雅詩蘭黛 (EL) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2008 first quarter conference call.

Today's call is being recorded and webcast.

For opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr.

Dennis D'Andrea.

Please go ahead, sir.

Good morning, everyone.

We have on today's call William Lauder, President and Chief Executive Officer; and Rick Kunes, Executive Vice President and Chief Financial Officer; Dan Brestle, our Chief Operating Officer is also here, and Dan will be available for the Q&A session.

Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements.

I'll turn the call over to William.

Good morning.

Thank you for participating in our fiscal 2008 first quarter conference call.

Our reported sales for the quarter rose 7% and diluted earnings per share were $0.20.

These results came in better than our expectations, because many of our international affiliates didn't spend as quickly as they expected.

Rick will discuss the financials in more detail a little later.

Once again, our performance is fueled by our international business, where we posted solid growth in all regions.

As we stressed before, we see our foreign operations continuing to provide the greatest opportunities and the first quarter was no exception.

I am especially gratified to note that our business in the fast-growing emerging markets continues to be vibrant.

Sales rose 25% and our presence in these markets keeps expanding.

For example, we recently established a corporate affiliate in the middle east and Clinique launched in India, with two locations in Deli.

In China, our largest emerging market, each of our eight brands turned in double-digit gains at retail during the quarter.

All of our brands combined make us the largest seller in our distribution network.

We also continue to make progress in Russia.

While Moscow and St.

Petersburg are the major cities, we see vast opportunities of potential among the country's many different time zones.

We're investing aggressively in emerging markets to expand our share and we expect big payoffs down the road.

The bulk of our most recent investments went toward building stores, adding doors, hiring and training employees and advertising.

Even as we invest in these promising markets, I am pleased to report that we're also getting good growth from important established markets.

Japan is our largest market in Asia and our sales momentum has been building over the past year.

Thanks to higher sales from every one of our brands and with an improved retail environment, our total business rose in the high single digits in local currency.

This is the best year-over-year quarterly showing in eight years.

As a result, the Company's share of Japan's prestige cosmetics business has grown in the last 12 months.

Skin care is a critical category in Japan, and we started seeing a turnaround in fiscal '07 after years of softness.

The improvement has continued into fiscal 2008, as the category sales climbed sharply this quarter.

We're pleased to note that the makeup business also expanded nicely.

Overall, our products are resonating with the Japanese consumer, who is typically younger than her U.S.

counterpart.

In the UK, our business was solid.

In particular, online sales were robust, with several brands posting 50% gains.

We ramped up eCommerce in the UK last year and we're exited about the potential.

Our affiliate is gearing up for a strong holiday push in this channel.

Last year, our UK affiliate upgraded its customer relationship management programs in order to capture additional consumer information, giving us better marketing opportunities.

During the first quarter, Clinique sent a targeted mailing to specific customers who shop at the British retailer booths.

Early results have been positive.

Some of our other brands in the UK planned holiday related targeted offers and we'll be able to measure their impact on subsequent sales.

As you know, we currently have 28 brands across 135 countries and territories, sold through multiple distribution channels.

Much of the growth we're enjoying is a result of well-placed strategic investments.

To cite a few examples, the Estee Lauder brand ran commercials for its Nutritious line on TV in 7 major Chinese cities.

This is the third time the brand advertised on television in China and each campaign was extremely successful.

M.A.C.

opened 34 doors in the quarter, 2/3 of which were international markets, and we continued to build infrastructure in China and Russia to support a fast-growing sales network.

We also devoted greater resources to travel retailing, a thriving channel benefiting from more global travelers, who increasingly buy cosmetics while waiting for flights.

Estee Lauder's Re-Nutriv and Idealist and Clinique's 3-Step lines have been best sellers in airport stores.

Our travel retail division spent approximately $6 million more this quarter than last year to increase the visibility of our brands and it paid off with sales rising solid double digits.

For instance, large illuminated ads for our products hung in airports worldwide and the exterior of Hong Kong's airport trains promoted Estee Lauder's Idealist treatment product.

We also increased our brand presence.

Travel retail continued rolling out Tom Ford, Donna Karan and Sean John and selectively placed other brands into more than 30 new doors.

Turning to our domestic business, sales in the period were dampened by a shift in retailers' calendars, which caused approximately $40 million of shipments to be delayed from the first quarter to the second.

Our retail takeaway from the quarter was healthy and our big brands were working to improve point of sale to stay relevant and compelling.

The Estee Lauder brand updated its counters by investing in new modular display and tester units at all North America department store locations.

With a new counter look in place to capture consumers' attention, the brand's beauty advisors turn to their strength, providing quality service.

To simplify the choices for consumers and advisors, the Estee Lauder brand organized its product line by skin care concerns.

The brand continued to reinforce its authority of skin care through its technology-driven products and compelling advertising and promotions.

We are improving the foundation of the Estee Lauder brand to generate future sales growth.

Another global power house brand, Clinique, launched a pilot program that aims to improve the consultant's job satisfaction.

The program is designed to keep them employed longer and create a stronger connection with consumers.

Early results are encouraging, anecdotal evidence shows that the program's [equidations] and financial incentives have reduced consultant turnover.

Switching now to distribution, I would like to update you on developments at our entrepreneurial Beauty Bank division.

Overall, the five Beauty Bank brands sold in Kohl's department stores have shown healthily like door growth this season.

We have a winning product in American Beauty's perfect mineral powder makeup.

It's been on shelves for two months and already is the number one foundation tapping into consumer demand for mineral-based cosmetics.

An even bigger success is TRI-AKTILINE, an anti-aging product from Good Skin launched in January.

Its retail sales have skyrocketed, exceeding our projections by 400% and it holds the distinction of being the top beauty SKU at Kohl's.

Based on the success of TRI-AKTILINE at Kohl's, we made it our first major international rollout, launching exclusively in 523 Sephora doors throughout Europe on September 1.

We sold 100,000 units in two months, far beyond our expectations.

TRI-AKTILINE also launched exclusively in cosmetics 250 pharmacies in Taiwan.

Our first foray in Taiwan's pharmacy channel.

Initial results have been terrific.

It's the best selling beauty product in those doors.

Based on this great response, we're planning to distribute TRI-AKTILINE in more countries.

We have high hopes for another Good Skin product called Smooth-365, which went on sale in Kohl's in July, and there's more in the Beauty Bank pipeline.

In a separate venture, last March, Beauty Bank introduced the Coach fragrance in 250 free-standing United States Coach stores.

That business is on plan and profitable and we intend to develop additional fragrances and related beauty products with Coach over the next couple of years.

We're very pleased that our Beauty Bank division has achieved its goal of being a creative think tank to bring ideas to reality and attract new consumers into our fold.

That's not all in distribution.

After three successful appearances, Bobbi Brown will host regular segments on QVC in the U.S.

every other month, which should add incremental sales.

We expect Bobbi's shows will build brand awareness and spill over to department stores.

DIRECTV retailing could become an important component of the brand's domestic sales.

Bobbi Brown products continue being sold on QVC in the UK where the brand has done well.

To update you on our operations, our SMI effort is proceeding and we expect the North American financial back bone and indirect procurement functions to be up and running in 2008.

Those areas involve about 80 legal entities and thousands of users.

Forecasting and demand planning for several brands is also expected to go live in 2008.

We are proceeding cautiously and deliberately to avoid disruptions in the flow of our business, but are on track with the implementation of savings projections.

Looking ahead to the holiday season, we are cautiously optimistic.

The national retail federation projection overall 4% increase in U.S.

holiday sales, slightly less than last year, however, high-end luxury retailers continue to do well.

Our brands have addressed the holiday season with compelling gift sets and we're expecting that consumers will find the Estee Lauder brands annual Blockbuster set a must-have item.

As you know, the majority of fragrance sales occur in the second quarter and we believe we're well positioned with both classic and contemporary scents, including our perennial top sellers, Beautiful, Estee Lauder Pleasures, and Clinique Happy.

Two recent additions, Sean John Unforgivable Woman and DKNY Delicious Night have been strong out of the gate.

We're also anticipating that some other best sellers, including Donna Karen Cashmere Mist and DKNY Be Delicious will do well in U.S.

prestige distribution.

In most other places around the world, the consumer seems confident and we expect to continue to generate strong sales growth from international markets.

Our research and development strength will be evident in coming months as we introduce some revolutionary products.

To cite a few, the Estee Lauder brand will introduce Re-Nutriv Ultimate Youth Cream, a cutting edge treatment that captures the benefits of retinaritrol, found in red wine, which claims to postpone the signs of aging.

Origins just launched Origins Organics, the first complete prestige collection of skin, body and hair care products to carry the USDA organic seal.

Clinique will unveil a redness relief line.

We're optimistic that consumers will be attracted to these unique offerings.

In closing my remarks, I want to reiterate that our international operations are an important driver of our overall growth.

This is a direct result of our long-term investment strategy.

We're backing our winners, our best performing brands, countries, channels and categories, to propel them to greater heights.

We have numerous opportunities to place our products in untapped markets, find alternative distribution, and spread the word about technology and excitement in our diverse portfolio of brands.

We strongly believe that the incremental investments we have made in the last six months will start to pay off in the second quarter.

Now, I will turn the floor over to Rick, who will provide more financial details.

Rick?

Thank you, William, and good morning, everyone.

My discussions today will focus on our results from continuing operations.

In local currency, sales this quarter were up 5% over last year, within the previously stated range.

U.S.

dollar weakened more than we anticipated, adding 2 percentage points of growth, resulted in reporting sales growth of 7% to $1.7 billion.

Net earnings from continuing operations for the quarter were $39.1 million compared with $58 million last year, and diluted EPS was $0.20 compared to $0.27 in the prior year quarter.

We exceeded the top end of our EPS range by $0.09.

Let me tell you some of the areas that contributed to that result.

As a multinational and multibrand company, there was not one single item to point to, although the majority of the favorability came from our international business.

Specifically, about 20 new door openings we had planned for M.A.C.

are expected to occur in the second quarter.

Along with the usual structural cost of a new door, our costs associated with hiring and training makeup artist, testers, events and counter amortization.

As a barometer the average cost to open a door for M.A.C.

is approximately $150,000.

For 20 doors, this equates to $3 million, or about $0.01 per share.

Some of our fast developing markets such as Russia, the Middle East and Latin America had aggressive expansion plans, but did not spend as quickly as expected.

The favorability amounted to approximately $6 million, or $0.02.

These markets expect to catch up as the year progresses.

A portion of the overall favorability came in from our international businesses in markets such as Germany, France, Benelux, Australia and Taiwan.

Under spending for advertising, merchandising and samples, as well as demonstration costs, totaled about $8 million, equal to $0.03.

And lastly, the weak dollar added about $0.01 to $0.02 to our earnings compared to our forecast.

Let me refer you to the press release we issued this morning for details of our net sales and operating income by product category and geographic region.

My remarks here will focus on those items that may add some more color to the information in the press release.

We saw robust growth in all categories, with the exception of makeup, which grew less than 1% in constant currency.

As William noted, U.S.

sales were adversely impacted by the shift in customer orders from the first to the second quarter.

The makeup category in particular saw a greater impact, as it is our largest product category in the U.S.

Internationally, our makeup artist brands continue to post double-digit sales increases.

When we look at our geographic results, we had an excellent quarter in Europe, the Middle East and Africa, posting double-digit local currency sales gains.

Travel retail grew more than 20% for the quarter, fueled by increases in international travelers and expansion of developing brands.

Almost all countries were up, with our UK business growing high single digits, led by strong results from our makeup artist brands and robust sales at our seven eCommerce sites.

Travel retail and the UK affiliate represent about half our sales in the region.

Among our developing markets in the region, Russia once again was up sharply, growing more than 30%, and contributed nicely to the region's growth.

And Turkey rose nearly 40% off a smaller base.

Asia-Pacific also had strong local currency sales gains, with every country recording increases.

Among the top markets in the region, we were particularly pleased with the high single-digit sales growth in Japan.

Every brand grew in Japan this quarter, driven by share gains and expansion of our developing brands.

Korea, our second largest market in the region, grew low double digits and Australia rose in the mid-teens.

Those three markets represent nearly 2/3 of the region sales.

China, our major developing market in Asia-Pacific, jumped over 25%, fueled by robust prestige beauty growth, expanded distribution and increased penetration of our developing brands.

The modest decline in sales in the Americas reflected the shift in retailer orders of approximately $40 million into the second quarter due to the change in the retail calendar.

Partially offsetting this decline were strong sales gains in our internet, salon, company owned free-standing retail store, Kohl's and Coach channels, as well as Canada and Latin America.

Taken together, these areas grew nearly 20% in the quarter.

The region also benefited slightly from the addition of two months sales from the Ojon brand, which we acquired at the end of July.

Almost all developing brands posted increases, although we continued to experience lower sales in certain core brands.

Moving on to gross margin, we had a 20-basis point improvement this quarter to 73.3%.

Contributing to the increase was favorable exchange rates of 30 basis points and lower promotional costs of 20 basis points.

Partially offsetting these improvements was an unfavorable change in the mix of our business of 30 basis points.

As we described on our last conference call, we planned for a high level of investment spending in our fiscal '08 first quarter.

Operating expenses as a percentage of sales for the quarter rose to 68.8%, from 66.9% last year.

Although not as high as planned, we invested heavily to drive growth, acquire market share and expand geographically.

A few key areas we spent this quarter include increased field sales, demonstration and training costs, associated with the opening of 34 new doors for M.A.C., including six retail stores, increased selling costs and samples behind the rollout of the new Clinique experienced pilot program in three U.S.

cities, higher advertising costs for Clinique's 3-Step TV spots in Europe and Asia.

Higher advertising spend behind the Estee Lauder brand in China, the UK and Russia, and incremental spending for information technology and stock-based compensation.

As a result, operating income declined 22% to $77.9 million compared to $99.9 million last year.

Looking at operating profit by category, hair care posted a solid increase due to strong sales and the acquisition of Ojon, which added incremental income.

Skin care, makeup and fragrance all declined, reflecting the planned impact of the $40 million sales shift previously mentioned.

While sales shifted, expenses did not.

At a gross margin of nearly 75%, this translates to an operating income impact of roughly $30 million, equal to about $0.10 a share.

These categories also were affected to varying degrees by the increase in investments made in M.A.C., Clinique and Estee Lauder brands that I mentioned earlier.

And fragrance saw the effects of launching the Sean John Unforgivable women's scent, DKNY Delicious Night and Tom Ford for men.

By region, operating profit increased in Asia-Pacific but declined elsewhere.

In Asia-Pacific, every country achieved gains, except China.

China reported a moderate operating loss this quarter, reflecting the increased advertising behind the Estee Lauder and Clinique brands, as well as further expansion.

We expect China to produce positive operating income for the full fiscal year.

The decline in the Americas was primarily caused by the impact of the sales shift, coupled with increased investments.

In Europe, the Middle East and Africa, we established an affiliate in the Middle East, resulting in incremental cost in the region.

Our operating results also reflect increased TV advertising by the Estee Lauder and Clinique brands to drive share in developed markets and awareness in developing areas.

Regarding our net interest expense, we reported $18.4 million this quarter versus $6.7 million in last years first quarter.

The increase is primarily due to higher average debt balances from financing our accelerated share repurchase last fiscal year.

The effective tax rate for the quarter was 35.5%.

Regarding cash flows, our fiscal first quarter always reflects seasonal working capital levels, as we gear up for the holiday season.

As such, cash outflows for the quarter ended September 30, 2007, were $133 million compared with $70 million last year.

The change primarily reflects seasonal levels of spending and timing of payments relative to accounts payable balances and the lower net earnings from continuing operations.

Our day sales outstanding were 56 days this quarter, 1 day higher than last year, resulting from the strong international growth.

Inventory days increased to 196 days compared to 180 days last year.

The 16-day increase is due to expected overall business growth in the second quarter, including the sales shift mentioned earlier, equal to approximately 7 days.

Five days resulting from excess stock to support new businesses in emerging market and the inclusion of Ojon and approximately 4 days related to the combined effect of foreign currency translation and some remaining safety stock in Aveda.

During the quarter we repurchased approximately 1.4 million shares of our stock at a cost of $54 million.

We spent $79 million for capital expenditures during the quarter, which includes incremental spending for our company-wide systems initiative.

For fiscal '08, we expect to generate around $700 million of cash flow from operations and to use about $325 million for capital expenditures.

Now, I'll update you on some assumptions for the balance of the fiscal year.

For the year, strong international sales are expected to lead growth.

We continue to expect fiscal 2008 local currency sales growth of approximately 7% to 9%.

Foreign currency translation is anticipated to add approximately 2 percentage points to growth.

As we've done historically, we will take advantage of market conditions around the world and invest for growth and market share, especially in Asia and Europe.

We plan to spend behind our faster growing brands and markets to continue the momentum that they are experiencing.

We are also investing more in our IT infrastructure.

As a result, our margins are expected to remain relatively unchanged from the prior year.

At this time, we estimate our effective tax rate will be approximately 36%.

We continue to be comfortable with our full year EPS forecast of between $2.28 and $2.40.

Looking at our second quarter, we expect EPS for the three months ended December 31, 2007 to be between $1.10 and $1.17.

Our sales growth for the second quarter is forecasted to come in around 10% to 12% in local currency and a positive impact of foreign exchange translation should add about 3 percentage points.

Our top line growth in fiscal '08 second quarter will include approximately $40 million from the retail calendar shift.

As I said earlier, at a gross margin of nearly 75%, this will translate to an operating income benefit of roughly $30 million, equal to about $0.10 per share.

That concludes my comments for today.

And we'll be happy to take your questions now.

(OPERATOR INSTRUCTIONS) Our first question comes from Wendy Nicholson with Citigroup.

Hi, good morning.

Good morning.

Could you explain a little bit more about the margin weakness in Europe?

I guess I'm surprised that that was down as much as it was on, number one, how much could the affiliate opening possibly have cost you?

And what exactly is going on in the UK to drag margins down so much there?

Wendy, it wasn't just the affiliate opening, but we spent rather heavily, and we had planned to spend heavily obviously based on guidance we had given.

In the UK and France, in Germany, and also in Russia, and in Russia in particular, it's related to the fast growth in our, in our points of distribution.

And so there's spending that associated with that.

In the other markets, it's just really advertising spending.

As you know, we sort of put our business plans together to achieve a certain result for the year, and at times that requires us, or it's advisable for us to spend heavily in one quarter versus another and that was what we had planned to do and what we actually did.

The results, as you see, are higher than our expectations for the quarter.

We actually didn't spend quite as much as we had anticipated to spend, but we did spend quite heavily in the quarter.

Could you talk about the travel/retail business.

I know that that usually sort of insulates the margin in Europe to a certain extent.

How much was that up in the quarter?

Travel retail was up 20% in the quarter, but we did also, as I think William mentioned in his remarks, we did spend quite heavily in travel retail.

We spent about an additional $6 million of advertising spending in the quarter versus last year for that business in anticipation of hopefully a heavy travel season in the second quarter.

Your next question comes from Bill Smith with Deutsche Bank.

Hi, good morning.

Good morning, Bill.

Good morning.

Can we spend a little bit more time on the second quarter guidance, both in terms of sales and in EPS growth?

Because, I think when you gave your guidance in August, it seemed like you were pretty, I guess, conservative going into the Christmas season and kind of what's changed in the last three months?

And then also just like you have the 10% to 12%, how do you get there?

Well, I don't think, Bill, that we've changed our outlook for the Christmas season here in North America, in particular in the U.S.

If you exclude the $40 million of sales that just shifted from quarter 1 to quarter 2, we're not anticipating a tremendously strong Christmas season here in North America.

But offsetting that is terrific results internationally, as we had said when we came into this year, and continue to be borne out through the first quarter and what we're anticipating next quarter.

We have some very, very strong growth internationally, and it's the benefit, if you will, of some of that spending that we're doing in the first quarter.

So it's accelerated internationally versus what you kind of told us in August on the International markets.

I think International business is quite strong.

I don't know if it's really a lot stronger than we thought it was going to be for the year.

We came in knowing that we were going to have a great year in International and we still feel that way.

Okay, and then just a follow-up on the department store side, can you just give me some data points on sell-in versus sell-through?

Kind of like where the inventory levels are?

What you're thinking for the holiday season, is there going to be destocking in January, that kind of thing?

Bill, this is Dan, let me address that.

This float that we're talking about obviously with the October receipt date, for Christmas goods was October 8th versus last year October 1st, so that's sort of throwing off the calendar.

We're investing heavily.

We've put more sets into the business, more value into the business.

We think you're going to need value to compete.

Obviously the returns in January are going to be predicated on how well the consumer reacts to that, but I think we're prepared for a pretty good season.

Not a great season, but a pretty good season, and all the brands have stepped up and increased the value to their Christmas programs.

Your next question comes from the line of Amy Chasen with Goldman Sachs.

Can you just give us an update on cost savings on how much you reaped in the quarter and whether you're still on track for the year?

Sure, Amy.

The program that we had actually implemented a year or so ago was all around people and that program is happening.

If you're referencing the SMI savings, the $80 million that we intend to achieve with the implementation of roll-out of SAP on a worldwide basis, we are beginning to see some savings at Aveda, which was the first site that we installed, but obviously that's more than offset by the continued cost of implementation as we begin to roll that program out around the world.

We still feel comfortable with that $80 million number, but as I think we said at our investor conference, that results in a net cost, if you will, for the next year or two and then it begins to kick over to a savings after that.

Okay, and can you just tell us, you mentioned this special gift you're doing for Estee Lauder and your high degree of confidence in the success of that.

Can you just tell us what's so special about it?

Because I know you've had some issues with your gifts in recent years.

The remarks referred to -- Amy, I'm sorry, the remarks referred to the Blockbuster.

Last year we had a sellout of the Blockbuster early in the season and we were a little naked coming into the last 10 days of the selling season.

This year, we've invested more in the Blockbuster.

We think it's a great looking piece and we put more quantity into the store, so we have something through those critical last 10 days to entice the consumer.

Okay.

Your next question comes from the line of Ali Dibadj with Sanford Bernstein.

I want to understand the guidance, basically your implied guidance for the back half of the year.

So if you assume guidance is right for the second quarter here, that would suggest that back half is about $1, call it, in terms of EPS.

But if you look at consensus it's about $0.20 above that.

Just trying to get a sense from you all that the level of conviction you have in your guidance in the back half of the year, understanding the oft repeated remark that you don't really manage on the quarters, but just trying to get a sense from you about your level of conviction there?

Sure.

You are correct.

We do run our business on an annual basis and that's the way we look at it.

Are we more comfortable today with the balance of the year than -- than we would have been, let's say, coming into the first quarter because our results were better than we expected?

I think the answer is yes.

But, do recall that we've only just finished three months, so we have a ways to go.

But we are, we are comfortable.

We wouldn't give the guidance if we weren't comfortable.

It's a range of $2.28 to $2.40 and we're comfortable with that.

I mean what -- maybe this is -- I'm not trying to be rude, but why do you even give guidance?

(laughter)

Well, that-- That's the best answer I can give you, Ali, is a laugh.

We used to not to, and the whip sawing of -- and differences of what was going on was worse than giving guidance.

You're not -- , you're not too terribly doing a great job now either, right, to be

Well, I think on an annual basis, quite honestly, Ali, we do a pretty good job.

We continue to remind everybody that our business can get effected on a quarter by quarter basis.

For instance, this quarter, with the -- with the timing of opening doors of M.A.C., which we have every intention -- had every good intention of opening during the quarter, it actually got moved into the second quarter.

Some of that is completely out of our control, quite honestly, but that moves expenses from one quarter to another.

So, on an annual basis, we're quite good.

Differences versus consensus, when we haven't even given any guidance for the second half of the year, we really can't comment on, but we can comment on what we say for the full year and we are committed to that number.

Okay.

I just have a quick question somewhere related, you did a very judicious job of not mentioning in your remarks, or I think even in the press release department stores.

But you are talking about taking Clinique, for example, and how that's rolling out in Sephora, the Boots experiment that you've done with direct mailings in the UK.

How has your attitude, if at all, changed about the mass channels, or as you guys call it, the popular channels, and what should we think about going forward on that front?

Our attitudes really haven't changed much, Ali.

We've been in Boots, and Boots is our largest customer in the UK for years, so that hasn't changed.

We have taken the Clinique brand a little more aggressively into some other distributions like Sephora, because we think they have customer base that skews to a younger customer of Clinique.

We are totally committed to the U.S.

department store business.

We have a big share of that market.

We understand it's going through some difficulties.

We're committed to help fix it.

We're going to continue to drive those businesses, but we're not going to be naive and stay exclusively in those businesses, and I think we've done a good job in last years in looking for alternative channels.

Your next question comes from Alice Longley with Buckingham Research.

Hi, good morning.

Also on North America, if I adjust for that $40 million shift in sales it looked like your first quarter sales would have been up 4.3% in the first quarter.

Should we expect any deceleration or acceleration from that adjusted growth into the second quarter?

I'm just wondering fundamentally if the North American business is accelerating or slowing, after adjusting for the $40 million shift?

I think, Alice, a better way to look at it is you're seeing a normalization in the businesses.

I think that the major mergers for which we were experiencing some indigestion from last year, you're seeing some normalization in the retail pattern, so you're seeing some leveling of the businesses, where in prior years you were not.

Okay, and on that line, you've commented before on the gap between same-store sales results.

From your perspective between the old Macy's and the new Macy's, are you seeing any narrowing of that gap?

Yes, we have, and we were sitting here, calls before talking about a 7% swing between the acquired versus the legacy doors, and I might add it's just not with Macy's.

It's with virtually all of our partners who had major acquisitions this past year.

We're seeing that level.

The growth isn't where we want it, but it is level.

We're experiencing the same type of businesses in the acquired and the legacy doors, so there's not that gap there was for the first 18 months.

Your next question comes from John Faucher with JPMorgan.

Yes, good morning, everyone.

Wanted to follow up a little bit on the second quarter guidance.

I understand the calendar shift at issue, but if I remember correctly, you guys benefited from sort of extra retailer buying towards the end of the quarter, and so when you take a look at the calendar shift and then look at the offsets in terms of the spending that didn't happen in the first quarter, and then the impact as you cycle that sort of late buying, can you talk a little bit about how those offset each other in the quarter?

Well, John, I think that the second quarter, I guess, you're wondering if our second quarter seems aggressive as far as its guidance.

We have terrific sales growth in the second quarter.

In particular from international.

And when you add into that the benefit of exchange, which is about 3% that we're anticipating in the second quarter, our numbers are pretty good.

Plus part of it is around the timing of our spending and we spend heavily in the first quarter.

We said that would happen and that's part of our plan.

Then the second quarter, that spending is, if you will, maybe more normalized in nature and that, plus the $40 million shift in sales has given us a pretty strong outlook for the second quarter.

Okay.

Can you give us an idea maybe in terms of what the late buying represented in the second quarter of last year?

So I mean, I guess, do we figure out a normalized number and just add the $40 million, or do we have to factor that late buying in last year's second quarter into our revenue estimates for North America?

Well, John, the $40 million shift is part of our guidance.

So that 10% to 12% comparable currency growth over last year and the 3 percentage points from exchange, those numbers are all inclusive, if you will, as compared to last year.

The growth last year, as you'll recall, was at -- we had said late in the holiday season, or leading up to the holiday season, that the department stores were buying fairly heavily in anticipation of a stronger Christmas than actually resulted.

And what happened was that we saw a little bit of that softness then come into our third quarter of last year from a sales perspective here in the U.S.

But, I mean, all of that is factored into our guidance that we've given for the second quarter.

Your next question comes from Lauren Lieberman with Lehman Brothers.

Thanks.

There are a lot of actually moving parts here with the timing of spending and currency, and full year expectations staying the same.

I just wanted to clarify a couple things.

One, are your intentions still to spend through the full year what you intended to spend this quarter, so it's truly a timing issue?

At this point in time, yes, I'm sorry, at this point in time the answer to that question is yes, but if you're asking are we more comfortable with achieving our full year after the first quarter results, the answer to that question is also yes.

We did give guidance of $2.28 to $2.40, so a fairly wide range for the year and we've only finished three months, so let's see how the rest of the year starts to progress.

There's also a currency benefit, which if you assume, you said I think it was $0.01 to $0.02 this quarter, so it seems like you expect a pretty comparable level of currency benefit at the top line through the year, so we can say it's maybe $0.06 to $0.08 of currency benefit that's now in your expectations that wasn't there three months ago?

Yes, $0.08 is probably a little bit high, but $0.05 to $0.06 anyway, yes, because we -- at least the forecast that we're using are anticipating the dollar to slightly strengthen as the year progresses after the second quarter.

(OPERATOR INSTRUCTIONS) Your next question comes from Linda Bolton Weiser with Oppenheimer.

Thanks.

Just a bigger picture question.

Ulta, the rapidly growing cosmetic chain that's coming public here, is carrying a lot of Estee Lauder-branded fragrances.

Yet I don't think they are carrying any of your cosmetic brands.

Can you discuss that?

And is there a margin differential for you that makes it attractive to supply your fragrances to them, but not your cosmetics?

Can you just talk about that a little bit?

The -- Linda, the fragrance market is a bit more scattered than the makeup and skin care markets.

And we talk about popular distribution, we talk about multiple points of sale.

We have been more aggressive with our fragrances across the board, not just with Ulta but with Sephora and other retailers, shoppers up in Canada.

The makeup and skin care is a different proposition, and realize one of our major selling features is the demonstration that Clinique consultant, the beauty advisor for Estee Lauder.

Those channels, like Ulta, offer some opportunity and we're experimenting with some of those opportunities with our brands to see if our brands work within that structure and they can provide that kind of level and service within that structure.

So Ulta is on our radar screen.

We're looking at it and I think we have one experiment in place as we speak.

And can you just -- is Clinique being sold in ASDA in the UK?

No, not legitimately.

If they have their hands on gray markets, good, it's certainly not because of us.

Okay, thank you.

Your next question comes from Filippe Goossens with Credit Suisse.

Yes, good morning, gentlemen.

Question here on the international side.

You mentioned in the press release, as well as in your prepared comments, William, some softness in the UK and in Germany.

To what extent is this driven by either the competitive environment, stronger year -- or difficult comps versus a year-ago, company-specific issues, or in the case of Germany I was reading something about some capacity constraints at the airports, given the demand for more air travel.

Can you just give a little bit more color on that?

And then maybe contrast that with how travel retail is doing?

Well, Filippe, just to be specific in the UK and Germany, the UK was up 7%, or 7 to 8% and Germany was up 3%, 3% to 4%.

Now, if you look at historical context, the Germany up 3% to 4% is historically very good for what has been an extremely soft German retail trend over year on year, whereas in the UK, the 7% to 8% uptrend is historically on the lower end of the range over the last few years.

So while on absolute value we like 7% to 8% in the UK in our largest market outside the U.S.

very much and we're pleased with Germany's 3% to 4%, both of those numbers lag our overall international growth.

I wish I could comment more specifically about airport capacity constraints in Germany.

Germany is not one of the larger travel retail markets.

However, German travelers throughout the world are meaningful players, but as you know, there's probably only two major gateway cities in Germany for the airports.

We've both -- we've invested in both of these markets very heavily.

We get a tremendous return on our investment, we're getting a very tremendous return over time.

We have the dominant share in the UK and we're estimating the full year in Germany, for example, to go up 6%, which again, historically is a very high rate for what has been a long-term anemic retail market in Germany.

We also expect to be going back to historical growth levels in the UK.

Now, let's not forget.

In the UK, virtually all of our department store retail partners, with the exception of Harrods and Harvey Nichols have been through an ownership change in the last two to three years, many of which House of Fraser and Debenhams in particular have been through private equity buyouts, IPOs and whatnot, and Selfridges has been acquired by a Canadian retail colossus.

So one of the things we're looking at there, and there's only one group that's been stable, which is the John Lewis Partnership.

So the result is that many of our retail partners in the UK have been through some significant ownership changes with perhaps some changes in shifts and strategies.

And even still, despite that, we have a meaningful commanding share and what would be considered very good growth.

If I can just follow up on the UK, if you don't mind.

Filippe, can you speak up a little?

We're having a hard time hearing you.

Certainly.

Thank you.

Just to follow up on the UK side, in the fourth quarter last year when you provided guidance for your current fiscal year, you were more cautious at it relates to the U.S.

market because of the macroeconomic environment.

Now, we have all heard some news about the banking sector in the UK, a potential decline in the housing market.

Any concerns at this moment with regard to the UK market from a macroeconomic perspective, particularly given such a large market for you guys?

It, it doesn't appear to be affecting the consumer retail market in the upper end in the UK yet.

I was just there two weeks ago.

They seemed to have a relative level of confidence and their consumer -- in the consumer sector.

I don't believe you have the same linkage in consumer buying patterns between housing market and consumer spending as you do here in the U.S., largely because I believe if you were to look at it, homeownership as a percent of the total consumer population in the UK is not the same as it is here.

So I'm not a smart enough economist to be able to tell you that there is truly a cause and effect link, but there doesn't seem to be that same tight link as there is in the United States.

In that regard, the United States, and perhaps to a certain extent, Canada, are unique in the world in those characteristics.

Your next question comes from the line of Justin Hott with Bear Stearns.

William, I guess, following up on that question, it's sort of the same thing in the U.S., in the past you have mentioned how you thought the U.S consumer might be on a hair trigger, especially with gas prices rising and housing, are you seeing any evidence of trading down, or are we seeing actual trading up going on in your business now?

Well, we continue to see extreme strength in the upper end of the luxury business, Justin.

And when we look at our business at the very top of the pyramid, Neimans, Nordstroms, Saks Fifth Avenue, Bloomingdale's, we see tremendous growth in those areas.

Those stores are growing at a far greater rate.

You've seen the results that are announced, obviously for those that are independently traded, and our brands in those channels -- in those stores in particular, are growing much faster, and those brands which are more premium priced are growing much faster.

So we obviously see strength at the very top end of the market to a degree that doesn't seem too correlated to the far broader department store business, which we do.

I think the broader department store business is, first of all, bigger on an absolute basis by a significant measure, number one, and far more dependent on consumer traffic.

Just the numbers of people walking through the stores.

And we still see that there are fewer people walking through the stores that we do business in every day than there were perhaps two years ago.

I'm, perhaps,would assign a certain amount of that to marketing and programming related to all of the transitions and acquisitions to so many of our retail partners, and would also assign some macroeconomic or individual multimillion micro economic behaviors to consumers also.

I don't know how I would weight one to the other.

And can you just maybe give us a little more detail on what you're doing at the beauty counters and how the, how they are being remodeled, how you are changing the training?

If you could look at some of the, some of the issues, Justin, we really thought that we really needed a facelift at the Lauder counter.

The testers are easy to sell from.

I think it makes skin care purchasing much more easy to understand.

Clinique is taking another interesting approach.

If you remember in the March conference, we talked about beauty advisor turnover, consultant turnover.

When you barely looked at our structure, we had an entry level and a counter manager with no ability to promote people throughout the counter, so Clinique is putting in levels of competency, which will increase pay levels, trying to slow down the historic retail turnovers.

So they are really, they are brick and mortar type of basics that we're getting back to, as we chop up additionally support our promotional activity, but both of the brands are focused every day on maximizing their effort with the consumers that are there.

Your next question comes from Lauren Lieberman with Lehman Brothers.

Thanks.

I just wanted to follow up on two questions.

One on fragrance and one on Macy's.

The one on fragrance, was that in the press release, there was a comment about still saying, but stay cautious on fragrance, even though we had a good revenue quarter, and then in your prepared remarks, it was sort of the opposite, talking about having the right mix of products for Q2.

So can you just tell me how I should be thinking about that.

Well, we still have a fundamental structural issue in the fragrance business, which we're still working our way through and it's a longer-term issue, which is that our mix of brands are predominantly Anglo-American oriented brands with a very small componentry in our brand mix of European-oriented brands.

The vast majority of the profitable fragrance business in the world is done in Europe or in European-oriented brands through the travel retail sector and Anglo-oriented brands just don't do as well on a global basis, number one, and number two, the Anglo fragrance markets are not nearly as profitable for a number of dynamic reasons than the European fragrance businesses.

So we have a significant multi-hundred million dollars business that is, that is underperforming largely because of our brand mix.

Where we are confident is that we know in the fourth quarter in the -- in most especially the Anglo markets in particular, fragrance is a significant component of the total and our second quarter, fourth quarter of the calendar year, the holiday season.

Our fragrance mixture, which is a very high component of the total, is very well positioned to do a good deal of business, and we've invested heavily in that quarter where there's consumer consumes a significant portion of the total category.

Okay, great.

So it's a long-term versus near-term discrepancy?

Correct, correct.

Correct.

The other quick thing was just, Macy's recently, I guess they put out two press releases in the last couple of months about diversifying their suppliers to their cosmetics department.

I can't imagine they are going to be taking much shelf space from your brands, but if you can just talk to anything about what you know, what you're seeing from them, any, anything you know about the motivation and are they are planning on expanding the size of the department?

Or will there, in fact, be a shelf space loser?

This is Dan.

I'm not aware of any conversations our brands are having specifically to a reduction in cosmetic space in total in the departments.

We're working with Macy's and with some different types of formats in some of their newer stores, but, no, our brands are not experiencing any type of pullback from Macy's at all.

In fact, they are excellent partners in trying to find solutions to get the business moving in the right direction.

Thank you.

That concludes 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.

Thank you.