Retail Consolidation Hurts Lauder's U.S. Performance In Third Quarter

Department store consolidations hurt sales of core Estee Lauder brands in the company's third fiscal quarter, ending in March.

While worldwide sales rose 7.1%, to $1.69 billion, sales in North and Latin America declined by 1.5%, to $856.9 million. More than half of total sales came from established and emerging international markets, including Russia, China, Hong Kong and the U.K.

In the U.S., where all product categories except hair care were down, overall sales were flat versus the same period last year.

Company executives said that sales in specialty stores and retail channels other than department stores/NPD-monitored channels were actually up 11%.

But in stores affected by consolidation--including the 400 May stores that were converted to Macy's after Federated's acquisition of May Department Stores last year--sales of Estee Lauder and Clinique suffered.

COO Daniel Brestle said that there was a seven-point performance spread between "legacy" stores and stores whose names have been changed. "That's a very significant statistic for one door, and when you add that up across hundreds of doors across a number of retailers, you have a big impact," he said.

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Clinique's recent gift-with-purchase program performed to expectations, although Estee Lauder's gift program was disappointing, he reported.

Turnover as high as 75% among the approximately 60,000 Lauder in-store beauty advisors, in part because of the retail consolidations, is also affecting performance. Lauder is now working with retailers to implement a multi-pronged program to increase longevity in these positions.

Lauder executives said that once the turbulence in the retail marketplace has settled and distribution dates are normalized, it will be clearer whether the performance of Estee Lauder and Clinique reflects the distribution channel challenges or some weakness in the brands. However, Brestle stressed that the company is confident that the two brands "are positioned well now and going forward."

Companywide, the hair care category showed the strongest gain--up nearly 21%, to $97 million. Skin care sales rose 9.5%, to $669 million, and makeup sales grew 6.9%, to $678 million. Fragrances, however, declined by 2.5%, to $240 million.

Overall advertising/promotion expenditures rose 7% during the period, and Lauder executives said the goal is to further increase that spending.

The company confirmed its previous full-year forecast of 6 to 7% sales growth and forecast profit from continuing operations of $2.15 to $2.20 per share (compared to its previous forecast of $2.10 to $2.20).

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