使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, everyone, and welcome to the Este Lauder Companies fiscal 2008 second 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.
- VP of IR
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 here and he will be available for the Q&A.
We're also pleased to have Lynne Green, Global President of Clinique with us today to discuss recent initiatives at the brand.
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.
And I'll turn the call over to William.
- President & CEO
Good morning and thank you for joining us.
Today I'd like to discuss our overall business results, Rick will provide the financial details and Lynne will discuss some of the exciting development at our Clinique brand.
For our second quarter reported sales rose strongly, up 16%.
On a local currency basis, sales were up 11%, within the range we forecasted.
Diluted earnings per share were $1.14, also on target with our guidance.
The sales growth we experienced was across the board.
Every product category in every region showed gains.
Our robust international business fueled much of the increase and has been the catalyst for our growth for several years.
We expect this trend to continue for the foreseeable future.
Asia Pacific was our top performing region, where all categories grew, most by double digits.
Sales of every brand were sharply higher and our shipments rose in every country with particularly strong growth in China, Hong Kong and Korea.
The region's retail environment strengthened from the first quarter and our distribution expanded.
For example, we opened five freestanding stores for five different brands in a new mall in Hong Kong.
As a Company, we have achieved positive retail sales growth in Japan for 12 of the last 13 months.
Sales of prestige cosmetics in Japanese department stores grew in the quarter and the category is expected to continue to show gains.
We expect our growth to outpace of that prestige beauty category.
Business was also healthy in Europe, the Middle East and Africa.
Overall, our international fundamentals and growth drivers remain in place, although some markets are experiencing softness.
For the second quarter in the UK, Bobbi Brown and Jo Malone both saw double-digit growth and Jo Malone opened a new store in Gilford.
Our eCommerce business nearly tripled this quarter with eight brand sides.
Additionally, the launch of Sean John Unforgivable Woman and the success of Tom Ford Beauty aided our growth.
In Italy, new malls are opening in the central and southern portion of the country.
The prestige sector is growing faster than the beauty market as a whole and we see further opportunities for expansion in fragrance and makeup.
Tom Ford is now available in 92 more doors than last year and we took over the distribution of Darfan where sales have increased.
In Germany, we had solid growth in the quarter and we believe that sales will exceed our projection for the remainder of the year.
France benefited from the success of Tri-Aktiline, a terrific new product from our Good Skin labs, which was launched exclusively in 536 [aforadors] throughout Europe.
Our efforts to expand and diversify our distribution also contributed to the sales growth.
Origins opened in 26 additional pharmacies and Jo Malone added two freestanding stores.
M.A.C.
opened both department store and freestanding doors this quarter, complimenting its dynamic like-door growth.
You may recall that in the fourth quarter of fiscal 2007 and earlier this fiscal year, we directed more investment dollars to support our brands in fast growing emerging markets.
That spending was allocated largely to building freestanding stores, introducing our brands into new doors, hiring and training employees, and in advertising and promotion.
I'm pleased to report that these investments are paying off.
In total, our emerging market sales climbed a strong 46% in the quarter.
In China, retail expanded at a fast clip.
Most brands had double-digit growth.
Companywide we estimate that our share increased by 3% in the quarter and we are now the second largest prestige cosmetics group in the stores where we sell.
The majority of prestige beauty sales in Asia are in the skin care category, but makeup is gaining traction in China and represents a strategic opportunity for many of our brands.
In fact, makeup comprises about 19% of prestige cosmetic sales in China's department stores and is the fastest-growing category in the channel.
M.A.C.
and Bobbi Brown had terrific retail sales growth in the quarter and have become the top makeup artist brands in the country in their points of distribution.
Retail takeaway for Bobbi Brown was exceptional, nearly triple that of the prior year's quarter and shipments kept pace with that demand.
Este Lauder and Clinique brands opened in eight Sephora stores and M.A.C.
added a department store counter.
We believe there is still much growth left in China.
We plan to take our brands into more department stores, increase our distribution and expand beyond the 33 cities where we currently operate.
While eCommerce is in its infancy in China, we're evaluating the on-line opportunity for our brands.
Sales and other significant and -- in another significant emerging market, Russia, were stellar.
The Este Lauder brand was a standout, driven by existing and new door growth.
The brand opened 177 doors in Russia in the last year, bringing its total to nearly 500, part of an aggressive strategy to quickly capitalize on the growing opportunity.
The Company's total like-door growth in Russia was 46% this quarter compared with the prior-year period.
Turning now to the Americas, sales in the period benefit from a shift in the retail calendar that moved $40 million of shipments from the first quarter to the second, which we discussed during the last call.
As you know, overall U.S.
holiday sales were disappointing, particularly in department stores, our primary channel of distribution.
Our total U.S.
department store retail sales for the quarter declined 2.5%.
Some brands and products fared well and we saw mixed results from holiday gift sets.
The Este Lauder brands blockbuster completely sold out at retail although, some of its other holiday sets did not completely sell through.
We had good results for holiday programs at M.A.C., Bobbi Brown and Jo Malone.
All sold well and exceeded prior-year results.
Strong sales in other channels, however, more than compensated for the overall slowdown in department stores.
Those channels include our freestanding stores, our network of hair salons and our growing eCommerce business.
Their results reflect our long-standing strategy of diversifying distribution.
In fact, in North America over the past five years, the mix of our business in alternative distribution grew by close to ten percentage points to 30%.
Our internet business has made great strides in recent years and that continued this quarter with a solid 30% growth in the U.S.
Healthy gains came from our brand sites as well as our retailer partner sites, including those run by Macy's, Nordstrom, Neiman Marcus and Sephora to name a few.
On-line sales for most of our brands grew strong double digits, ranging from 17% to over 100%.
Aside from the internet, we continue to identify other ways to get our products in front of consumers whenever and wherever they choose to shop for prestige beauty products.
We have some exciting distribution concepts in the works and Lynne Green will discuss several initiatives for the Clinique brand, including the recently-announced collaboration with Allergan.
Now, I want to briefly discuss our outlook for the second half of the year.
You may remember that when we started the fiscal year, we saw a weakening U.S.
business environment and expected department stores to remain soft.
We now feel somewhat more cautious than we did six months ago due to growing economic uncertainty in the U.S.
Retailers ranging from mass to luxury saw shoppers reduce their spending during the holidays.
Many upscale retailers, which had enjoyed unrestrained growth for years, are seeing a slowdown in spending from their core consumer.
We believe, as many observers do, that the turmoil in the housing sector, higher oil and gas prices, an erratic stock market, and constant talk about a possible recession will contribute to soft retail sales in the U.S.
for the balance of our fiscal year.
While we are also seeking -- seeing pockets of softness in certain foreign countries, we believe our international business overall will remain solid, more than compensating for slower domestic growth.
Most of our brands are expected to expand for the remainder of the year.
To cite a few examples, Lamar and Bobbi Brown intend to launch in four countries.
Origins plans to open in 80 additional French pharmacies.
Additionally, some Beauty Bank brands are expected to roll out in Australia and Good Skin is planning to sell Tri-Aktiline on DIRECTV in Korea, in limited booth stores in the UK and in the [Duglus] chain in Germany.
Good Skin and Flirt expect to begin eCommerce in Korea shortly.
On another note, I am proud to report that as of December 1, 2007, the Company's global operations division has entered into agreements to ensure that all of the electricity it utilizes is generated from green sources.
The Este Lauder Companies now ranks 21st on the EPA's list of leading Fortune 500 companies in alternative power usage.
The wind, hydro and solar power we are purchasing annually equates to a carbon dioxide reduction of over 35,000 tons, about the amount produced by driving 67 million miles.
We're committed to reducing the ecological impact of our business and I believe we have made terrific progress in this area.
Another major development will be the arrival of our new President and Chief Operating Officer, Fabrizio Freda, who joins us on March 3rd.
We're thrilled to have Fabrizio help lead the Este Lauder Companies.
He is a talented global executive with the right skills, extensive experience and financial discipline that will complement our strong leadership team.
Initially he will delve into global operations, bring a fresh perspective to strategic and operational planning, and assess opportunity for further growth.
He will be a strong partner with me as we continue to drive our Company's growth and profitability objectives.
To conclude my remarks, I want to reiterate that although the U.S.
economy is likely to remain uncertain for at least a short term, our story is still a growth story.
We fully plan to execute our strategic imperatives and make investments to enhance profitability and shareholder returns.
We are prepared to keep a tight lid on expenses in order to achieve our profit objectives.
As of always, we will remain the preeminent leader in prestige beauty by doing what we do best; building brands, creating cutting-edge products, designing effective marketing programs, providing excellent service, and speaking to consumers in a voice they can relate to no matter where they live and shop.
Now, I will turn the floor over to Rick who will discuss the financial details.
Rick?
- EVP & CFO
Thank you, William, and good morning, everyone.
In local currency, sales this quarter were up 11% over last year.
The U.S.
dollar weakened more than we anticipated, adding five percentage points of growth, resulted a reporting sales growth of 16% to $2.3 billion.
Net sales for the quarter increased 8% -- net earnings, rather, for the quarter increased 8% to $224.4 million compared with $208.4 million last year.
And diluted EPS was $1.14 compared to $0.99 in the prior year quarter.
Both sales and EPS results fell within our guidance ranges.
A number of investments that we originally planned for last quarter have been as expected this quarter.
These include new door openings for M.A.C., expansion in emerging countries and A&P investment in other international markets.
During the quarter we saw robust growth in all regions and all categories.
When we look at our geographic results, we had a superb quarter in Asia Pacific, which saw strong local currency sales growth in every country.
Among our largest markets in the region we are pleased with a sustained growth in Japan, where nearly all brands saw increases this quarter.
Korea and Australia, the second and third largest countries in Asia Pacific, grew in the mid teens.
These three markets represented over half the region's sales for the quarter.
China, our largest developing market in the region, jumped over 50%, fueled by robust prestige beauty growth, expanded distribution, share gains, and increased penetration of our developing brands.
We are now in 81 department stores and 31 Sephora stores in 33 cities across China.
In Europe, the Middle East and Africa, we again posted double-digit local currency sales gains.
As has been the case for 12 consecutive quarters, our travel retail business grew rapidly.
The 17% sales gain this quarter was fueled by increases in international travelers, new airports, improved retail stores and expansion of new brands and products into the channel.
In the rest of the region, all countries were up, with UK business growing high single digits, fueled by strong results from our Jo Malone brand, continued success of our makeup artist brands, and robust business from our eCommerce business.
Travel retail and the UK affiliate represented nearly half of our sales in the region this quarter.
Among our developing markets in the region, Russia once again was up sharply, growing nearly 60%, our Eastern European business rose more than 40%, and Turkey gained over 30%.
The relatively strong sales growth 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, as well as the inclusion of sales from the Ojon brand acquired in July.
The regions underlying growth was generated by strong gains in alternative channels other than the U.S.
department stores.
Canada and all countries in Latin America also saw growth.
Taken together, these areas grew more than 25% in the quarter.
These factors mitigated our 2.5% retail decline in the U.S.
department store channel.
Our gross margin was unchanged compared to the prior-year quarter at 74.9%.
Favorable exchange rates of 20 basis points and unfavorable manufacturing -- and favorable manufacturing variances of ten basis points were offset by an increase in obsolescence charges of 20 basis points and an increase in the level and timing of promotions of ten basis points.
Operating expenses as a percentage of sales for the quarter rose to 58.9% from 58.2% last year.
As we described on our last conference call, we carried over a high level of investment spending from our fiscal '08 first quarter, primarily in international markets.
A few other key areas where we spent money this quarter include incremental spending for global information technology of 50 basis points and new business development activities of 40 basis points.
The comparatively-low operating expenses generated by our higher-growth brands, as well as our ongoing cost containment initiatives, offset most of the increases.
As a result, operating income rose 11.5% to $370.5 million compared with $332.4 million last year.
Looking at operating profits by category, makeup and skin care were the primary beneficiaries of the $40 million shift in department store orders from the first quarter.
Makeup results reflected strong growth inter -- strong international growth, partially offset by softness in the U.S.
and some brands.
Skin care profits rose due to global growth of certain core brands and contributions from La Mer.
Fragrance posted a nice increase in operating income due to strong international sales.
Hair care results declined, reflecting amortization of intangible assets from recent acquisitions and investments to support growth and distribution.
By region, operating profit decreased in the Americas but grew substantially elsewheres.
In Asia-Pacific, operating income increased as every country in the region achieved gains.
Australia, Japan, China, Korea and Hong Kong were the largest contributors.
In Europe, the Middle East and Africa, operating results primarily reflected improvements in the UK, travel retail, the Balkans and Germany.
These gains were partially offset by spending in support of our continuing expansion in Russia.
The decline in the Americas was primarily because of the increased spending on information technology infrastructure and new business development initiatives.
In the U.S., the benefit from the retail calendar shift was offset by ongoing challenges in the department store channel.
Regarding our net interest expense, we reported $18.3 million this quarter versus $7.7 million in last year's second quarter.
The increase is due to higher average debt balances from financing our accelerated share repurchase last fiscal year.
The effective tax rate for the quarter was 34.9%.
Operating cash flow for the six months ended December 31, 2007, was $361.9 million, a 16% increase compared with $312.7 million last year.
The increase primarily reflects higher income after adding back noncash items, such as depreciation, amortization and stock-based compensation, as well as improved accounts receivable collections.
Our day sales outstanding improved by two days this quarter to 43 days.
Inventory days increased to 174 days compared with 165 days last year.
The nine-day increase was due to three days resulting from the inclusion of Ojon and safety stock to support new business in emerging markets, approximately two days related to foreign currency translation, and about four days from the expected growth of our business.
During the six months, we repurchased approximately 1.9 million shares of our stock at a cost of $80 million.
We spent $160.4 million for capital expenditures for the six months which includes the incremental spending for counters and our companywide systems initiative.
For fiscal '08, we expect to generate between $650 and $700 million of cash flow from operations and to use approximately $325 million for capital expenditures.
Now, I'll update you on a few assumptions for the balance of the fiscal year.
For the year, strong international sales will lead growth.
Americas sales will grow slower than the Company as a whole, as we expect softer U.S.
sales to reflect the tough retail environment.
We still expect fiscal 2008 local currency sales growth to fall within our full-year guidance of about 7% to 9%.
Foreign currency translation is anticipated to add approximately 3.5 percentage points to growth.
As always, we will continue to invest in the areas that protect our brands and grow our brands.
However, we are prepared to adjust our spending, where appropriate, to protect the bottom line.
At this time, we estimate our effective tax rate will be approximately 36%.
We reconfirm our full-year EPS forecast of between $2.28 and $2.40.
Looking at the third quarter, our sales growth and EPS will be impacted by the soft retail sell through in the second quarter for the Americas.
That said, sales for the three months ending March 31, 2008, are forecasted to grow between 8% and 10% in local currency.
The positive impact of foreign exchange translation should add approximately 3.5 percentage points to growth.
EPS for the third quarter is expected to be between $0.43 and $0.49.
When you do the math, strong EPS growth is implied for our fourth quarter.
I'd like to remind you that we spent heavily in the fourth quarter of last year, creating an easy comparison.
This is also one of the reasons we have enjoyed such terrific sales growth this year, particularly in international.
That concludes my comments and now I would like to turn it over to Lynne Green.
- Global President - Clinique
Good morning.
It is my pleasure to speak to you about Clinique.
As you may already know, Clinique is a significant part of the Company's portfolio, both in North America and internationally.
In fact, 60% of our sales are now outside of North America.
Internationally, the brand is growing double digits, with some outstanding highlights.
William mentioned the Russian growth for the Este Lauder brand.
Clinique's growth is incredibly vibrant as well, over 60% this fiscal year.
Clinique's strategy for all emerging markets, including Russia, is to build a strong foundation while accelerating door expansion on a sustainable basis.
In Russia, consumers view the Clinique consultant in the white lab coat as a significant symbol of the brand's authority.
To keep up with the tremendous growth in Russia, we have more than doubled the number of Clinique consultants this year.
The Russian consumer relates very well to our allergy-tested and fragrance-free points of difference.
Our solid growth in the rest of Europe reflects our focus on strong Clinique fundamentals, including our 3-Step skin care system, dynamic moisturizer category, and foundations.
As an example, the successful launch in September of Super Moisture Foundation reinforced our number one position in the face category throughout Europe.
We are also doing very well in Asia.
Clinique is experiencing double-digit growth in China and it has been accelerating every month since the beginning of the fiscal year.
Our Japanese turnaround, which began about a year-and-a-half ago, is continuing.
It is being driven by new consumer recruitment as indicated by 3-Step double-digit growth.
Our Acne Solutions product line was successful everywhere it launched, literally doubling that particular category.
In Korea, it ignited high double-digit growth for the entire brand since its launch at the beginning of the fiscal year.
Today, I'm most excited to talk to you about some interesting initiatives in the United States.
As you know, Clinique ranks number one, with more than a 13% share of U.S.
prestige department stores.
Our strategy is to strengthen that business, which has been challenging, and at the same time reach new and lapsed consumers through alternative channels.
This approach should benefit the overall Clinique business in the United States.
Clinique announced last week that it is reinforcing its dermatological heritage through a strategic collaboration with Allergan, the number one global medical aesthetics company.
Together we will develop a Clinique branded skin care line that will be sold exclusively through United States physicians offices.
The products are expected to launch this fall.
This collaboration combines Clinique's expertise in product development with Allergan's deep understanding of the physician channel.
As you know, Allergan sells Botox Cosmetic, Juvederm and other products to dematologists and plastic surgeons.
The new Clinique skin care line will be used before and after in-office cosmetic procedures, such as microdermabrasions, chemical peels and laser treatments.
In the last ten years, the market for nonsurgical aesthetic procedures has grown nearly 750% to $4.5 billion.
The Clinique Allergan initiative enhances the dermatological heritage of Clinique by adding new authority to the original positioning.
This is a tremendous opportunity to tap into a growing channel while simultaneously enhancing Clinique's brand equity.
While physicians' offices are relatively small channel for skin care, at more than $230 million now it has grown by over 18% annually during the past five years.
importantly, the combination of our two industry-leading companies could expand sales in the channel further.
Clinique's positioning gives it the flexibility to pursue alternative distribution.
To further articulate that point, I'm excited to talk about our next new initiative, QVC, which begins this month.
As you may know, direct response TV is a rapidly-growing channel for beauty.
Sales in our category on TV were close to $600 million in 2006, growing at about 13% per year.
Clinique will premier on QVC for the first time on Sunday, February 17th.
This new channel will provide a platform to speak about the equity of core Clinique product categories, such as 3-Step foundation and protection.
We believe the positioning and price points of Clinique are completely suitable for the direct TV consumer.
We know this channel also drives the overall department store traffic based on the experience of some of our other brands.
On QVC, we will be able to articulate some of the significant Clinique points of difference, namely that all of the products are allergy tested and fragrance free.
In addition, the ability to communicate through a personality amplifies our consultant heritage in front of 90 million households and 2.5 million active beauty buyers.
We also expect to have an additional opportunity to pursue our business on QVC.com, one of the largest on-line beauty venues.
Allergan and QVC offer new opportunities for us.
It is also important to enhance the customer experience in the department store, not only for the existing core consumer but for the potential new consumers that may come from these two initiatives.
Let me briefly talk about our program to improve the experience of our core consumer base in the department store, where some $9 billion in prestige beauty sales occur in the U.S.
every year.
We are redefining the experience that a Clinique shopper receives in this environment.
Last fall we implemented a test program in more than 70 doors that improved customer service.
Clinique's consultants were given expanded educational programs that offered them the opportunity for added recon -- for additional recognition and additional compensation.
So far, the extra education has translated into greater sales.
At the test sites, sales growth is higher than it was at the same time last year and consultant turnover has been cut by a quarter.
a meaningful reduction.
Based on what we have learned from this test, we expect to expand the program in the next 12 months.
In international, we've completed 35 doors in 14 countries with even better results.
This program reinforces Clinique's service, which is one of its core values in the department store.
We also feel that it is important to note that Clinique is enjoying a vibrant business with Sephora.
We currently sell Clinique in 169 stores in the United States, growing over 80%.
We are excited because this validates the relevancy and desirability of Clinique with the younger consumer.
Double digit international growth, we are pleased with these results.
The Allergan collaboration, the QVC environment and the enhancement of the core consumer experience, we feel these initiatives provide equity-building opportunities that enhance our existing distribution while also building relevancy with the younger consumer in Sephora.
I am glad I have the opportunity to speak with you today and we're happy to take your questions now.
Operator
(OPERATOR INSTRUCTIONS) Our first question today comes from Justin Hott with Bear, Stearns.
- Analyst
Thank you.
Maybe we could start with William, maybe some of the decisions for the management changes going on.
The rationale, the process and maybe some of the changes we could expect to see over the next year?
- President & CEO
Justin, thank you.
The rationale really for -- we were talking about how we can look at our management team, look at our strength and find a way to complement the strengths and deep experience that our senior management team has in our industry.
The average tenure in the prestige beauty industry of the senior executives of our Company is over 20 years, and that brings a great deal of benefit to our Company, but we also felt that there was an opportunity for us to bring a new vantage point and a new view to the way we manage our business and grow our business in the future.
And so when we started looking for the best talent and abilities around, we really try to cast our net far and wide to look for the best product-branding and consumer-oriented talent we could with disciplines that we think would be beneficial to our company.
And in the process, I was fortunate to meet Fabrizio as an available executive and great leader whose mind I have a great deal of respect for and he and I clicked very well and I think he'll be a great partner to me.
- Analyst
Can you tell us a little bit about his background maybe, what attracted him to come to the Company or what -- excuse me, let me rephrase that -- what you found particularly compelling in his background?
- President & CEO
He's got a broad background base primarily in -- his career was predominantly with P&G, however he spent time with the Gucci group in Italy.
He's been both a country manager for P&G as well as a category manager, has had some exposure to the luxury good sector at P&G, and I thought his strategic thought process, the way he builds an argument and a thought process, as well as the disciplines he takes to building his business I thought would be compatible and would add a great deal to what our Company is all about.
- Analyst
Okay, thanks.
I'll jump back in the queue.
Operator
Your next question comes from Alice Longley.
- Analyst
Good morning.
Can you detail a little bit what you're planning to do with cost in the Americas to offset the weakening sales?
What kind of plans are you cutting back on for the year?
- President & CEO
Yes.
We're experiencing what everyone is experiencing.
I think that as everyone's describing, it will be a rough road.
There's not going to be a lot of cutback.
The cores of our business, continue supporting our promotional program, continue supporting our demonstration, which is our people behind the counters, they'll all stay in place.
We'll be smarter in some of the discretionary expenses we have, but we really aren't going to walk away from the market.
We'll continue to participate.
Sometimes in bad times there's more opportunity than the good times, so we're looking forward to it.
- Analyst
Should I assume a margin decline in the Americas despite these costs for the year?
- EVP & CFO
I think you should assume that our business is a little soft in the U.S.
certainly, and it'll put pressure on our margins but we try to manage our business globally and we try to manage our business to meet our financial obligations and commitments to you, the investment community, and I think we're doing a pretty good job of that.
We're using our strength in international to not only fund investments in international but to also offset some of the toughness that we have in the U.S.
- President & CEO
Let me do a little bit of a clarification on my statement.
When we talk about softer businesses, we look at the productivity of our makeup artists, beauty adviser, consultant, you name it, and we will adjust the staff versus that productivity.
So, if traffic's down, we naturally adjust the staff to that so we maintain a selling cost.
So, it's not business as normal, we're adjusting our staffing based on the environment.
- Analyst
And you're adjusting the staffing at retail.
you're basically supporting fewer people or supporting them less?
- President & CEO
Yes.
We won't fill openings as quickly if we don't have the productivity from the existing counters.
Each of our beauty advisers, each of our brands has a certain benchmark and whether it's $200,000 per person or $150,000 per person, we expect to get that from every employee at the counter, and we adjust that up and down based on the business.
- Analyst
Thank you very much.
Operator
Your next question comes from Amy Chasen with Goldman Sachs.
- Analyst
Obviously it sounds like in the third quarter, you expect your U.S.
business to slow pretty materially given some of the excess inventory levels, but when you look at the second half of the year, do you expect that to be substantially slower than the first half?
I'm just trying to get a sense of how much of the slowing is related to the excess inventory versus your comments about the weaker consumer.
- EVP & CFO
I think, Amy, for the second half of the year, you'll see our sales in the U.S.
will obviously be the slowest growing region.
I don't think you'll see quite the softness in the fourth quarter that we're going to see in the third quarter, so that's sort of an answer to your question.
The third quarter's really being impacted by what was sold in in the second quarter, which didn't totally sell through so the reorders are a little bit softer, but it's not disastrous for us.
And we mentioned during the call that, by the way, everything other than U.S.
department stores in the Americas region grew by 25% in the second quarter and that trend we expect to continue.
- Analyst
Let me just ask, it sounds like in the third quarter that your U.S.
sales are actually going to be down, but you're saying that the fourth quarter growth will not be as bad as the third quarter growth.
Does that mean that for the fourth quarter we can expect that sales will be up?
- EVP & CFO
Our third quarter sales growth rate will be down, but our sales will not be down in the third quarter versus prior years --
- Analyst
Right.
- EVP & CFO
-- and our fourth quarter growth rate will be more in line with the first and second quarter.
- Analyst
The average of the first and second quarter?
- EVP & CFO
Yes.
- Analyst
Great, thank you.
Operator
Our next question comes from Bill Smith with Deutsche Bank.
- Analyst
Hey, can you just talk a little bit about where the margin leverage is coming from in the model, because you said that that $40 million calendar shift was about a 70% margin.
I know there's a big fix cost base and there's also reinvestment and so I know it is a pretty broad question, but can you talk about why, given such strong organic growth, that you're not getting more volume leverage off of it?
I know there is some reinvestment but when does that kind of taper off?
- President & CEO
Bill, you'll remember that in the first quarter we exceeded what our guidance because we had not spent all of the money that we anticipated, in particular in some of the international markets, and so we said that that spending would go carry over into our third quarter.
And obviously in the guidance that we gave for the third quarter, we knew about the 40 mil -- for the second quarter rather, we knew about the $40 million shift from the first quarter to the second quarter so that was all sort of built in.
We're investing heavily internationally.
Our business is doing terrific.
Some of those investments are markets where the profitability is still developing, if you will, so China and to some extent in Russia, where we're making heavy investments but they're not -- they don't generate the same profitability level but it certainly drives share growth, it drives sales and it positions us well for the future.
So, I think our story has been fairly consistent in that nature and we think we're doing a reasonable job at it.
- Analyst
Ok, great, and next a follow-up, sort of related.
It looks like accounts receivable only increased 9.5% year over year but sales were up 16%.
Does that mean that sales slowed down toward the back end of the quarter?
- EVP & CFO
I'm sorry.
Bill, the first part of your --
- Analyst
If you look at accounts receivable it was only up about 9.5% year over year but sales were up 16%, and so I'm wondering if sales slowed as the quarter progressed because you would assume that if it was evenly split that sales and accounts receivable should grow at the same rate?
- EVP & CFO
Bill, only a little bit to some extent in the U.S.
that would be a true statement, but other than that, it's just a -- it's a pattern of our collections and our DSOs did go down by a couple of days and that's just really a mix of business.
There's no particular item that stands out as to why we did a better job collecting our receivables in this quarter than the same quarter of last year.
So, the only thing where your statement holds true to some extent is in the Americas where we started to see that slowdown of reordering toward the end of our second quarter and that will carry over into the third quarter.
- Analyst
Great, thank you.
Operator
Your next question comes from Connie Maneaty with BMO Capital Markets.
- Analyst
Good morning.
I was hoping you could explain a little bit more the decline in America's operating profits, because there's almost a -- I don't know, a 26 point spread between sales growth of 9% and the profit decline of 17%.
You had positive currency from Canada and Latin America, I imagine, in the profits, so what accounts for that decline?
- EVP & CFO
Couple of things, Connie.
There was some carry over of expenses.
Although most of it was internationally related there was some carry over from quarter one into quarter two in the Americas.
We also spent fairly heavily in particular on this quarter on IT-related spending, including our SMI initiative, and a lot of those expenses were -- there was about $7 million of incremental expense in the second quarter versus history.
The third thing was that there was some amortization of intangible assets related to some recent acquisitions that impacted our second quarter, to some extent a little bit more so than it will normally happen because we did some adjustments to our first quarter results.
They weren't substantial but it just increased a number, if you will, in the second quarter.
So, I think those are really the three major items that are out there.
- Analyst
Okay.
And as a follow up, with inventory days continuing to go up, do you envision at some point having to take an inventory write-down?
- EVP & CFO
No.
At the end of the first quarter, I think, Connie, our inventory days were up -- I want to say 19 days year over year, and at the end of this quarter, they're up nine days year over year, so we're actually beginning to get our inventory back in line.
We wouldn't anticipate anything unusual.
We did mention that there was about a 20 basis point impact, I think, or ten basis point impact due to obsolescence, and that's a charge for reserve in case there's any issues with the inventory.
So I think from an accounting perspective, we're not seeing anything from a major adjustment or write-off due to inventory.
- Analyst
Is that ten to 28 basis point impact due to on obsolescence, is that a new feature in cost of goods and should be putting it in our models going forward?
- EVP & CFO
No, it's just a reflection -- there's always provision for obsolescence that goes into any of our financial results, it's just incrementally it's a little higher because of our higher inventory position in this particular quarter.
- Analyst
Okay, thank you.
Operator
Your next question comes from Lauren Lieberman with Lehman Brothers.
- Analyst
Good morning.
I just wanted to see if you could talk a little bit about the UK market in particular.
I know you said that it was -- you actually called it out as being particularly strong this quarter.
But in terms of the outlook, I mean the news coming out of the UK doesn't seem to be terribly encouraging from a consumer standpoint, just like it isn't in the U.S.
If you can talk about the business over there a little bit?
- President & CEO
Sure, Lauren.
Our business in the UK continues to be a robust and healthy business.
It is our largest business outside of the United States.
It is the second largest country in the world, we have the second greatest share.
Our share in North America still is greater but our UK business is extremely healthy and extremely good.
Our comp growth quarter -- the comp growth in the second quarter in the UK was 8%, which is very healthy relative to our growth in North America.
But for the UK market, that was the first time in about three or four quarters for them where they did not grow on a double-digit rate.
You're correct.
Everything that you read and I read about the overall economy -- health of the economy in the UK would indicate that they will follow a pattern in -- like the United States.
However, we've tended to see in our business that that does not follow lock step with the U.S., but I would expect that there will be some continued softness in the UK., but we're not seeing that yet.
And as I mentioned in my prepared remarks, they launched their internet business in the fall of this year and it was extraordinarily strong relative to the size of the total market, and we were very impressed.
We continue to see strong demand for a number of our brands across the country.
- Analyst
Does continued softness, though, because you said for you guys right now, 8% versus double digit is considered soft, so expecting that level or a deceleration from what saw?
- President & CEO
Lauren, let's put it in perspective.
- Analyst
I don't think --
- President & CEO
In a very mature market 8% growth everyone ought to be very happy with and we are very pleased with 8%, if you will.
For a group that's used to double digit, they're not as pleased with 8% as they would be with 10%, 12% or 15%, as most of us would.
We're pleased with a business that's over $500 million, or some number greater than that, to be growing at 8% and we hope that they'll continue.
- Analyst
Okay Thank you.
Operator
Your next question comes from Neely Tamminga with Piper Jaffray.
- Analyst
With respect to the U.S.
consumer -- not to beat a dead horse on all these conference calls during Q4 for most people -- but I would think that the department stores would be looking for some partnership with respect to PWPs or GWPs.
Are you getting that sense from them and should we be factoring that in our models in the first half -- or second half?
Thanks.
- President & CEO
Neely, they're looking off, obviously, for us to step up and do whatever we can to help generate sales and this is from the most -- there are upscale specialty stores all the way through the basic department store.
But we can't move as quickly and we don't have the mechanism to move much quicker than what we have, laying around in inventories.
So, we have great programs.
I think all of our retail partners have looked at our spring programs and I think they're stronger in every division.
They're happy.
They're walking away saying that we are prime for good season if the consumer cooperates.
So it's not a matter of extra and excess and more programs, it's a matter of better executing the programs we have.
- Analyst
I guess related to that, if Lynne could speak -- if she's still around -- on the direct mail initiatives I think Clinique has had in place to reignite and reengage some of their former customers.
Is that playing into some of your plans for the March and June quarters?
- Global President - Clinique
I'm glad you asked about that.
Yes, we have had nice success with the recruitment that we have done on the lapsed consumers, most especially some of the lapsed consumers from some of the mergers, and we will, indeed, continue that.
And I think that even as relevant on the gift with purchase promotions as well that that lapsed consumer, we made sure on some of the last promotions that we've done that she received the proper notification of the promotions that were happening.
- Analyst
Great.
Thanks.
Good luck, you guys.
Operator
Your next question comes from John Faucher with JPMorgan.
- Analyst
Yes, good morning, everyone.
I guess I'm looking at the guidance for the back half of the year and as I look at this, I'm just trying to figure out why -- if we look at the midpoint of the range here why, given the effect of the spending comps seem to be relatively high -- the SG&A was up a lot in both the third and the fourth quarter -- why we're seeing it looks like a slightly lower number for the third quarter and a higher number for the fourth quarter.
Can you talk about the programs, the spending, what have you, given the fact that the spending comps don't look dramatically different for either quarter?
- EVP & CFO
John, in our third quarter, we actually -- there is a disproportionate spend, if you will, on new product launches and on expanding our newer brands internationally, as well as in new and growing markets.
We have some TV advertising that's -- we don't do a great deal of, but there's a couple of TV campaigns, one in France and one in China in particular, that's happening in the third quarter.
And we do continue to spend quite heavily to drive that top-line growth, especially in these developing markets, like China and Russia.
M.A.C.
is also opening quite a few freestanding stores in the third quarter, and again that's based on the timing of us being able to take occupancy of the stores to make sure that that spending happens in the third quarter.
So we are investing quite a bit in the third quarter.
And relative to last year in the fourth quarter our spending is not as high by any means.
So we think that -- and again, it's sort of proven out, John, that we invest our money where we see opportunities to grow.
We invest invested in the fourth quarter of last year and the first quarter of this year.
We've driven tremendous growth internationally.
That trend is really helping us.
We're gaining market share.
And we have to spend when we think we have the competitive opportunity and not so much worried about the quarter-by-quarter results, we just try to give you guys a heads up on what we're going to do.
- Analyst
Ok.
Thanks very much.
Operator
Your next question comes from [Julia Maneva] with Gabelli Company.
- Analyst
Good morning.
I wanted to ask if you have raised your prices in the recent quarter and also if you are planning to raise them in the future and especially in Asia and Japan?
- President & CEO
We didn't take any unplanned increases.
We have some selective brands where we'll raise prices in some countries.
I think we have two price increases, one in March and one in July, but nothing unplanned like some of our competitors have been announcing.
- Analyst
What about Japan in particular?
- President & CEO
I don't know Japan sitting here.
I'm not aware of any increase in Japan, but Dennis can get back to you if we misspoke.
- VP of IR
Generally you would not see in our business any meaningful moves on the total for our companies in price increases, because we don't -- we normally take them at a very marginal basis.
They're usually very incremental and given the broad number of SKUs we actually offer to the consumer around the world, that's usually not a meaningful driver.
- Analyst
Thank you.
Operator
Your next question comes from Connie Maneaty from BMO Capital Markets.
- Analyst
I have a follow up -- a couple of follow-up questions for Lynne.
What do you size the opportunity on QVC to be?
And before these initiatives that you announced today, what had the sales growth rate for Clinique been in the U.S., say over the last three years?
- Global President - Clinique
Let me talk about the QVC opportunity and the rationale for that QVC opportunity.
The two-pronged approach that you saw to our strategy, which was QVC and also Allergan, are really two strategic moves that not only move -- that not only are valuable in and of themselves for equity building purposes but also drive the overall growth of the core consumer.
We think that those two initiatives can recruit lapsed consumers, as an example, and also new consumers.
I think it is important to know that Clinique in its recent consumer research has a 92% awareness factor in the United States in the prestige arena, and we think that QVC can be an excellent conversion to buy opportunity, both there and in the overall department stores.
- Analyst
You mentioned -- excuse me -- that there would be a personality.
Did you mean that there would be a spokeswoman who is known to viewers or did you mean something else by that?
- Global President - Clinique
Actually, the spokesperson will be the Senior Vice President of development for Clinique and she has developed the new products for Clinique for a significant amount of time and we feel that she will be an excellent representative for the brand.
- President & CEO
Connie, as a follow up to that part of the question, we've seen a pattern of success for direct TV, where it's not just about product that's being presented but it's actually the personality of the person presenting the product that makes a difference for the consumer who watches this media and shops this media and this channel that makes a brand successful.
- Analyst
Does the Allergan brand have a name and who's going to market it to physicians' offices?
- Global President - Clinique
The Allergan brand does have a name but we have not announced it yet, and we will use the outstanding credibility of the Allergan Company to call on the physician channel.
- Analyst
So, that means you must have some -- is it a sale down profit sharing arrangement with them or how does the venture work?
- Global President - Clinique
We haven't disclosed the financial terms at all.
- Analyst
Okay.
And which of these two ventures do you think has the most upside, QVC or -- which do you think will be bigger, QVC or Allergan?
- Global President - Clinique
I actually put them -- I put them in a tie.
I think that they both have the opportunity to drive new consumers and to recruit lapsed consumers, and I wouldn't give more to one or the other.
- Analyst
Okay, thanks.
Operator
Your next question comes from Jason Gere with Wachovia Capital Markets.
- Analyst
See if you can give us an update on SMI?
And then secondly, can you talk a little bit about some of the brands in the portfolio that are underperforming, how you're looking at potential divestitures, and also the acquisition outlook as well?
Thank you.
- President & CEO
Let me answer the second question first for you.
Obviously, in any portfolio company we will have brands that are performing at or above your standards and believe it or not, performing at your standards.
A number of those brands that are performing at or above our standards, we're pushing them to continue their performance and enhance their performance in contribution to the Company and using them strategically to grow our business in key markets around the world, as well as to contribute financially.
Brands that are not performing at our standard, we're looking to find ways to make sure that they improve their performance as well as to minimize their under performance in one way, shape or form, if they're key in strategic different responsibilities.
There's a number of different brands which we believe have key strategic positions which are important to us as a key channel commander on a global basis and we continue to push them to improve their performance.
As far as the acquisition landscape, we're continually looking at opportunities that would complement our portfolio and enhance our long-term strategic priorities.
We're primarily focusing in on category approaches and channel approaches and different -- and markets outside of North America.
Those are the three themes we're looking at.
And we're also overriding throughout all of the themes are brands which we feel we can successfully plug into our deep credibility and knowledge of the channel and our network around the world.
As far as pricing is concerned, you know the ratios that are being paid out there and we know those ratios, too, and we will be reasonable and rational in our acquisition approach.
- Analyst
In terms of some of those brands that you might consider to be underperforming, can you quantify what are tail brands or is that a small percentage of the portfolio?
- President & CEO
It is a small percentage of the portfolio we're continually pushing.
And like I say, we feel that virtually every one of the brands in our portfolio has a reason for being and a reason for existence, and if we didn't feel they had a reason for being or existence, they probably wouldn't be in our portfolio anymore.
- Analyst
Okay.
And then can you just give the update on SMI and how should we look at it in terms of the roll out?
- EVP & CFO
Sure.
We did -- if you heard earlier, we mentioned that we are spending fairly heavily.
It did drive an additional $7 million of spending in our second quarter.
You know that Avada is live.
You know that -- or you may know that we're going -- should go live with our first manufacturing facility later this calendar year as well as the financial backbone here in North America.
And we're developing a model affiliate concept, testing and laying the ground work for our first affiliate installation.
Our hopes is that once that happens, we will then start to accelerate the pace because we will have really touched every single model that we have as a Company and we will then begin multiple stream implementations and pick up the pace on it.
Operator
We have time for one more question, please.
Your final question comes from Bill Smith with Deutsche Bank.
- Analyst
Markets growth, which is great and very robust, can you just talk about the economics of expanding there.
Does it work the same way as the inventory recourse?
Do you accept returns?
Are you paying for half the fixtures?
Are you paying the commission to the sales people and the Este Lauder employees.
I know it is kind of a broad question, but just trying to figure out how the margin mix plays out as you invest.
- President & CEO
Bill, we missed the first part of your question.
We didn't hear you start until you say markets.
Are you --
- Analyst
I was talking about developing markets and just the dynamics and how that differs from the U.S.
and when the big heavy-up investment's going to be done, but also the subtleties of that -- of going there?
- President & CEO
Let's talk -- I'll compare and contrast our two largest and fastest growing markets in the emerging markets category right now in China and Russia and try to compare and contrast them.
They each quite obviously have dramatically different dynamics to each other and each relate, if you will, to the region in which they're a part of.
China being an Asia market is much more a department store-oriented market.
It's entirely a department store-oriented market.
Russia, being at the far end of -- or the eastern end of Europe, is really a parfumery-oriented market, and we're seeing the dynamics develop similar to their total regions.
And as a result, what you see in China is -- and I think we may have quoted to you before the number of doors and number of cities, which are based on concentration and productivity concentration in a department store model and basis, where we do partner with the retailer in different expenses to driving the business in those market places for they're installation and others.
In Russia, the comparison would be it is mostly parfumeries.
It's primarily with two or three different parfumery partners as well as a handful of department stores.
And most especially, the parfumery partners are very aggressively opening doors on an average of one or two a week in Russia.
But these are parfumery doors.
These are smaller doors that are not producing as much each, but are going far deeper into more neighborhoods and we're now expanding our presence outside of the two major cosmopolitan cities of Moscow and St.
Petersburg.
The investment dynamics for each are very different but just to give you an idea, our emerging markets, as we classify them, combined are growing at 43%.
The economics of these markets are similar.
We expect that we are there both in profitability now for total affiliates and each -- and certain brands within those are meaningfully profitable and are beginning to approach -- or we see them beginning to approach the norms for those brands in the international arena and that's what we expect over a longer period of time.
- Analyst
Ok, so when does the mix stop being negative?
Have you modeled that out?
- President & CEO
Well, I don't want to make any prediction and tell you that on July 1, 2021, it's going to be a certain number.
- Analyst
(LAUGHTER) I hope it is not that long.
- President & CEO
Oh, really.
Okay, we'll call -- well, 2020.
- Analyst
Okay, that's perfect.
- President & CEO
Here's the reality, Bill, and it'san interesting way to look at it.
We want to look at -- I mentioned earlier the UK, which is our most developed market.
It was the first international market we launched as a Corporation -- I think it was back in 1959 or 1960 -- and we went want to look at relative penetration to the total population and disposable income and what the growth opportunities are.
We've said in the past that, for example, China, a rapidly growing economy, a very large population with a certain level of wealth and that's growing, we wouldn't -- you shouldn't want us to stop investing or to reduce our investment until we begin approaching the penetrations that we have in the rest of the region relative to disposable income, luxury spending, retail channels and profitability and scale.
- Analyst
Okay, that's fair.
Operator
That concludes today's question-and-answer session.
If you were unable to join for the entire call, a playback will be available at noon -- 12 noon eastern time today through February 12th.
To hear a recording of the call, please dial 800-642-1687, passcode number 29427240.
That concludes today's Este Lauder conference call.
I would like to thank you all for your participation and wish you all a good day.
- President & CEO
Thank you.
- EVP & CFO
Thank you.