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Operator
Good day, everyone and welcome to the Estee Lauder Companies fiscal 2005 first quarter conference call.
All participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation.
Today's call is being recorded and webcast.
For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea.
Please go ahead.
- VP of Investor Relations
Good morning, everyone.
Thanks for joining us.
On today's call are William Lauder, President and Chief Executive Officer; and Rick Kunes, Senior Vice President and Chief Financial Officer.
Also with us today is Patrick Bousquet-Chavanne, Group President with responsibility for the Estee Lauder and M*A*C brands, as well as our Aramis and designer fragrance business.
Let me remind that you some of our remarks today contain forward-looking statements which involve risks and uncertainties.
In addition to specific risks described in this call, you will find additional factors that could cause actual results to differ materially from these forward-looking statements in our press release today.
Additionally, our discussion today will focus on our results from continuing operations.
With that, I will turn the call over to William.
- President and CEO
Thank you, Dennis.
Good morning, and thank you for joining us to review our first quarter results.
As you saw from our press release this morning, fiscal '05 is off to a good start and we are optimistic we can continue to build on the momentum from last year.
For the first quarter, we reported a terrific net sales increase of 12% to $1.50 billion from $1.35 billion in last year's quarter.
Excluding the impact of foreign currency translation, net sales rose a strong 9%.
Net earnings from continuing operations for the quarter were up 22%, to $95 million, compared with 77.7 million in the prior year's quarter.
We delivered diluted earnings per share from continuing operations of 41 cents, compared to 34 cents in the prior year, an increase of 22%.
Helping drive sales this quarter was the continued growth in travel retail and our international business, aided by a favorable comparison in Europe against a tough quarter in the year-ago period.
Additionally, we saw growth in the Americas, further helped by the launch of our BeautyBank initiative in Kohl's.
You also saw our announcement this morning about that we declared an annual dividend of 40 cents per share, which represents a 33% increase over the previous annual rate of 30 cents per share.
We are pleased that we have substantially raised our dividend 2 years in a row, reflecting our confidence in both our ability to fund future growth, and our commitment to return value to our stockholders.
Now, let's first talk about the quarter's product category results.
In skin care, reported sales increased 13% to $524.3 million, and grew a strong 9% in constant dollars.
Recent product launches from the Estee Lauder brand including Future Perfect and Hydra Complete and Clinique's Repairwear line contributed to the sales increase.
Aside from our core brands, growth came from several developing brands.
Our exclusive La Mer brand has maintained its momentum, growing double digits in every region.
Darphin anniversaried full quarter-over-quarter, with sales posting a healthy increase.
And Rodan + Fields, although still very small, also grew this quarter and continued to make headway in their brand awareness with an East Coast launch in Henry Bendel in New York City.
Initial shipments of our new American Beauty and Good Skin brands added incremental skin care sales.
We're excited about the launches of these brands and seeing the fruit of our labor materialize.
Makeup sales growth was outstanding, rising 23% to 599.5 million in dollars, and 20% in local currency.
All our makeup artist brands, M*A*C, Bobbi Brown and Stila posted excellent growth.
Chic, stylish new products such as M*A*C's color collection, Tease Me, Tempt Me and Stila's lip glaze performed exceptionally well.
New or recent products from our core brands this quarter were Superbalanced Compact Makeup and the Colour Surge line from Clinique, as well as Lash XL Maximum Length Mascara and Electric Intense LipCreme by Estee Lauder.
The launches in Kohl's of Flirt!, our new pop-culture makeup brand and American Beauty also benefited this category sales.
Our fragrance category had some exciting activity this quarter, but was up against some major launches last year.
Our first quarter fragrance sales declined 6%, to 311.7 million, on a reported basis, and 9% excluding currency.
This category's results continue to be challenging in the U.S., partially offset by increases internationally, including our travel retail business.
While the current quarter benefited from the launches of Lauder Beyond Paradise Men, True Star by Tommy Hilfiger, and initial shipments of DKNY Be Delicious, they were up against the strong fragrance launch business in the prior year.
Growth in the quarter was tempered by lower sales of the prior-period launches, as well as from existing fragrance brands.
Hair care rose 15% this quarter to 63.1 million on a reported basis, and grew 14% in local currency.
Aveda, again, had double-digit sales increases, due to successful product launches such as Air Control Hair Spray, and Pure Abundance, and increased concept salon distribution.
Aveda entered Japan a year ago, where hair care is an extremely important category.
And our minority-owned distributor joint venture continues to expand distribution in that country, adding six new salons this quarter.
Bumble and bumble also contributed double-digit growth, resulting from the success of existing products and new salon openings.
On a geographic basis, in the Americas region, sales increased 4% from the prior-year quarter, to 888.2 million.
Consumer traffic and spending was somewhat lack-luster the U.S., with some retailers experiencing hurricane-related difficulties.
The most impressive growth was seen at high-end specialty stores, where we sell the greatest breadth of our portfolio.
Most of our developing brands posted strong growth, as did our free-standing stores, with M*A*C, once again, leading the way.
This quarter, our business in Canada also generated a healthy increase.
Additionally, initial shipments of our 3 new brands into nearly 300 Kohl's stores contributed nicely to the region's growth this quarter.
Once again, growth in the prestige beauty industry in the U.S. for the quarter as measured by NPD, outpaced the AC Nielsen mass universe, including Wal-Mart panel data by approximately 2 percentage points overall.
Europe, the Middle East, and Africa had an excellent quarter, with net sales increasing 29% over the prior year, to 423.8 million, and an impressive 20% on a local currency basis.
Our travel retail business was strong again this quarter, contributing to the region's local currency growth, with a 27% increase over the prior year's period.
We had growth in virtually every country, with the strongest increases in the U.K., Spain, Switzerland, and Italy.
You may recall that in the prior year's quarter, many markets in continental Europe suffered from abnormal weather conditions, and we had some trade renegotiations with 1 key customer, and lower sales orders, due to a change in the fiscal year of another.
This comparison allowed us to report growth in markets that have been weak of late, including Italy, France, and Germany.
Virtually all of our developing brands in Europe turned in strong double-digit growth, while Estee Lauder and Clinique reported growth in the high single digits.
Rolling our newer -- rolling out newer brands continued this quarter with M*A*C's entrance into Hungary, Turkey, and Israel.
And following on its success in the U.S., Prescriptives debuted on the British QVC channel.
In Asia-Pacific, net sales grew 15% over the prior year, to 192.1 million.
In local currency, sales were up 10%.
Local currency sales were up in every market except Korea, with the largest double-digit increases in China, Hong Kong, Australia, and Taiwan.
In the quarter, La Mer entered the Chinese market with a presence in Beijing and Hangzhou, where we expect great results.
Also, Jo Malone launched the first door in David Jones in Australia.
That wraps up the first quarter.
Now let's look ahead.
First, let me say that we're committed to growth, that we've laid out an achievable business plan, and that I'm comfortable with our prospects to meet our stated financial goals for this fiscal year.
Let me also remind you that we run our business on an annual basis, and because of the nature of our business, specifically as it relates to the timing and promotion of product launches, quarterly fluctuations will sometimes occur.
Rounding out our first half is the holiday season, which is fast approaching.
At this time, the domestic economy appears to be in a state of trying to decide which direction it wants to go.
The U.S. consumer is cautious, given the current climate of record high energy prices, a soft labor market, as well as the continuing uncertainty surrounding the election.
Hopefully, this will be less of a factor before the peak selling season in the weeks before Christmas.
Irrespective, we feel good about our strong products and programs going into the season.
Behind which, we are placing planned additional support spending.
More importantly, as our results demonstrate, we feel good about the strategic direction of the Company.
Today, we have the largest portfolio of brands and product categories in our history.
And we are selling more products in more places through more channels of distribution than ever before.
Finally, we remain financially strong, and this means we have appropriate capital resources to allocate to new product development and marketing.
Taking into consideration the global environment, we continue to feel good about our prospects.
Looking near-term, fragrances continue to be a major holiday product.
In fact, the month of December represents 30% of annual fragrance sales in U.S. department stores.
True Star, Beyond Paradise Men, and Be Delicious will each make their holiday debut, as will a fourth, Donald Trump, The Fragrance, launching this month and we'll also roll out an array of attractive gift sets and holiday color palettes.
In the U.S. our 3 new brands from BeautyBank sold in Kohl's will have their first holiday season.
As these are new brands and an alternative channel for us, we are closely monitoring the consumer appeal for them.
These brands have great store location, and the products and installations look great and we are very encouraged.
Needless to say, brand building does not happen overnight, and requires awareness and an ongoing commitment, as well as some degree of patience.
Aside from the U.S., momentum remains high for us in many international countries with various levels of growth driven by our core brands, as well as the development of newer brands.
We expect travel retail to continue producing growth, albeit at more normalized levels in the low double digits.
And we're continuing to expand our foothold in the developing markets of China, Russia, and certain Latin American countries, where we are experiencing excellent growth.
As I said earlier, La Mer just entered China, where we see tremendous opportunity, and we have well formulated plans to launch some of our other brands, including M*A*C and Bobbi Brown.
Expanding our newer brands into new countries will continue to be an avenue for future growth.
In skin care and makeup, we have a number of exciting new product offerings coming during the balance of the year, including Prime Time Foundation, Perfectionist Lip Pen, and Future Perfect Lotion from Estee Lauder;
Super Defense by Clinique;
M*A*C Dry Skin Compact Foundation;
Origins Cocoa Therapy; and Prescriptives' Modernista Lipstick, to name a few.
As the year unfolds we'll tell you about additional launches.
Some additional items of note.
We are on track to launch our BeautyBank brands in another, approximately, 300 Kohl's stores in February.
Origins announced they will team with Dr. Andrew Weil, one of the most recognizable leaders in integrative medicine in the country as a product development collaborator and spokesperson for a new wellness-focussed product line.
And Aveda and Lab Series will build on our successful e-commerce initiative, launching their own sites in November.
Based on the current tone of business, our first half top-line growth expectations are between 8 and 9% on a reported basis, which translates to 7 to 8% in constant currency, in line with what we said on our last call.
On the bottom line, we are comfortable raising our EPS by a penny to a range of 96 to 99 cents for the first half.
For the full first fiscal year, we expect sales growth of between 7% and 8% on a reported basis, including approximately a half of a percent of positive foreign currency effect.
And we remain comfortable with our full fiscal year 2005 diluted earnings per share estimate in the range of $1.88 to $1.93.
The combination of talented people constantly developing new ideas, innovative products, and effective communication in marketing, gives me confidence in our prospects for the remainder of the year.
With that said, now I'd like to hand it over to Rick Kunes, our Chief Financial Officer to take you through the financial details.
Rick?
- SVP and CFO
Thank you, William.
And good morning, everyone.
The Company achieved first operating income of 155.3 million, a 20% increase compared with the 129.7 million last year.
This reflects an increase in operating margin of 70 basis points to 10.3%, due to improvements in operating expenses.
Our gross margin of 72.7% for the quarter decreased 30 basis points over last year's 73%.
This decrease reflects changes in foreign exchange rates and in our mix of business.
Operating expenses as a percentage of sales for the quarter improved 100 basis points to 62.4%, from 63.4% last year.
The decrease as a percentage of sales reflects our planned shift of spending closer to the holiday season, which benefited the current quarter, coupled with higher rates of sales growth and continued tight management of operating costs.
Operating expenses also benefited from the elimination of related party royalties.
Looking at operating profits by category, skin care rose 25.2 million to 64.8 million, and makeup increased 19.3 million, also to 64.8 million, reflecting a strong sales growth in these categories.
Fragrances', operating income decreased 6.9 million to 22.3 million.
The decline was due to the continued soft fragrance business in the U.S., coupled with ongoing development costs for future fragrances and brands, as well as sustained support spending related to existing products.
Hair care operating results were lower by 1.9 million, to 2.8 million, due to increased operating expenses incurred to support our growth in the U.S.
Switching to operating profits by region, the Americas decreased 12 million to 107.1 million.
This region was up against a difficult comparison to last year, when operating income increased by $53 million.
This quarterly decrease was due to the relative size of the Company's major launches in last year's quarter, versus this year's launches.
During the quarter, we continued to spend on advertising sampling and merchandising for both prior-period products, and certain current-period launches.
In Europe, the Middle East, and Africa, operating income rose 34.2 million, to 41.9 million, versus last year.
Conversely, as William described, this region was up against an easy comparison to last year.
Our travel retail business, the United Kingdom, Italy, South Africa, and Spain posted the most significant increases.
Asia-Pacific operating income increased 3.4 million to 6.3 million, with the largest increases coming in Hong Kong and Australia, partially offset by lower results in Japan, Korea, and China.
As we have said previously, China is a developing market for us, where we continue to invest in brand expansion and business opportunities.
Regarding our interest costs, we reported net interest expense of 4.1 million this quarter, versus 7.7 million last year.
The decrease is primarily due to a lower amount of dividends on our remaining redeemable preferred stock, partially offset by higher average borrowings and, to a lesser extent, a higher effective interest rate during the quarter.
The effective tax rate for the quarter was 37%, versus 36.1% in the prior year.
This increase was due to the forecasted full-year mix of global earnings, partially offset by the reduction in the amount of nondeductible preferred stock dividends.
At this time, we expect our effective tax rate will be approximately 37% throughout fiscal 2005.
As you may know, last month, the American Jobs Creation Act of 2004 was passed into law.
This legislation contains significant changes to the U.S.
Internal Revenue Code.
At this time, we are currently evaluating the new legislation's impact on our business and our effective tax rate.
We will keep you apprised on future conference calls.
For the fiscal first quarter, net earnings from continuing operations increased 22% to 95 million, compared with 77.7 million last year.
While diluted earnings per share from continuing operations also rose 22%, to 41 cents, versus 34 cents for the three months of last year.
Regarding our financial position, the Company's cash balance was 387 million at September 30th, 2004, a decrease of 96 million versus last year.
For the quarter, net cash flows used for operating activities was 101 million, versus 47 million in the prior-year period.
These outflows reflect seasonal working capital levels and generally reverse in the next three months.
The change over the prior year primarily reflects higher net earnings offset by more cash used for certain working capital components.
For the full fiscal year, we continue to expect net cash from operating activities of approximately 685 million, growing at a slower rate than the prior year, due to certain deferred compensation and supplemental retirement payments.
During the quarter, $88 million was spent to repurchase approximately 2 million shares of common stock, under our share repurchase programs, bringing the total shares repurchased under the programs to 18.7 million.
In fiscal '05, we expect capital expenditures of about 250 million, as we continue to catch up on some deferred spending, begin a Company-wide systems upgrade program, and invest in some leasehold improvements for our recently extended corporate office lease.
Let me now briefly update you on our working capital.
At September 30th, 2004, inventory was 713 million, an increase of 85 million versus last September.
Inventory days were 171 at the end of the quarter, versus 172 last year.
As we have said before, our business model, which generates exceptional gross margins, will always require us to carry more inventory than other consumer products companies.
Regarding receivables, our DSOs are 54 days at September 30th, 2004, improved by 2 days from 56 days a year ago.
Our return ratios continued the improvement we have experienced for the last 2 years.
Let me now update you on a few assumptions for fiscal 2005.
For the full year, as William said, we anticipate reported sales growth of approximately 7 to 8%, which includes the benefit of about one-half of 1% from foreign exchange.
We continue to expect gross margin to improve about 10 to 30 basis points for the fiscal year.
Our ongoing supply chain savings and strategically lower promotional activities are expected to provide about half of the improvement, each.
Slightly offsetting these improvements will the impact of BeautyBank and product mix including new products.
The recent increase in oil prices has not had a material impact on our cost of raw materials and componentry so far.
Continuing oil price increases could result in higher costs; however, at this time, based on the composition of our raw materials and componentry, we believe they will not have a material adverse effect on our cost of sales margins in the near future.
We anticipate operating expenses to improve between 40 and 60 basis points.
This is due, primarily, to the sales growth and tight cost controls in non-business-building areas.
These improvements are expected to be partially offset by continued investment in the BeautyBank initiatives, strategically higher advertising sampling and merchandising spending, and a shift of a portion of our marketing investment from promotional to advertising spending.
Operating expenses will also reflect the end of the international royalty payments.
Let me reiterate a few points regarding our venture with Kohl's.
Our forecast for fiscal '05 includes the first year sales to Kohl's with the initial pipeline product shipments to approximately half of Kohl's stores taking place in our first fiscal quarter.
Most of the remaining stores are expected to ship in our fiscal third quarter, while the second and fourth quarters will reflect replenishment shipments.
As we've said before, longer term, this business will have a lower gross margin and lower operating expense structure than our corporate average.
The lower gross margin will reflect a relative lower wholesale prices, and different margin structure, while operating expenses include beauty advisor training, product development, and creative costs, as well as our portion of advertising spending.
In fiscal 2005, the first year of operation, the impact of Kohl's business is expected to lower our overall gross margin by 10 basis points, and increase operating expenses as a percentage of sales by 10 basis points.
We continue to forecast approximately a break-even operating income for this business in fiscal 2005.
Operating margin is expected to increase 50 to 80 basis points.
And for the full year, we continue to anticipate diluted earnings per share of between $1.88 and $1.93.
Regarding the fiscal '05 first half, let me emphasize that we are only a quarter of the way into our fiscal year and there are external variables ahead, such as the post-election impact and consumer spending in the holiday season that we will closely monitor for our second quarter.
We planned increased advertising sampling and merchandising spending to support both new and existing products in our fiscal '05 second quarter, shifting some of that spending closer to the holiday season.
We expect sales in local currency to grow between 7 and 8%, and anticipate slightly more than 1% positive impact of foreign exchange.
Reported sales in this year's first half are expected to grow between 8 and 9%.
Gross margin is expected to decrease 20 to 40 basis points for the first half, due to product mix, including new products, and the impact of BeautyBank, partially offset by supply chain initiatives.
Operating expenses for the first half are expected to be comparable to the same period in fiscal '04, but reflect the continued startup of the BeautyBank business, along with planned advertising, merchandising and promotional expenses growing faster than sales to support new launch activity.
As a result, operating margin for the first half is estimated to be lower by 20 to 30 basis points versus the prior year.
Considering our first quarter performance, we are increasing our diluted earnings per share for the first half by a penny, versus our guidance given in August.
We now expect EPS in the range of 96 to 99 cents.
This concludes my comments for today.
And I'm pleased to turn the call over to Patrick Bousquet-Chavanne.
- Group President
Thank you, Rick, and good morning.
Let me first briefly talk about the continued momentum at M*A*C, where we realized strong double-digit increases at retail in the U.S. in the quarter, in line with our expectations.
Internationally, the brand continues its strategy to continue grow faster than the industry with successful launches in the quarter in 3 new markets, Turkey, Hungary, and Israel.
We are also particularly pleased with Mac's renewed growth in Japan and its growth acceleration in continental Europe.
We continue to gradually expand the brand distribution, M*A*C is presently sold in 812 doors, globally, as of October, and in the next 2 months, we will be opening 20 new doors around the world, including free-standing stores in the Mall of America in Minneapolis, the Mall of Millenia in Orlando, and Del Amo in Southern California.
Based on available sell-through data, our comp door increase in the U.S. in the quarter was solid double digits.
Regarding the Estee Lauder brand, we continue to see the benefits of the modernization initiatives that we initiated 3 years ago.
This is much visible in the strong reception that the new product entries continue to receive from our consumers around the globe, especially in the makeup and fragrance categories.
Our new product contribution to total sales peaked last fiscal year at about 20%, due to the positive impact of Beyond Paradise.
It is our intention to keep our new product activities at between 15 and 18% of sales in a given year on an ongoing basis.
Among the noticeable launches, so far this year, our Lash XL Maximum Length Mascara and Electric Intensity Cream and Pure Color Pops for lips.
These launches have given the Estee Lauder brand the best growth of the top-3 brands in the U.S. department stores in the makeup segment in the quarter.
The makeup category continues to be a recruitment category for the Estee Lauder brand, despite the rapid growth of the Makeup Artist brands.
Maintaining growth in makeup is key.
In skin care, we faced a slow down at retail in the U.S. during the quarter.
We, along with other established brands, are challenged by the continued increase in distribution of dermatologist-inspired brands which are trying to establish themselves.
We had a challenging quarter in this category in the U.S., with a low single-digit decline in retail sales, despite the successful launch of Future Perfect Anti-Wrinkle Radiance Cream, which ranked as the Number 1 new skin care product launch in department stores for the September quarter according to NPD.
Future Perfect also received a very good reaction in Europe and has greatly expanded the reach of our moisturizers.
We are confronted with strong competition in the anti-aging segment, which is obviously a concern that we are addressing.
The Estee Lauder brand has historically been the leader in this category in the department store arena, and we have several initiatives in the works that we believe will positively impact the brand performance in the spring season.
Skin care is core to the Estee Lauder brand, and we will aggressively defend our position in anti-aging and continue to look for ways to increase sales in the U.S. and gain share in the overseas markets, where the category has great potential for continued growth.
Let me now address fragrances for the Estee Lauder brand, as well as the Aramis and designer fragrance groups.
As indicated by William earlier, the fragrance category continues to show weakness globally, and this is most evident in the U.S. department stores, where the total category declined 5% for the quarter according to NPD, therefore, reversing some of our earlier expectations that we were witnessing a positive turn-around in consumers attitude vis-a-vis the category.
Moreover, we were expecting a tough comparison this quarter, as we anniversaried the very successful launch of Beyond Paradise in the U.S. last year.
We were expecting to be more or less flat at retail on Beyond Paradise at the end of the quarter, and this is where we are.
Beyond Paradise is going into its first fall season in most international markets, and the initial response from the overseas consumers is very promising.
Our strategy, going forward, must take into consideration that the Estee Lauder brand has 3 fragrances in the women's top-5 in the U.S. department stores -- Beautiful, Beyond Paradise, and Pleasures -- and this puts, of course, enormous pressure on us in a market which is [inaudible - highly accented language] to sustain [inaudible - highly accented language] for the long term.
Our strategy will continue to support the classics in our line instead of accelerating the number of new franchise launches in response to the intense activity in the marketplace.
We are still in the launch mode on Beyond Paradise Men.
The first results are very positive since, season-to-date, this fragrance ranks in the top-20 in the U.S. department stores and we have planned strong support between now and Christmas which should improve our rankings.
Men's fragrance is an area where we believe the Estee Lauder brand is under-penetrated, and we hope to improve our share of this category by the end of the season.
Our 2 other launches this season are in the designer fragrance division.
True Star by Tommy Hilfiger and Be Delicious by DKNY have had strong been beginnings in the U.S., and True Star, a particularly strong start in the U.K. market.
Both launches will have extensive support in advertising and point-of-sale over the next eight weeks.
The timing of the support will impact our A&P in the second quarter, as we anniversaried last year launches an seek to ensure the successful introduction of these new franchises.
Be Delicious is planned to roll out internationally in the spring.
Let me say a few words on our fragrance strategy moving forward.
First it is our vision to continue to compete in this category globally and to keep our Company relevant, not just here in the U.S. but also overseas, especially in Europe and in the travel retail channel distribution, where we are still largely under-penetrated as a Company.
Second, we are putting tremendous emphasis on improving the profitability of the category, which is today substantially below the corporate average.
We have several initiatives supported by operations and marketing that aim at improving our cost of sales over the next 3 years.
Finally, we are looking closely at our A&P mix, particularly at our advertising mix by franchise, to ensure that we achieve improvement in our marketing efficacy.
We believe that all of these initiatives combined can achieve a substantial improvement in fragrance's operating margins within the next 3 years.
In summary, we remain cautious but the state of the U.S. fragrance business, along with the strategies we are pursuing in terms of launch activities and cost reductions, makes us feel good about the category for the longer term.
In a separate note, you might have seen the press release that we issued last week, describing a change in management at the head of the Estee Lauder brand.
As I focus more on the long-term growth opportunities for the corporation, across channels, region, and product categories, I asked John Demsey to take over the global management of the Estee Lauder brand as of January 1st.
John has led the successful development of M*A*C for the past several years, to be the fastest growing makeup artist brand within our Company.
His mission will to be continue to continue the brand renewal initiatives at Estee Lauder and I have confidence in his ability to do so.
That concludes our comments for today, and we'll be happy to take your questions now.
Operator
Thank you, sir.
The question-and-answer session will be conducted electronically today.
If you have a question, you simply press the star key, followed by the digit 1 on your touch-tone telephone.
To ensure everyone has the opportunity to ask their questions, we will limit each person to 1 question, and a related follow-up.
Time permitting, we will return to you for additional questions.
Just queue up again by pressing the star key, and the digit 1.
Our first question today comes from Andrew McQuilling with UBS.
- Analyst
Thanks, very much.
William, I'm looking at a September '03 transcript, and I noticed that after the first quarter, which was very healthy last year, management left fiscal '04 guidance unchanged, $1.45, $1.50, given that it was only one quarter into the year.
Since you offered fiscal '05 guidance on August 17th, are you feeling better about your outlook for fiscal '05?
Or worse?
And how come?
- President and CEO
You know, Andrew, I think I'm feeling about the same as we did before.
And quite honestly, that reflects a level -- a measure -- a healthy measure of skepticism for the remainder of the year.
I think there are a great deal -- there's a great deal of uncertainty about consumer confidence in the most developed markets in the world.
My hope is that now with the conclusion of the campaign season -- the political campaign season here in the United States, that consumers will feel that it's safe to come out and spend again.
And that will have an impact.
And also, we really don't know the level -- the sustained level of consumer confidence in Europe, and Asia.
That is, again, if we do better, great, wonderful.
If we do where we currently are trending, I'm comfortable where we are right now.
And I want to just continue to remind you that, I said this before, and I tried to put emphasis on the words, we try to run our business on an annual basis, we'll give you guidance on a half-yearly basis because of calendar fluctuations, but given the current trends we're seeing right now, on a regional basis, I wouldn't be changing the guidance and the confidence level where we are right now.
- Analyst
Terrific.
Maybe a couple smaller ones.
How big do you think the hurricane impact was on North America sales in the quarter?
- President and CEO
Well, I think if you were to talk to those retailers with a significant presence in Florida, it's pretty significant.
In addition, you know, just as an anecdotal basis, I can't put any measurement on it, in a conversation with a key retailer in the Carolinas the other day, they talked about the fact that one of the hurricanes, forgive me, I can't remember what name it was, hung over the Carolinas, dumping 30 inches of rain for some 30 hours.
So saturated ground which couldn't absorb any more water was given 30 more inches of rain.
And that wiped out roads, it wiped out stores, you know, they had people who were flooded out of being able to -- consumers were flooded out of coming to work.
People were more concerned about draining their basements of water than they were about shopping.
How much of an impact that has, or the aftermath of that when you talk about record high temperatures in, what is meant to be a winter clothing season, can have an impact, though, I'm not certain whether we're capable of measuring that, and the impact on our business, which is so much of a traffic-driven business.
- Analyst
Terrific.
Maybe 1 more if I could, and just on the BeautyBank, understanding it's new, are you planning any type of gift-with-purchase, purchase-with-purchase activity in the December quarter for BeautyBank?
- President and CEO
No.
We are hoping to build these brands with the same brand values that we have built all of our other brands in the 58-year history of our Company.
- Analyst
And any thoughts, because you mentioned that BeautyBank, you're thinking about taking it internationally, any update there?
- President and CEO
Well, we introduced the brands and the brand values and the qualities that we're looking for for retail partners to our international general managers at the end of September.
And we have given them general guidelines as to the opportunities we're looking at.
And now, it is up to them, in partnership with the brand management, to look for the right opportunities and partnerships around the world.
As of today, we have no concrete, solid plans anywhere other than the United States.
- Analyst
And I assume nothing internationally is budgeted for BeautyBank.
- President and CEO
Correct.
- Analyst
Terrific.
Thank you.
- President and CEO
Okay.
No, excuse me.
There are budgeting, we are doing trademark, a great deal of trademark activity in all the key markets in the world to make sure that we can protect the key trademark names and products and brands in all the key markets in the world, where we see it as an opportunity.
So there is budgeting on the expense side to make sure we're protecting our intellectual property.
- Analyst
Understood.
Thank you.
Operator
Our next question, Amy Chasen of Goldman Sachs.
- Analyst
Hi.
First of all, can you just talk a little bit about this shift in marketing from the first quarter into the second quarter?
When did you decide to do that?
And why are you making that shift?
- President and CEO
Well, basically, Amy, we, you know, it's always a matter of strategic allocation of our resources.
And we, you know, the second quarter of our fiscal year, the fourth quarter on the calendar year, is the single biggest quarter from a retail basis.
And we felt that strategically, it's most important to invest our money when the customers were there to spend, and to be taking advantage of their propensity and willingness to spend, and spend our promotional dollars accordingly.
The actual numbers, I believe, if I'm not mistaken, is a 50-basis point shift -- 150-basis point shift from the first quarter last year into the second quarter of this year.
- Analyst
First quarter -- I'm sorry, but I thought you guys were saying that the shift in the earnings from the second quarter this year to the first quarter this year was because you shifted some marketing from the first quarter to the second quarter.
Is that not true?
- SVP and CFO
Amy, that's correct.
And what William was saying was that while we had a -- basically, a flat A&P as a percentage of sales in our first quarter of this year versus last year, in our second quarter of this year, we have an increase of about 150 basis points in advertising, merchandising and sampling.
- Analyst
I guess my question is, that seems like a change from what you expected when you gave guidance in August, and I'm just wondering -- and William, I understand you want to spend in the holiday season, that obviously makes a lot of sense, but why did you -- why wasn't that originally in the plan?
- President and CEO
Not a change at all, Amy.
And it was in our plan, and as you recall in August, we gave first half guidance and we're exactly on that first half guidance.
And one of the reasons that we don't like to give quarterly guidance is because of some of these shifts quarter-to-quarter in a particular season.
- Analyst
Okay.
So the -- this quarter's results were basically in line with your expectations?
- SVP and CFO
Yes, they were.
With the exception of a little bit of benefit from exchange, which is why we took up our first half number by a penny.
- Analyst
Okay.
Secondly, on Kohl's, can you give us an update just, you know, I guess, more on a touchy-feely basis then, and maybe on how the sales are doing so far.
How you guys are feeling about it.
What time of bogeys you're looking at, to see whether this is a successor not.
- President and CEO
Well, generally, we're both very pleased with the business, and we are constantly in communication with the Kohl's management.
They are pleased with both the sales level, as well as the transaction level in consumer interest in the stores about the products.
So we have -- we both have no basis of measurement to go upon.
If you will, it was a -- the plan was based on no history and knowledge, and just as much of an instinct.
And generally, we're pleased, and we're learning, both on an hourly basis, as well as on a daily basis the different transaction trends that are going on, by stores.
Both Kohl's management in our conversations with them, as well as our own management, we're pleased with the results.
- Analyst
Okay.
You guys have must have had some sort of financial model for this.
So far, is it in line, better or worse than what you expected?
- President and CEO
It's pretty much right on what we expected.
The allocation of businesses between and amongst the brands is more or less, right where we expected.
We've had a couple of surprises, if you will.
We expected one color to be better than the other, and it's reversed itself.
But nothing unusual, and, generally, we're pleased with where we're going.
We're very pleased with the way the 2 companies are working together.
And the information flow is working very well together, also, which is -- also makes us very happy, because we are getting a very good look at the sell-through data, as well, which helps us a great deal in our forecasting and planning for the future.
- Analyst
Okay.
Great.
Thank you.
Operator
Our next question, Linda Bolton Weiser at Oppenheimer.
- Analyst
Thank you.
Given that you did have the initial sell-in in the quarter for Kohl's, is there any way you could somehow give us an indication of, you know, what the America's growth was, kind of, excluding that?
- President and CEO
No.
I think you can do the math yourself from the information we've given you, but where we give you guidance on a regional basis and on a category basis, not on a brand basis.
- Analyst
Okay.
And then, just, secondly, can you just give a little more information about your long -- your plans over the next couple years about improving the fragrance profitability?
I guess, I'm a little surprised to hear that you feel the gross margin needs improving.
I would think it would be getting more effectiveness out of the advertising and promo spend.
And can you tell us, then, how much lower the gross margin is in that business versus the corporate average?
- Group President
Linda, we're looking at the 2 areas that you just mentioned.
Definitely, I think on the A&P side, the alignment of our resources against the different franchises that we have, especially at a time when we have -- when we are launching new brands like Tramp (ph) and Be Delicious and True Star, is a key area that we are focusing on right now.
Of course, all the brands and the marketing, people in the field organization is looking very closely at this.
On the gross margin improvements, I think it is -- we have several initiatives under way, they are manufacturing-led right now, and we are looking literally at the next 3 years, at ways that we can, indeed, impact by, you know, a few hundred basis points, the gross margin, favorably.
I think it's going to be a long process, but it's a part of the value analysis that we're looking at on a product development standpoint for existing franchise, as well as very strict benchmark and course guidelines for new product development.
- Analyst
Okay.
Just one final thing, then.
On the European region, I mean you commented on the comparison issues in the quarter.
I mean, I guess that makes for a hard comparison coming up in the next quarter.
What should we expect to see for the growth?
Do you still expect robust growth?
Or will it come up significantly in the second fiscal quarter?
- President and CEO
You're correct that we are -- we are up against a difficult comparison in the second quarter for Europe.
But you know, for the half, I think you'll see numbers that are in line with, you know, reasonable numbers.
And we've given you guidance as far as the rankings of the regions and I -- you know, so.
But you're exactly correct, in that we will have a difficult comparison in the European region in the second quarter.
- Analyst
Okay.
Thank you, very much.
Operator
Our next question, Chris Farrar of Merrill Lynch.
- Analyst
Hi.
I was wondering if you could talk about the skin care category a little bit more.
It seems like you devoted some time to talk about the competitive environment.
And I was just wondering if you could talk about how incrementally different that is, and, you know, a little bit about the competitive dynamics of the category, maybe?
And, you know, who is really stepping up there?
- Group President
Christopher, I think, we, looking at the evolution of the market and, clearly, the impact of some of those new brands which are entering and trying to establish themselves.
The beauty categories, the skin care category had been, until this quarter, rather healthy, and we witnessed a slow down in skin care.
And I think we are looking at that closely.
Obviously, there have been some new entries in the anti-aging category, which remain very vibrant.
So we were impacted slightly on some of our core brands here in that category.
But all in all, I think we remain, you know, reasonably optimistic about the way the skin care market is evolving in the U.S., and definitely overseas.
I think that the Asian market in skin care remains very solid.
And, you know, we have, obviously, several initiatives that in the U.S. and internationally are going to be addressing some of the problems that we seem to be facing in some of the subsegments right now.
And that's mostly on the Estee Lauder brand.
- Analyst
What do you need, sort of, different new product development?
Or do you need changes in price points?
I guess, what do you view right now as the way to get past this?
- Group President
I think, you know, we are looking closely at some of the innovation that we have in the pipeline, and bringing -- and their time-to-market.
There are some key initiatives in the spring season, both on Estee Lauder and Clinique.
Those initiatives are timed to counteract some of the, you know, the competitive activities that we see in the marketplace.
We, also, we're looking very closely at some of our communication and advertising strategies, sampling.
So at this point in time, not taking anything for granted, and just spending a substantial amount of time on the education side, as well, in stores, to make sure that we are well-prepared to answer the consumers demands.
- Analyst
Got it.
Thanks.
And just one other on China.
Can you talk about the incremental investments you're seeing?
You know, and I understand it's an investment market, and profits are down, but can you talk a little specifically about what's going on there?
- President and CEO
Well, China is a booming market right now.
And for those people who've got experience in the region, and for those who have been watching, one is reminded of what Japan was like in the 1970s, as far as the strong growth in the economy, strong growth in consumer, and emerging middle-class and upper-middle-class consumers, and their desirability to spend for aspirational imported brands.
We're also seeing a tremendous revolution in upgrade in the retail environment there, where formerly Communist-party owned and controlled department stores are renovating and upgrading their stores, and merchandising their stores by standards that are highly competitive with any western-level appearances.
And those consumers are coming -- they're doing this because they want to look as good as their stores other places in the world, and they want to attract those consumers who are now more freely permitted to travel around the world and they want to be competitive.
That environment is a heady brew for strong growth.
And our belief is, is that this is a potentially huge market.
There is 1.5 billion people.
And if we just focus on the top-10 to 15% of the population, on an economic basis, that's a larger market than anywhere else in the world on a long-term basis.
And we feel very strongly that this is a marketplace which, truly, for thousands of years, has thought about -- thought about their -- themselves in generations, not in quarters.
And therefore, we need to invest for future generations of market share strength and growth, rather than the next quarter's strength.
So we are heavily investing both -- first of all, in infrastructure, so that we have the infrastructure to support a business with such a significantly large market.
And, secondly, for support of market share strength and growth, so we can have the same position of leadership from a market-share basis with our great brands, as we do in other markets in the world.
- Analyst
Thank you very much.
Operator
Our next question, Bill Schmitz at Deutsche Bank.
- Analyst
Good morning.
- President and CEO
Good morning.
- Analyst
Quick question on the margin expansion, on gross margin, both operating margin.
How much of that was travel retail, the business of travel retail?
And, also, how much of that was from the elimination of the royalty in the base period?
- SVP and CFO
The royalty is the easy one, Bill.
That's 30 basis points.
The TRD number, I don't have at the moment, but Dennis can probably get you that.
But our TRD business in the quarter was up in the 20%-range over last year, so that was quite solid.
Now, we're not anticipating that, obviously, to continue for the year.
We think the TRD business will be up in the very low double-digit numbers for the year itself.
So that's, you know, that's, sort of, the answer hopefully that will give you.
- President and CEO
I want to remind you, if I'm not mistaken, the TRD gross margin is lower than our total number.
So let's not get ourselves confused here.
TRD has a higher operating margin, but a lower gross margin.
- Analyst
Right.
- SVP and CFO
And you asked that, didn't you Bill?
You asked for operating margin.
- Analyst
That's exactly right.
Because, I knew it was a lower gross margin.
Now, also, can we just talk about the Japanese business a little bit?
I know it has been kind of an investment phase.
You've invested a lot behind Clinique.
And I saw the volume was only up 1%.
I know a lot of that is economic softness, but that's still a pretty big market for you guys.
Can you just talk about that market and what's going on there?
- President and CEO
Sure.
And, actually, I was just in Japan last week, so I believe I can speak with a relative level of intelligence.
The economic climate there is still generally sideways.
It has been sideways for the better part of the last 5 years.
I will say by Western standards, by European and American standards, there is still a great deal of traffic in the stores, and there is still a fair amount of health.
The fact of the matter is, though, by Asian standards, they are really not very pleased with the business.
Japan is our third largest operating country in the world, after the United States and the U.K.
It is strategically important to the region, from a standpoint of its significance to us in the region, as well as its impact on total region and from a branding perspective.
There seems to be an interesting fluctuation in the market right now.
Still, obviously, it's a very strong skin care market, and strong branding values within the category -- within the overall categories of the brand.
We're very pleased with the general direction of where the Clinique brand is going right now in Japan.
I guess the best way to describe it is, is that Clinique, as a brand, was the first Western brand to, really, ever gain a foothold in the Japanese market in the late 70s and early '80s.
And it got to the point where, really, Clinique had such a dominant share, that if you will, it couldn't increase its share, it could only give up its share.
If we look at the share perspective, the Clinique brand has lost some relative share, but the vast majority of the share it's lost it's given to its sister companies, which are part of our portfolio.
And, so, from an overall perspective, we still have a very competitive share in the marketplace.
The issue is, of course, the Clinique managers, in particular, are sanguine about the fact that may have given up share to their sisters down the hall.
But we, as a corporation, are fairly confident about the total share in the marketplace.
We continue to invest in that market.
But we do gain a fairly sizable earnings from that marketplace, and we'll continue.
And we expect to continue to invest in this marketplace as a key strategic -- one of the key strategic markets in the world.
- Analyst
Great.
Thanks.
And then 1 more.
I just want to -- I hate to beat a dead horse, here, but to go back to Chris' question on skin care.
How much of the market share loss do you think is from growth of some of these masstige brands and how much of it is from the dermatological brands where Rodan + Fields is just kind of starting off?
- Group President
Okay, I think you should look on the quarter, the skin care category, had an overall, a soft, very soft quarter.
You should actually exclude the impact of capital from new brands that are registering for the first time in NPD on the quarter.
You have a negative -- you have a negative market in skin care.
So there's an overall softness.
Regarding most specifically, I think the Lauder brand, we have some share erosion on the quarter, in the category.
So you are essentially correct.
And that's something which we are addressing right now.
You know, whether the softness is just on the quarter, or will it continue over the next few months, you know, too early to call.
But I think it's been a very resilient product category.
And as I said earlier, we have the right product initiatives going forward, definitely in our core brands, to turn around the situation.
- Analyst
Okay.
And do you think there's any impact from some of these masstige brands that are becoming more and more commonplace?
- Group President
You know, think back to William's comment earlier, you look at the prestige side of the business have had a healthier growth than mass, overall.
There is, obviously, some biting from some of these masstige brands, and we, also, are watching that very closely.
- Analyst
All right.
Thanks, very much.
Operator
Our next question, Wendy Nicholson, Smith Barney.
- Analyst
Hi.
My question goes back to, I think, Linda's question about the Kohl's ship-in in the quarter, if the North America business was up -- or total America's business was up about $30 million, I'm assuming a big piece of that was the Kohl's ship-ins.
So, if I assume the U.S. business was, basically, kind of flat year-over-year, I know the prestige business is growing faster than mass, but can you tell us specifically, according to your data, what the U.S. business grew as a category?
And if it grew better than 0, I guess that implies that your market shares are down, so you can comment on that?
- President and CEO
Well, I want to be careful.
I think as you put a -- some questions inside of questions here.
First of all, let's not -- I mean, this becomes a game which we're constantly playing with each other, about measuring our net shipments against retail sell-through.
And you know there's always a lag between the 2.
And they don't match up to each other on a monthly basis, or even if you want it on a quarterly basis, especially when you get into the first and second quarters of our year, because of the substantial ship-in, in the portion of the first quarter for the early Christmas shipments.
What exacerbates that is we now also had in the quarter the ship-in in the first quarter of Kohl's.
And comparing that and trying to match it up in the same quarter with retail sell-through, will confuse you and spin your head, if you will, spins our heads on a regular basis.
The best way to describe it is, is that we are comfortable with the retail environment, the sell-through environment, in our existing distribution with the department stores.
We are comfortable with the market share positions of the brands in that segment, as well, we also had, in the quarter, just the sell-in, the filling of the pipe, of Kohl's.
Kohl's retail sell-through, the BeautyBank retail sell-through, we will really be seeing in the second quarter of the year, as well as continued replenishment shipping in all categories of merchandise in North America.
- Analyst
Is it fair to say that the dollar value of the shipments to Kohl's, though, was bigger in the first quarter, given you did 300 stores, that's an awful lot of inventory, I would bet, to just get on the shelf initially.
So my sense is, is that initial shipment, if you will, even though it was only, you know, whatever, 2 weeks worth of sales in the first quarter, is bigger than what you are going to see in the second quarter?
- President and CEO
Yes, yes.
The expression we use is "filling the pipe."
You said it right.
We've got to fill the shelves, and now what you'll see in the second quarter for that business is replenishment sales.
- Analyst
Okay.
So I guess, if you did 4% sales growth in the Americas business in the first quarter, do you think the second quarter, given that Kohl's is going to be a smaller net boost to that business, you know, the overall U.S. business, do you think the second quarter is up more than 4% on the top line?
- SVP and CFO
You know, we've given you the rankings by region and you're doing a great job, Wendy, of trying to back into what the Kohl's business is, but, you know, our -- we've given guidance as far as what our growth will be for the half.
We've given you guidance as far as what the regional rankings will be.
And, you know, let's -- you know, let's leave it at that.
- Analyst
Okay.
Then my last question is on the dividend increase.
Obviously, it's a great dividend increase.
Does that speak at all to any change in your acquisition strategy?
Or, I mean, you're still sitting on a, you know, huge amount of cash, so you got a lot of flexibility.
- President and CEO
No.
It doesn't speak to any change in our acquisition strategy at all.
We feel we have a very healthy balance sheet, a very solid cash flow in the future, and we feel we have the ability -- we've got the ability, if the right opportunity arises, to finance virtually any key strategic acquisition, up to a very substantial size.
It really reflects the fact that we have a healthy cash flow.
And we have to find a way to make sure that we balance that healthy cash flow with how we return to our shareholders the value that we are generating.
And, obviously, you know the exercise we go through between share repurchase and dividend, and how we balance those -- the return of the -- this income to our shareholders.
And we feel we have the right balance allocating our resources between the 2.
- Analyst
Fair enough.
Thanks, very much.
Operator
Once again, ladies and gentlemen, if you did have a question, it's star, 1 at this time.
Our next question, Bonnie Maneaty at Prudential.
- Analyst
Hi, it's Connie Maneaty.
I have a couple of questions.
As we take a look at the outlook you gave for sales in your last guidance, local currency -- sorry, your total sales growth of 7 to 8% is unchanged.
But in the last time you gave guidance, there was a modest drag from foreign exchange.
And now it looks like there'll be a slight positive.
Does this suggest that are you implicitly lowering your outlook for local currency sales growth?
- SVP and CFO
Connie, it does, but, you know, we're talking about, you know, tenths of percents here.
So it's really a swing, because the overall impact in our last guidance was relatively small from exchange.
And it's still is relatively small, it's just, kind of, flip-flopped directions, if you will, from one side of the equation to the other.
- Analyst
Okay.
Anecdotally, going to some of the Kohl's stores, we heard something we really didn't think we would hear, and that is that some of the consultants are saying to us, as we look at the products, this is from Estee Lauder, only cheaper.
Were they trained to say that?
- President and CEO
They were not trained to say that.
And, in fact, there've been a number of issues which have arrived on this, which we've been made aware of.
And we have been actively talking about this issue with Kohl's management, as well as the associates in the store, and the store management, in particular.
Because this is -- the purpose of this is not to say that, in fact, these are good brands on their own, they're meant to stand on their own as brand values, not as, if you will, the reference to the brand name.
I think what you're looking at is, we have over -- something like 800 or 1,000 sales associates.
And, oftentimes, they're looking at what is the most expedient way of closing a sale, perhaps, rather than what is the right long-term way of building a brand.
And I think we will -- we in partnership with the Kohl's management, will be actively encouraging these associates to focus on the right brand values.
- Analyst
Does it in -- over the near term, does it change the -- where you think you'll get sales from, you know, department stores, versus mass?
- President and CEO
No, if you look at the total universe of where our brands are available for sale, and where the consumer has had the confidence to buy our brands, I have no doubt that the vast majority of our sales in the Americas will continue to come from -- and the vast majority of our growth, will continue to come from our established trade of distribution which is the upscale department store market, where, for example, the Estee Lauder and Clinique brands are each in approximately 2,500 points of distribution in the world.
And the consumer has come to expect these brands in these stores, and rely on these brands in these stores.
When it comes to the business we have established with the BeautyBank brands in Kohl's, it's in approximately 280-some-odd doors in the United States.
These are doors where the consumer has never previously shopped for cosmetic products, and is now learning about brands that she's never known before.
So we expect that as they come to know these brands, they will like it, but again, our research has shown, both from the research from the -- with Kohl's as well as our own research that most of these consumers who shop in this channel of distribution have previously been comfortable shopping for their cosmetics purchases in the chain and mass drug outlets.
As those consumers come to understand the brand value that is being offered to them in a Kohl's environment, they will become more comfortable shopping out of the chain and mass drugs into this channel and distribution.
- Analyst
Okay.
One final question.
You can just give us a sense of how big China is, as a percentage of Asia and sales, just to get a sense of how that is growing?
- President and CEO
China, I would say, China is the four, fifth -- fifth-size market in the region.
But I would say, in 5 years time, I would certainly expect it to be the second largest market in the region.
And in 10 years time, I would expect it to be -- to be the largest region in the marketplace.
And it's approximately 5%.
- Analyst
5% of Asia sales right now?
- President and CEO
Yeah.
- Analyst
Great.
Thanks a lot.
Operator
We will take our next question, Janet Kloppenburg, JJK Research.
- Analyst
Hi, everyone.
Congratulations on a good quarter.
- President and CEO
Thank you.
- Analyst
Just a couple of points of clarification for me.
On the Japanese market, when you talked about investing in the business, William, does that imply that we could look for the business to continue to improve?
You did have an improvement here in this quarter.
Should we look for that trend to continue?
And also for Patrick, are you optimistic that the fragrance business in the U.S. can improve during this Christmas season?
And I was wondering if some of those increased AP dollars would be going towards the fragrance business and the Christmas season?
Thank you.
- Group President
Let me first, Janet, address the fragrance question.
You know, we are reasonably cautious about the next few weeks, because of the weight that every new week brings to the category in terms of a contribution to sales.
You know, we're looking for what is the post-election day and to see if we start seeing some momentum.
I'm reasonably confident, because of the entry that we have in the season, the 3 that William mentioned, obviously, there are some substantial A&P allocations to make sure those franchises take hold in the marketplace.
The first feedback on Be Delicious is, you know, very, very solid.
I think that the True Star brand is also doing well.
And in men's, Beyond Paradise has been well accepted.
So, again, reasonably confident.
I think there is a realignment, in terms of the media strategies, to get closer to when the consumers are in the stores, and shopping.
And that, of course, is going to impact our A&P spending in the second half.
How the market, overall, will behave, I think it's too soon to call.
Promotional intention on the fragrance category, if everyone I'm reading or hearing, is about the same that it was a year ago, in terms of consumer behaviors.
I think that's always an important indicator.
And I think that it will depend, to a great deal, about the proportional intensity that we've seen as the -- non-fragrance businesses in department stores and in the electronic field as well.
So, overall, again, reasonably optimistic about what we see here.
- Analyst
Thank you.
- President and CEO
In answer to your question about Japan, we are significantly investing in Japan, first and foremost to maintain and expand market share, because we feel very strongly that as a key strategic market on a global basis, the market share is one of the key drivers for continued success.
- Analyst
So you do look for that business to continue to improve then?
- President and CEO
We certainly expect so, and the pressure we're putting on our local management to maintain this posture is quite significant.
- Analyst
An lastly, for Patrick on the skin care outlook for the United States, could it just be that the brands that you own in the United States in the skin care category are highly developed, and maybe some of these newer products are coming in and making inroads?
Is that something that could be occurring?
- Group President
I think, you know, highly developed in those shares never slowed us down to grow share further and definitely here, we see some erosion in a couple of key segments.
I've mentioned the anti-aging segment earlier.
You might, you know, say that the Lauder brand was, you know, potentially over-developing that, in that segment of the market, therefore some of the vulnerability that we seem to look at today.
But I think that we have tremendous product innovation capabilities.
It's always been our hallmark.
And I think that we should be able to slow down some of the erosion that we are seeing in the quarter
- Analyst
Thank you very much.
Operator
That was our final question for today.
That will conclude today's question-and-answer session.
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That concludes today's Estee Lauder conference call.
I would like to thank you all for your participation, and wish you all a good day.
You may disconnect at this time.