Restructuring and other charges .08
-.09 .05 Forecast / actual results excluding charges 9-10 % 9-10 %
12-15 % 12-15 % $.94 - $.97 $.84 Impact of foreign currency on
earnings
per share
—
Forecasted constant currency earnings
pershare
$.94 - $.97
_________________________
(1) Represents GAAP.
(F) Represents forecast
Reconciliation between GAAP and
non-GAAP
Year Ending June 30, 2018 (F) Twelve Months June 30
Net Sales Growth Diluted EPS Growth Diluted
Earnings Per Share (Unaudited)
Reported
Basis
Constant
Currency
Reported
Basis
Constant
Currency
2018 (F) 2017
Forecast / actual results including
charges /adjustments
8-9 %(1) 7-8 % 7-10 %(1) 5-8 % $3.60 - $3.70 (1) $3.35 (1)
Non-GAAP
Restructuring and other charges .24 -.27 .38 Contingent
consideration (.12 ) Intangible asset impairments .06
China deferred tax asset valuation
allowancereversal
(.20 ) Forecast / actual results
adjusted 8-9 % 7-8 % 11-13 % 9-11 % $3.87 - $3.94 $3.47
Impact of foreign currency on earningsper
share
(.09 )
Forecasted constant currency earnings
pershare
$3.78 - $3.85
_________________________
(1) Represents GAAP.
(F) Represents forecast
Conference Call
The Estée Lauder Companies will host a conference call at 9:30
a.m. (ET) today, August 18, 2017 to discuss its results. The
dial-in number for the call is 888-294-4716 in the U.S. or
706-902-0101 internationally (conference ID number: 65289585). The
call will also be webcast live at
http://www.elcompanies.com/investors/events-and-presentations.
Cautionary Note Regarding
Forward-Looking Statements
The forward-looking statements in this press release, including
those containing words like “expect,” “plans,” “may,” “could,”
“anticipate,” “estimate,” “projected,” “forecasted,” those in Mr.
Freda’s remarks and those in the “Outlook for Fiscal 2018 First
Quarter and Full Year” section involve risks and uncertainties.
Factors that could cause actual results to differ materially from
those forward-looking statements include the following:
(1) increased competitive activity from
companies in the skin care, makeup, fragrance and hair care
businesses; (2) the Company’s ability to develop, produce and
market new products on which future operating results may depend
and to successfully address challenges in the Company’s business;
(3) consolidations, restructurings, bankruptcies and
reorganizations in the retail industry, and other factors causing a
decrease in the number of stores that sell the Company’s products,
an increase in the ownership concentration within the retail
industry, ownership of retailers by the Company’s competitors or
ownership of competitors by the Company’s customers that are
retailers and our inability to collect receivables; (4) destocking
and tighter working capital management by retailers; (5) the
success, or changes in timing or scope, of new product launches and
the success, or changes in the timing or the scope, of advertising,
sampling and merchandising programs; (6) shifts in the preferences
of consumers as to where and how they shop; (7) social, political
and economic risks to the Company’s foreign or domestic
manufacturing, distribution and retail operations, including
changes in foreign investment and trade policies and regulations of
the host countries and of the United States; (8) changes in the
laws, regulations and policies (including the interpretations and
enforcement thereof) that affect, or will affect, the Company’s
business, including those relating to its products or distribution
networks, changes in accounting standards, tax laws and
regulations, environmental or climate change laws, regulations or
accords, trade rules and customs regulations, and the outcome and
expense of legal or regulatory proceedings, and any action the
Company may take as a result; (9) foreign currency fluctuations
affecting the Company’s results of operations and the value of its
foreign assets, the relative prices at which the Company and its
foreign competitors sell products in the same markets and the
Company’s operating and manufacturing costs outside of the United
States; (10) changes in global or local conditions, including those
due to the volatility in the global credit and equity markets,
natural or man-made disasters, real or perceived epidemics, or
energy costs, that could affect consumer purchasing, the
willingness or ability of consumers to travel and/or purchase the
Company’s products while traveling, the financial strength of the
Company’s customers, suppliers or other contract counterparties,
the Company’s operations, the cost and availability of capital
which the Company may need for new equipment, facilities or
acquisitions, the returns that the Company is able to generate on
its pension assets and the resulting impact on its funding
obligations, the cost and availability of raw materials and the
assumptions underlying the Company’s critical accounting estimates;
(11) shipment delays, commodity pricing, depletion of inventory and
increased production costs resulting from disruptions of operations
at any of the facilities that manufacture nearly all of the
Company’s supply of a particular type of product (i.e. focus
factories) or at the Company’s distribution or inventory centers,
including disruptions that may be caused by the implementation of
information technology initiatives or by restructurings; (12) real
estate rates and availability, which may affect the Company’s
ability to increase or maintain the number of retail locations at
which the Company sells its products and the costs associated with
the Company’s other facilities; (13) changes in product mix to
products which are less profitable; (14) the Company’s ability to
acquire, develop or implement new information and distribution
technologies and initiatives on a timely basis and within the
Company’s cost estimates and the Company’s ability to maintain
continuous operations of such systems and the security of data and
other information that may be stored in such systems or other
systems or media; (15) the Company’s ability to capitalize on
opportunities for improved efficiency, such as publicly-announced
strategies and restructuring and cost-savings initiatives, and to
integrate acquired businesses and realize value therefrom; (16)
consequences attributable to local or international conflicts
around the world, as well as from any terrorist attack, retaliation
or similar threats; (17) the timing and impact of acquisitions,
investments and divestitures; and (18) additional factors as
described in the Company’s filings with the Securities and Exchange
Commission, including its Annual Report on Form 10-K for the fiscal
year ended June 30, 2016.
The Company assumes no responsibility to
update forward-looking statements made herein or otherwise.
The Estée Lauder Companies Inc. is one of the world’s leading
manufacturers and marketers of quality skin care, makeup, fragrance
and hair care products. The Company’s products are sold in over 150
countries and territories under brand names including: Estée
Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy
Hilfiger, M•A•C, Kiton, La Mer, Bobbi Brown, Donna Karan New York,
DKNY, Aveda, Jo Malone London, Bumble and bumble, Michael Kors,
Darphin, Tom Ford, Smashbox, Ermenegildo Zegna, AERIN, Tory Burch,
RODIN olio lusso, Le Labo, Editions de Parfums Frédéric Malle,
GLAMGLOW, By Kilian, BECCA and Too Faced.
ELC-FELC-E
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF
EARNINGS
(Unaudited; In millions, except per
share data and percentages)
Three Months Ended
June 30
Percent
Change
Year Ended
June 30
Percent
Change
2017 2016
2017 2016 Net
Sales (A) $ 2,894 $ 2,646 9% $ 11,824 $ 11,262 5% Cost of sales
(A) 613 511 2,437
2,181
Gross Profit 2,281 2,135
7% 9,387 9,081 3%
Gross Margin 78.8 % 80.7 % 79.4 % 80.6 % Operating
expenses: Selling, general and administrative (B) 1,947 1,893 7,469
7,338 Restructuring and other charges (A) 73 99 195 133 Goodwill
impairment (C) 28 — 28 — Impairment of other intangible assets (C)
3 — 3 —
2,051 1,992
3%
7,695 7,471
3%
Operating Expense Margin 70.9 % 75.3 % 65.1 % 66.3 %
Operating Income 230 143 61% 1,692 1,610 5%
Operating Income Margin 7.9 % 5.4 % 14.3 % 14.3 %
Interest expense 32 19 103 71 Interest income and investment
income, net 9 6 28
16
Earnings before Income Taxes 207 130 59% 1,617
1,555 4% Provision (benefit) for income taxes (D) (23
) 35 361 434
Net
Earnings 230 95 100+% 1,256 1,121 12% Net earnings
attributable to noncontrolling interests (1 ) (1 )
(7 ) (6 )
Net Earnings Attributable to The Estée
Lauder Companies Inc.
$ 229 $ 94
100+%
$ 1,249 $ 1,115 12%
Net earnings attributable to The Estée
Lauder Companies Inc. per common share:
Basic $ .62 $ .25 100+% $ 3.40 $ 3.01 13% Diluted .61 .25 100+%
3.35 2.96 13% Weighted average common shares outstanding:
Basic 368.1 368.8 367.1 370.0 Diluted 374.0 375.8 373.0 376.6
(A) In May 2016, the Company announced a multi-year initiative
(Leading Beauty Forward) to build on its strengths and better
leverage its cost structure to free resources for investment to
continue its growth momentum. Leading Beauty Forward is designed to
enhance the Company’s go-to-market capabilities, reinforce its
leadership in global prestige beauty and continue creating
sustainable value. During fiscal 2017, including during the fiscal
2017 fourth quarter, the Company continued to approve specific
initiatives under Leading Beauty Forward. The Company plans to
approve additional initiatives through fiscal 2019 and expects to
complete those initiatives through fiscal 2021. The Company expects
Leading Beauty Forward will result in related restructuring and
other charges totaling between $600 million and $700 million,
before taxes. Once fully implemented, Leading Beauty Forward is
expected to yield annual net benefits of between $200 million and
$300 million, before taxes, of which a portion is expected to be
reinvested in future growth initiatives.
During fiscal 2016, as part of the Company’s ongoing initiative
to upgrade and modernize its systems and processes, the Company
transitioned its global technology infrastructure (GTI) to
fundamentally change the way it delivers information technology
services internally. This initiative is expected to result in
operational efficiencies and reduce the Company’s information
technology service and infrastructure costs in the future. The
implementation of this initiative was substantially completed
during fiscal 2016.
THE ESTÉE LAUDER COMPANIES INC.
(B) In June 2017, the Company revised and approved financial
projections for certain of its fiscal 2015 and 2016 acquisitions.
In the process, the Company noted that actual results and the most
recent projections were lower during their respective earn-out
measurement periods than the financial targets made at June 30,
2016 and it reassessed the likelihood of achieving those targets.
As a result, the Company recognized a $58 million gain within
selling, general and administrative expenses, to reflect the
adjusted fair value of its contingent consideration, primarily
related to the acquisitions of GLAMGLOW, Editions de Parfums
Frédéric Malle and Le Labo as of June 30, 2017. The gain recognized
for the 2017 full fiscal year was $57 million.
(C) The Company performs annual impairment tests for each of its
reporting units. In addition, the Company may perform interim
impairment tests as a result of changes in circumstances and
certain financial indicators. Such tests may conclude that the
carrying value of certain assets exceed their estimated fair
values, resulting in the recognition of impairment charges.
During the fourth quarter of fiscal 2017, the Company recorded
goodwill impairment charges related to the Editions de Parfums
Frédéric Malle and RODIN olio lusso reporting units of $22 million
and $6 million, respectively. Additionally, during the fourth
quarter of fiscal 2017, the Company recognized impairment charges
related to the RODIN olio lusso trademark, customer relationship
and persona intangible assets of $3 million.
(D) In the fourth quarter of fiscal 2017, China enacted a
favorable change to its tax law that expanded the corporate income
tax deduction allowance for advertising and promotional expenses.
As a result of the new law, in the fourth quarter of fiscal 2017,
the Company released into income its previously established
deferred tax asset valuation allowance of approximately $75 million
related to its accumulated carryforward of excess advertising and
promotional expenses.
THE ESTÉE LAUDER COMPANIES INC.
Total returns and charges associated with
restructuring activities and other adjustments included in net
earnings for the three months and year ended June 30, 2017 and 2016
were:
Sales
Returns
Cost of
Sales
Operating Expenses Total
After
Tax
Diluted
Earnings
Per Share
Restructuring
Charges
Other
Charges/
Adjust-
ments
(Unaudited) (In millions, except per share data)
Three Months Ended June 30,
2017
Leading Beauty Forward
$ — $ 5 $52 $ 21 $ 78 $ 55 $ .15 Contingent consideration — — — (58
)
(58
)
(42 ) (.11 ) Intangible asset impairments — — — 31 31 23 .06
China deferred tax asset
valuationallowance reversal
— — — — — (75 ) (.20 ) Total $ — $ 5 $52 $ (6 ) $ 51
$ (39 ) $(.10 )
Year Ended June 30, 2017
Leading Beauty Forward $ 2 $15 $122 $ 73 $212 $143
$ .38
Contingent consideration — — — (57 )
(57
)
(44
)
(.12 ) Intangible asset impairments — — — 31 31 23 .06
China deferred tax asset valuation
allowance reversal
— — — —
—
(75 ) (.20 ) Total $2 $15 $122 $ 47 $186 $ 47
$ .12
Sales
Returns
Cost of
Sales
Operating Expenses Total
After
Tax
Diluted
Earnings
Per Share
Restructuring
Charges
Other
Charges/
Adjust-
ments
(Unaudited) (In millions, except per share data)
Three Months Ended June 30,
2016
Global Technology Infrastructure
$— $— $17 $ 3 $ 20 $12 $.03 Leading Beauty Forward 1 — 75 4 80 56
.15 Contingent consideration — — — (8 )
(8
)
(4 )
(.01
)
Total $1 $— $92 $ (1 ) $ 92 $64 $.17
Year
Ended June 30, 2016 Global Technology Infrastructure $— $— $46
$ 7 $ 53 $34 $.09 Leading Beauty Forward 1 — 75 5 81 56 .15
Contingent consideration — — — 8 8 8 .02 Total
$1 $— $121 $20 $142 $98 $.26
THE ESTÉE LAUDER COMPANIES INC.
SUMMARY OF CONSOLIDATED RESULTS
(Unaudited; Dollars in
millions)
Three Months Ended June 30 Net Sales
Percent Change
Operating
Income (Loss)
Percent
Change
2017 2016
Reported
Basis
Constant
Currency
2017
2016
Reported
Basis
Results by
Geographic Region
The Americas $ 1,173 $ 1,103 6 % 6 % $ 48 $ 36 33 % Europe, the
Middle East & Africa. 1,173 1,073 9 12 247 184 34 Asia/Pacific
548 471 16 18 13 23
(43 ) Subtotal 2,894 2,647 9 11 308 243 27
Returns and charges associated with
restructuring and other activities
— (1 ) (78 ) (100 ) Total $ 2,894 $
2,646 9 % 11 % $ 230 $ 143 61 %
Results by
Product Category
Skin Care $ 1,072 $ 1,032 4 % 6 % $ 186 $ 141 32 % Makeup 1,311
1,128 16 18 151 116 30 Fragrance 362 328 10 12 (42 ) (27 ) (56 )
Hair Care 140 143 (2 ) (1 ) 13 16 (19 ) Other 9 16
(44 ) (44 ) — (3 ) 100 Subtotal 2,894
2,647 9 11 308 243 27
Returns and charges associated with
restructuring and other activities
— (1 ) (78 ) (100 ) Total $ 2,894 $
2,646 9 % 11 % $ 230 $ 143 61 %
_________________________
This earnings release includes some non-GAAP financial measures
relating to charges associated with restructuring and other
activities, goodwill and other intangible asset impairments, the
changes in the fair value of contingent consideration and the China
deferred tax asset valuation allowance reversal. The following is a
reconciliation between the non-GAAP financial measures and the most
directly comparable GAAP measures for certain consolidated
statements of earnings accounts before and after these items. The
Company uses certain non-GAAP financial measures, among other
financial measures, to evaluate its operating performance, which
represent the manner in which the Company conducts and views its
business. Management believes that excluding certain items that are
not comparable from period to period, or reflect the Company’s
underlying ongoing business, provides transparency for such items
and helps investors and others compare and analyze operating
performance from period to period. In the future, the Company
expects to incur charges or adjustments similar in nature to those
presented below; however, the impact to the Company’s results in a
given period may be highly variable and difficult to predict. Our
non-GAAP financial measures may not be comparable to similarly
titled measures used by, or determined in a manner consistent with,
other companies. While the Company considers the non-GAAP measures
useful in analyzing its results, they are not intended to replace,
or act as a substitute for, any presentation included in the
consolidated financial statements prepared in conformity with
GAAP.
The Company operates on a global basis, with the majority of its
net sales generated outside the United States. Accordingly,
fluctuations in foreign currency exchange rates can affect the
Company’s results of operations. Therefore, the Company presents
certain net sales, operating results and diluted earnings per share
information excluding the effect of foreign currency rate
fluctuations to provide a framework for assessing the performance
of its underlying business outside the United States. Constant
currency information compares results between periods as if
exchange rates had remained constant period-over-period. The
Company calculates constant currency information by translating
current-period results using prior-year period weighted average
foreign currency exchange rates.
THE ESTÉE LAUDER COMPANIES INC.
Reconciliation of Certain Consolidated
Statements of Earnings Accounts
Before and After Returns, Charges and
Other Adjustments
(Unaudited; In millions, except per
share data and percentages)
Three Months Ended
June 30, 2017
Three Months Ended
June 30, 2016
As
Reported
Returns/
Charges/
Adjust-
ments
Adjusted
Impact of
foreign
currency
translation
Constant
Currency
As
Reported
Returns/
Charges/
Adjust-
ments
Adjusted
% Change
versus Prior
Year Before
Charges
% Change
Constant
Currency
Net Sales $ 2,894 $— $ 2,894 $43 $2,937 $ 2,646 $1 $ 2,647 9% 11%
Cost of sales 613 (5 ) 608 511
— 511 Gross Profit 2,281 5 2,286 2,135
1 2,136 7% Gross Margin 78.8 % 79.0 % 80.7 % 80.7 %
Operating expenses 2,051 (46 ) 2,005
1,992
(91
)
1,901 5% Operating Expense Margin 70.9 % 69.3 % 75.3
% 71.8 % Operating Income 230 51 281 143 92 235 20%
Operating Income Margin 7.9 % 9.7 % 5.4 % 8.9 %
Provision (benefit) for income taxes
(23
)
90
67 35 28 63
Net Earnings Attributable to
The Estée Lauder Companies Inc.
229 (39 ) 190 94 64 158 20%
Diluted net earnings attributable
to The Estée Lauder Companies Inc. per common
share
.61 (.10 ) .51 .01 .52 .25 .17 .42 21% 25%
Year Ended June 30, 2017 Year
Ended June 30, 2016
As
Reported
Returns/
Charges/
Adjust-
ments
Adjusted
Impact of
foreign
currency
translation
Constant
Currency
As
Reported
Returns/
Charges/
Adjust-
ments
Adjusted
% Change
versus Prior
Year Before
Charges
% Change
Constant
Currency
Net Sales $ 11,824 $2 $ 11,826 $187 $12,013 $ 11,262 $1 $11,263 5%
7% Cost of sales 2,437 (15 ) 2,422
2,181 — 2,181 Gross Profit 9,387 17
9,404 9,081 1 9,082 4% Gross Margin 79.4 % 79.5 % 80.6 % 80.6 %
Operating expenses 7,695 (169 ) 7,526
7,471 (141 ) 7,330 3% Operating Expense
Margin 65.1 % 63.6 % 66.3 % 65.0 % Operating Income 1,692
186 1,878 1,610 142 1,752 7% Operating Income Margin 14.3 % 15.9 %
14.3 % 15.6 %
Provision for income taxes
361 139 500 434 44 478
Net Earnings Attributable to
The Estée Lauder Companies Inc.
1,249 47 1,296 1,115 98 1,213 7%
Diluted net earnings
attributable to The Estée Lauder Companies
Inc. per common share
3.35 .12 3.47 .12 3.59 2.96 .26 3.22 8% 11%
THE ESTÉE LAUDER COMPANIES INC.
The impact on operating results for the adjustments related to
the changes in fair value of contingent consideration and the
goodwill and other intangible asset impairments by product category
and geographic region for the three months and year ended June 30,
2017 and 2016 is as follows:
Operating Results
Three Months Ended June 30,
2017
Year Ended June 30, 2017
Three
Months
EndedJune 30,
2016
Year
EndedJune 30,
2016
(Unaudited; In millions)
Contingent
Consideration
Intangible
Asset
Impairments
Net
Impact
Contingent
Consideration
Intangible
Asset
Impairments
Net
Impact
Contingent
Consideration
By Product Category: Skin Care $(31 ) $9 $(22 ) $(24 ) $9
$(15 ) $(14 ) $(5 ) Fragrance (27 ) 22 (5 ) (33 ) 22 (11 ) 6
13 Total $(58 ) $31 $(27 ) $(57 ) $31 $(26 ) $(8 ) $8
By Geographic Region: The Americas $(46 ) $17 $(29 )
$(43 ) $17 $(26 ) $(12 ) $— Europe, the Middle East & Africa
(12 ) 14 2 (14 ) 14 — 4 8 Total $(58 )
$31 $(27 ) $(57 ) $31 $(26 ) $(8 ) $8
Excluding the impact of the charges associated with
restructuring and other activities, the changes in fair value of
contingent consideration and the goodwill and other intangible
asset impairments, operating results for the three months and year
ended June 30, 2017 would have increased/(decreased) as
follows:
Operating Results (Unaudited)
Three Months
EndedJune 30, 2017
Year EndedJune 30, 2017 By Product
Category: Skin Care 29% 19% Fragrance (100)+% 4%
By
Geographic Region: The Americas (21)% (25)% Europe, the Middle
East & Africa 32% 16%
Total operating income in constant currency for the three months
and year ended June 30, 2017, excluding the impact of the above
adjustments, increased 24% and 11%, respectively.
THE ESTÉE LAUDER COMPANIES INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(Unaudited; In millions)
June 30
2017
June 30
2016
ASSETS Current Assets Cash and cash equivalents $
1,136 $ 914 Short-term investments 605 469 Accounts receivable, net
1,395 1,258 Inventory and promotional merchandise, net 1,479 1,264
Prepaid expenses and other current
assets
349 320
Total Current Assets
4,964 4,225
Property, Plant and Equipment,
net
1,671 1,583
Other Assets 4,933 3,415
Total Assets $ 11,568 $ 9,223
LIABILITIES AND EQUITY Current Liabilities Current
debt $ 189 $ 332 Accounts payable 835 717 Other accrued liabilities
1,799 1,632
Total Current
Liabilities 2,823 2,681
Noncurrent Liabilities Long-term debt 3,383 1,910 Other
noncurrent liabilities 960 1,045
Total Noncurrent Liabilities 4,343 2,955
Total
Equity 4,402 3,587
Total
Liabilities and Equity $ 11,568 $ 9,223
SELECT CASH FLOW DATA
(Unaudited; In millions)
Year Ended June 30 2017 2016 Cash
Flows from Operating Activities Net earnings $ 1,256 $ 1,121
Depreciation and amortization 464 415 Deferred income Taxes (118 )
(94 ) Other items 177 202 Changes in operating assets and
liabilities: Increase in accounts receivable, net (92 ) (101 )
Increase in inventory and promotional merchandise, net (85 ) (69 )
Increase in other assets, net (80 ) (72 ) Increase in accounts
payable and other liabilities 278 387
Net cash flows provided by operating activities $ 1,800
$ 1,789 Capital expenditures $ 504 $ 525
Acquisition of businesses 1,681 101 Purchase of investments, net 41
643 Payments to acquire treasury stock 413 890 Dividends paid 486
423 Proceeds from issuance of long-term debt, net 1,498 616
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The Estée Lauder Companies Inc.Investor
Relations:Dennis D’Andrea, 212-572-4384orMedia
Relations:Alexandra Trower, 212-572-4430
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