The Estée Lauder: Strong second quarter results

The Estée Lauder Companies Inc. (NYSE: EL) reported financial results for the second quarter ended December 31, 2010 that were sharply higher than the prior-year period.

For the quarter, the Company had net sales of $2.49 billion, a 10 % increase compared with $2.26 billion reported in the prior year. Excluding the impact of foreign currency translation, net sales increased 11% from a year ago. The Company reported net earnings for the quarter of $343.9 million, a 34% increase from $256.2 million last year. Diluted net earnings per common share rose 34% to $1.71, compared with $1.28 reported in the prior year. All mention of net earnings in the body of this release refers to net earnings attributable to The Estée Lauder Companies Inc., which reflects the adjustment for noncontrolling interests.

During the quarter, the Company's performance was better than anticipated, due to stronger overall holiday business, particularly from the Company's largest brands, as well as from a weaker U.S. dollar. The Company posted sales gains in each of its geographic regions and product categories. Sales growth was led by the Company's international businesses, particularly in travel retail and emerging markets. These results reflect solid increases from higher-margin product launches and the positive impact of more effective advertising spending.

Skin Care

The skin care category is a strategic priority for the Company. Skin care net sales grew in each of the Company's regions. The Company gained share in this category during the quarter in certain countries, in the stores where its products are sold. Across each region, the Estée Lauder brand had strong sales from the recent launches of Advanced Night Repair Eye Synchronized Complex and Re-Nutriv Ultimate Lift Age- Correcting Collection. Contributing to the increased sales were the successful recent launches of Even Better Clinical Dark Spot Corrector, Repairwear Laser Focus Wrinkle & UV Damage Corrector and All About Eyes Serum De-Puffing Night Massage from Clinique. The Regenerating Serum and The Eye Balm Intense, recent product launches from La Mer, as well as other successful products from La Mer, also contributed incremental sales.

These sales gains were partially offset by lower sales from existing products. Operating income increased sharply, primarily reflecting improved results from certain of the Company's heritage brands, driven by increased net sales from higher-margin product launches.

Makeup

Makeup net sales grew in each geographic region. The majority of the sales increase came from the Company's makeup artist brands, which included incremental sales from the acquisition of the Smashbox brand on July 1, 2010. The higher makeup sales reflected increases across a broad range of products, such as the recent launches of new Pure Color eye products from Estée Lauder and Acne Solutions Liquid Makeup and Redness Solutions Makeup SPF 15 from Clinique. Partially offsetting these increases were lower sales of Prescriptives products, due to the brand's exit from global wholesale distribution after the prior-year period, and from existing products of other brands. Operating income increased, primarily reflecting improved results from certain of the Company's heritage brands and from its makeup artist brands.

Fragrance

The fragrance category posted solid double-digit net sales growth compared with the prior-year quarter. Sales gains were strongest in the Americas. Incremental sales were generated from the recent launches of pureDKNY, Hilfiger Loud for Her, Coach Poppy and Estée Lauder pleasures bloom, as well as higher sales of Jo Malone and Tom Ford fragrances, and certain other designer fragrances through self-select outlets. Partially offsetting these increases were lower sales of Clinique Happy and Aromatics Elixir. Future net sales growth in this category is anticipated to be impacted by the Company's efforts to improve profitability through a more strategically focused approach to investment spending, as well as competitive dynamics. Fragrance operating results improved substantially. The improved results primarily reflected higher net sales of designer fragrances and recent product launches, cost reductions and a more strategically focused approach to support spending on winning launches and classics, and in markets with the greatest potential.

Hair Care

Hair care net sales increased primarily because of incremental sales from expanded distribution, particularly outside the United States, as well as from the recent launch of Control Force and Volumizing Tonic from Aveda. These improvements were partially offset by lower net sales resulting from the reformulation and anticipated re-launch of Ojon brand products. Hair care operating results increased, primarily reflecting the absence of goodwill and other intangible asset impairments recognized in the prior-year period, partially offset by the impact of the reformulation and anticipated re-launch of Ojon brand products.