雅詩蘭黛 (EL) 2010 Q1 法說會逐字稿

Good day, everyone and welcome to the Estee Lauder Companies fiscal 2010 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 the Vice President of Investor Relations, Mr.

Dennis D'Andrea.

Please go ahead, sir.

Good morning, everyone.

We have on today's call, Fabrizio Freda, President and Chief Executive Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer.

Thia Breen, President of North America, is also on the call and will be available for questions.

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 will find factors that could cause actual results to differ materially from these forward-looking statements.

You can also find a reconciliation between GAAP and non-GAAP figures in our press release and on the investor section of our website.

And I'll turn the call over to Fabrizio now.

Thank you.

Good morning.

I'm pleased you have joined us for our fiscal 2010 first quarter earning call.

In our remarks this morning, I will discuss progress we made against our strategy during the quarter and Rick will provide the financial details.

Two weeks ago we said that sales for the quarter would be better than we had expected and earnings per share would be significantly higher.

This morning we announced that before restructuring, our sales were $1.85 billion, a 3% decline versus the previous year period.

Diluted earnings per share were $0.85 compared to $0.26 in the year-ago quarter.

Sales were better than we forecasted, due to improved business in Asia, better than expected airline passenger traffic in (inaudible)and a major product launch.

Going into the quarter, we planned our spending to reflect the lower level of sales we anticipated.

Although sales far exceeded our projections, we were extremely cautious in our spending.

So earnings ended up substantially higher.

Our higher operating income came mainly from three areas.

One, increased sales that we achieved without additional costs.

Two, a lower cost of goods thanks to an improved mix that was weighted towards skincare.

And three, restrained spending because of uncertainty in the environment.

Some of the spending that we curtailed we look for in the future quarters as we ramp up our innovation, advertising and marketing activities behind improved consumer confidence and major opportunities.

Looking at our top line, our quarter-over-quarter sales were unchanged on a constant currency basis, reflecting continued strong growth in Asia, flat sales in Europe, and lower sales in Americas.

We had higher sales than a year ago in several important international markets.

In our priority skincare category worldwide, and in our online business.

We also benefited from the selling of the new higher margin products and initial success of our strategy in travel retail, converting shoppers into buyers.

Foreign currency remained a drag on our results but not to the extent we envisioned.

Despite the upbeat first quarter performance, we believe it is prudent to remain cautious in our outlook for the balance of the fiscal year.

In the US, which is our largest market, high unemployment and weak consumer sentiment create continuing economic uncertainty which affects consumer spending.

These trends and other factors are also evident in several key Western European countries, such as Italy and Spain, as well as Japan.

Additionally, the holiday outlook in the US is uncertain.

Some high end retailers are under pressure.

The H1N1 virus remains a risk that could affect our business and we expect competitors to be more aggressive.

Moreover, internally, we are challenged to manage the vast amount of projects under way and at the same time adapt to the cultural change.

Thus, while we are increasing full year guidance, we are tempering that outlook with a healthy degree of prudence.

Let me also remind you that during the quarter, we began executing the full year strategy that William Lauder and I communicated last February, which seeks to grow our global share in prestige beauty and generate improved and sustainable profitable growth.

This was the first of 16 quarters of our strategic journey.

I'm happy to say that we made quantifiable progress toward our goals right from the start.

In the quarter, as a Company, we gained share in the US prestige department stores in skincare, makeup and the beauty department overall, as measured by MPD.

Our brands also improved share in travel retail and in prestige distribution in many markets including the United Kingdom, China and Russia.

To advance our strategy, as we said we would, we took decisive actions on some brands to position us for greater future profitability.

We made a difficult decision to close wholesale distribution of our Prescriptives brand.

After considering value alternatives, we determined that the brand did not have strong enough global consumer appeal, nor did it meet our financial targets.

We will now be able to utilize Prescriptives key assets including formulas and trademarks in other brands and deploy its resources against strategic priorities that have greater potential.

This move underscores our commitment to moving forward aggressively and finetuning our portfolio so we have the most powerful collection of prestige beauty brands anywhere.

We are locating our financial and human resources to those brands and businesses that provide the best returns.

In addition to Prescriptives, we discontinued some smaller brands and incubator investments.

This is part of an effort to streamline our assets and not use management time and money on endeavors with little payoff.

We closed the Eyes by Design and evolved Grassroots into Grassroots Research Labs which focuses on a handful of skincare products that combine nature and science.

As we discussed last quarter, Aramis and designer fragrances is working diligently to improve its profitability.

It made good strides in the recent three months, by cutting expenses, raising some wholesale prices where relevant, and reducing the amount of promotional offerings.

The division also is striking a better balance between supporting its classics and introducing new products.

It recently began a new advertising campaign for Cashmere Mist, a 15-year-old classic that is still a best seller in the US prestige department stores.

And we successfully launched Michael Kors Very Hollywood which is distributed only in the US and UK, where the designer has a strong following.

DKNY Be Delicious Fresh Blossom was a successful addition to the Be Delicious franchise and helped the division performance globally.

The successful development of our Strategic Modernization Initiative, SMI, is another integral part of our strategy.

The next major undertaking is our North American manufacturing facilities which are scheduled to go live in April.

At that point, about 50% of the implementation will be complete, up from 30% now.

We are on track to substantially finish the development of the project by the end of 2012.

Our cost savings initiatives are also moving ahead according to plan.

In the quarter, we realized savings of $48 million, roughly 25% of our target this year.

Major areas of savings in fiscal 2010 will come from resizing and restructuring initiatives, merit salary freezes, improvements in cost of goods, and in direct procurement.

Additionally, the expected headcount reduction we previously announced which we said could take up to two years will be two-thirds complete by the end of December.

Reducing costs gives us better leverage on our sales and that leverage should grow as the savings accelerate over time.

The achievement of our strategic goals depends on cost cutting on one end but even more importantly on investing in the most promising opportunities worldwide to grow our business.

Throughout the Company we are focused on leading in skincare and we grew sales and operating income in the category in our first quarter.

This was accomplished in large part by selling of the Estee Lauder brand-new version of its iconic Advanced Night Repair which launched in July in more than 140 countries.

We expect it to be the biggest launch in the history of the flagship brand in its first year.

The product has a high gross margin and helps to drive the brand gains in global skincare sales and operating income.

Additionally, Clinique and Estee Lauder solidified their positions as the top two skincare brands in US prestige department stores as they gain share of 60 and 20 basis points, respectively.

In another example, our Bobbi Brown brand, best known for its makeup artistry, enjoyed a big jump in skincare sales in Asia, thanks to its new cleansing oil which was developed specifically for that market.

In line with the corporate strategy, Bobbi Brown is committed to increasing the percentage of skincare sales in its overall mix in the next several years.

In the makeup category, product extensions into lipstick and eye shadows in the (inaudible) brand (inaudible) franchise helped lift its sales.

Clinique benefited from another (leap) in face products.

MAC posted solid growth in international markets driven by (inaudible) collection, and door expansion.

MAC entry level prices with prestige are helping to boost sales and attract consumers seeking great value.

The Company's future investment will continue to be directed to areas where we see the greatest momentum and potential.

To accelerate its solid growth, MAC expects to open at least 55 freestanding stores this fiscal year, mostly in foreign markets.

A new MAC store in Grand Central terminal in New York City has far exceeded its potential since its opening and the brand will open another high traffic location in New York in Times Square slated for the spring.

It will also allow eCommerce website in Germany and Japan in January.

Other brands such as Darphin and Origins are refocusing their core position to realize their potential.

Darphin discontinued makeup and fragrance globally and closed the department store distribution in North America and in the UK.

In the quarter it opened eight North America specialty stores and salons and expects to aggressively build on its pharmacy door distribution in Europe already this fiscal year.

Origins has made good strides in refocusing its geographic presence.

As we mentioned on our last call, the brand is slated to launch in China in March.

Further, Origins recently closed its Australian affiliate but will continue to be distributed through original retailers in New Zealand, Philippines, Greece.

As it further enhances the skincare product lines, costs should also improve.

Our brands continuously look for new ways of reaching consumers, consistent with their image.

For example, a few weeks ago Bumble and Bumble opened a styling bar and shop on the beautiful redesigned main floor of Bloomingdale 59th Street.

This attack is a first for the store and a first for the brand.

Bumble trained stylists offer working (inaudible) services and advise consumers on the brand haircare products.

In its first few weeks, the shop has driven traffic to Bumble salon network for cut and color service via a salon locator on site.

During the quarter Bumble also opened its first travel retail location at a airport in Singapore.

Clinique also unveiled a modern, vibrant space in Bloomingdale's new beauty department which will attract consumers looking for a variety of high touch personalized services.

The open floor plan lets consumers who knows their concern by using a computer and conversing with a consultant, whichever makes them more comfortable.

They can browse with a shopping basket, play with the latest makeup shades or grab the prepackaged skincare kits and be out in a minute.

Clinique's new approach redefines its service model, and elevates the Company commitment to individualized service and education, by offering consumers a choice in how they want to shop.

We expect that having created new energy and excitement at the counter and servicing consumers in multiple ways, our brands will also help reinvigorate the department store and drive traffic to these important shopping destinations.

Clinique opened similar counter (inaudible) in London and is exploring ways to provide high touch service in European perfumeries where there aren't consultants dedicated to the brand.

Our high touch service in all its forms is one of the important pieces that comprise our brand value proposition.

In North America, our brands have continued to emphasize their value.

Retailers are posting prices, offering less expensive, smaller sized products, providing free makeovers and advice and our brands are indicating their superior service across new technologies and platforms.

The (inaudible) brand has introduced smaller sizes and its best selling fragrances for suggested retail price of $29.50, slicing $10 off the previous entry level price.

And its holiday gift sets will have wider suggested price ranges, giving consumers more choice.

Turning to our regions, we are pleased with the strong growth in Asia-Pacific.

We extend our sales increases in China, Korea and Hong Kong.

The continued recession in Japan depressed our sales in that market, particularly in skincare.

But overall, sales in the region exceeded our projections.

We are optimistic that Asia will show strong growth again in our second quarter.

Accounting investment in the region will be targeted to online expansion, new consumer insight and locally relevant innovation efforts.

The Europe, Middle East and Asia region performed better than planned.

However, Spain and Italy had lower results as limited stocking continued in those markets.

The Americas continues to be our most challenging region and the focus for the holiday season remains uncertain.

That said, we are prepared for the current environment by, for example, producing fewer blockbuster gift sets.

In this climate consumers are looking for brands they know and trust and we will support our popular classic products and franchises.

We believe that our prestige products and gift sets which combine innovation with good value will attract consumers to our counters.

I want to emphasize that this quarter's performance, while impressive, is just a first step, and possibly the easiest step, of our long journey to implement our strategy and become a more sustainable and profitable company.

There are still many quarters ahead of this difficult road, and much work to do.

Although we expect the external environment will improve in future years, we may face internal challenges for some time as our corporate culture undergoes an important change.

That said, even though we aren't far along in our strategy, it is encouraging to know that we have begun to successfully align the fundamental building blocks that will fuel our growth.

We are cutting costs substantially through resizing and restructuring.

Accelerated sales in skincare which is our priority category, carrying higher gross margins.

Rededicated ourselves to innovation and created a more holistic efficient organization.

We expect to increase our investment during the remainder of the year to accelerate growth in our most promising opportunities, advance our priorities and gain share.

Our four key product categories are supported by a wide ranging portfolio of amazing brands, each of which is distinctive in its own way.

Our unique high touch service model enhances the performance of our products and forges strong emotional bonds with consumers..

This winning combination which is infused with innovation across product development and new approaches to customized service should enable us to increase our global leadership position in prestige beauty.

We are confident we have started building the right fundamentals that should enable us to progress toward our goals by 2013.

Before I turn the call over to Rick, I want to take a moment to personally thank all our people for their hard work this quarter.

Our talented employees are one of our most important strengths and they dedicate themselves every day to making Estee Lauder Companies the best it can be and I'm extremely proud and grateful.

Now I will turn the call over to Rick to provide the financial details of the quarter.

Rick?

Thank you, Fabrizio, and good morning, everyone.

A quick reminder.

My discussions on the quarter and the outlook exclude restructuring and special charges, which I'll comment on separately.

As Fabrizio said, the quarter came in much better than we anticipated.

In local currency, sales this quarter were comparable to the prior year.

As you will recall, we had a very good first quarter last year before the financial crisis really took hold.

Adverse currency translation continued to weigh on sales by about 3 percentage points, resulting in a reported sales decline of 3% to $1.85 billion.

Net earnings for the quarter more than tripled to $168 million, compared with $51.2 million in the prior year quarter, and diluted EPS was $0.85 compared to $0.26 in the prior year, $0.55 above the high end of our expectations.

There are a number of factors contributing to the stronger than expected quarter.

Before we review them, I would like to remind you that we have just started our four year program.

There may be interim volatility since we have multiple initiatives going on at once in the midst of significant cultural changes, while we have our sights firmly on our goal of 12% to 13% operating margin by 2013.

We had anticipated organic sales growth of 2% to 5% and we came in flat.

Therefore, we beat our sales projections by roughly $70 million.

Those sales came primarily from our high margin businesses, travel retail and skincare, creating a favorable mix.

Additionally our operating expenses came in quite a bit lower than anticipated.

Given the weak consumer demand in some major markets including the US, Japan and much of southern Europe, our affiliates were extremely cautious in their spending, although some of this will come back later in this fiscal year.

Lastly, a lower than expected tax rate and more favorable foreign exchange rates contributed to the variance.

Compared to last year, we saw the fastest growth in the strategically important skincare category.

Sales rose 5% in local currency.

Aided by the launch of Estee Lauder's new Advanced Night Repair.

Strong growth in Asia and Europe was fueled by high margin products and increased sales in emerging markets also benefited the category.

In makeup, local currency sales decreased 1% as growth at MAC was more than offset by declines in several other less profitable brands.

Our fragrance business fell 8% excluding currency and declined across all geographic regions.

This category has suffered disproportionately in the difficult economy.

The success of the current quarter's launch of Michael Kors Very Hollywood and the recent introduction of DKNY Be Delicious Fresh Blossom was not enough to offset larger prior year launches.

In hair care, sales rose 1% due primarily to Ojon's good performance on direct response TV and Aveda's new styling products.

Our business in salons remains soft, as anticipated.

When we look at our geographic results, our strongest sales growth continues to come from the Asia-Pacific region which saw a 12% rise in local currency on top of a 21% increase last year.

Every country except Japan reported increases.

Among the top markets in the region, Japan declined 8% as it continued to suffer from the tough economic environment.

However, Korea, our second largest country in the region, grew 24% and Australia rose 12%.

Those three markets represent more than half of the region's sales.

China, our major developing market, rose 37% fueled by light door growth and expanded distribution.

In Europe, the Middle East and Africa, sales were flat in local currency.

This is not a bad performance given that the region grew 14% in the year ago quarter.

Travel retail sales increased slightly for the quarter, which was better than expected, as declines in international passenger traffic were not as sharp as we had planned for.

We are also improving the conversion of airport traffic into purchases in store.

The channel responded to the better traffic by select restocking of some inventory.

However, given the volatility of this business, this may not indicate a trend.

Our UK sales rose about 2% although business was more buoyant at retail.

Travel retail and the UK affiliate represented just under half of our sales in the region.

Developing markets in the region contributed positively to this quarter.

Russia, Eastern Europe and the Middle East rose double digits.

Most of the Western European countries declined.

Trade destocking continued in a few markets and among niche brands although it has abated in the heritage brands and in some key countries.

The 4% decrease in local currency sales in the Americas reflected the continued caution of the consumer.

Sales in department stores, salons and our own retail stores declined mid single digits.

Those declines were partially offset by sales growth on the Internet and direct response TV and in Canada and Latin America.

We continue to experience selective trade destocking among our high priced brands in top tier department store distribution.

Our gross margin improved by 260 basis points this quarter, to 76.3%.

Contributing to the increase were favorable mix of 90 basis points, favorable manufacturing variances and lower obsolescence charges of 50 basis points each, lower promotional costs of 40 basis points and positive currency of 20 basis points.

The lower obsolescence reflects the benefit of fewer SKUs and better inventory management.

These figures include benefits from our costs savings initiative of $10 million or 50 basis points.

Operating expenses as a percentage of sales for the quarter improved 680 basis points to 62.1% compared to 68.9% last year.

Cost savings initiatives contributed $38 million, or 210 basis points.

Lower foreign currency translation losses compared to the prior year quarter improved the operating expense margin by about 100 basis points.

Our affiliates were cautious and did not spend all that they had planned in the quarter.

This contributed 450 basis points.

We expect much of this planned investment to be spent in the coming three quarters.

These efforts were partially offset by higher IT and infrastructure costs of 80 basis points.

As a result, operating income more doubled to $262.7 million compared to $92.6 million last year.

Operating margin rose 940 basis points.

Our cost savings initiatives are on track with total savings of $48 million or 260 basis points in the quarter.

Regarding our net interest expense, we reported $19.6 million this quarter versus $15.3 million in the last year's first quarter.

The increase is primarily due to the shift from short-term instruments to long-term notes which carry higher interest rates.

The effective tax rate for the quarter was 32.1%, lower than expected due to the geographic mix of our earnings.

We recorded $42.3 million in restructuring and other special charges.

The charges, primarily related to Prescriptives, reflect employee related costs, asset and inventory write-offs, contract terminations and other costs.

These costs were equal to $0.14 per share for the first quarter.

For the full year, we continue to expect to record charges of between $80 million and $120 million.

Our fiscal first quarter cash flow typically reflects seasonal working capital levels as we gear up for the holiday season.

This quarter net cash flow from operating activities was $3 million, compared to cash outflows of $196 million last year.

The biggest drivers of the gain were higher net earnings, inventory improvements and timing of tax payments.

Our days sales outstanding were 53 days this quarter, two days lower than last year.

We continue to monitor the financial health of some key customers.

Inventory days improved to 170 days compared with 188 days last year.

While we have seen terrific improvements in inventory over the past year, from better SKU management among other things, I want to remind you that we expect to build inventory in our second and third quarters in advance of the North American SAP rolloff in April.

At the end of September our SKU count was down 10% from a year earlier.

We spent $45 million for capital expenditures which includes spending for our Company-wide systems initiative.

For fiscal 2010, we expect to generate around $600 million of cash flow from operations and to use about $315 million to $330 million for capital expenditures.

Looking ahead, we are balancing the better than expected sales and earnings for the first quarter with healthy caution around the trajectory of a consumer recovery and other risk factors such as the possible impact of the H1N1 virus, uncertainty around the upcoming holiday season and the likelihood of more aggressive competition for the remainder of the year.

That said, we believe it is reasonable to raise our expectations.

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

We continue to expect fiscal 2010 local currency sales growth of about 0 to 2%.

Currency has been moving more favorably for us and is now expected to add between 2 and 3 percentage points to our reported sales.

Our new assumptions for the euro is $1.46, for the yen, 89 yen to the dollar and for the pound, $1.61.

If the dollar strengthens or weakens against these major currencies it will further impact our financial results.

We expect to increase investing behind our strategic priorities in the remainder of the fiscal year to drive growth and increased share in our priority markets in Asia and Europe and in our home market, North American.

We plan to spend behind our fastest growing, most profitable brands and countries to further their momentum.

We will accelerate our work to reinvigorate our North American department store business and develop our brands in emerging prestige channels.

We are also continuing to invest in our IT infrastructure.

At the same time, we are pursuing cost saving initiatives we previously laid out for you.

We continue to expect to save between $175 million $200 million this year.

Given our revised sales forecast and cost savings initiatives, we now expect a 220 to 250 basis point improvement in operating margin this year.

At this time, we estimate our effective tax rate will be approximately 34.5%.

We are raising our full year EPS forecast to between $1.95 and $2.10.

Our outlook for the holiday season reflects cautious consumer spending, balanced with better trade inventory levels than last year.

Our sales growth for the second quarter is forecasted to come in between 0 and 3% in local currency.

The positive impact of foreign exchange translation is expected to increase sales growth by about 3 to 4 percentage points.

We expect EPS for the three months ending December 31st, 2009 to be between $0.80 and $0.87.

Summing up, we delivered terrific results for the first quarter.

We continue to focus on providing consumers with innovative products, delivered with unique service that sets us apart from the competition.

We will accelerate our investments in strategic priorities while pursuing structural and sustainable cost savings and modernizing the information systems and processes of the Company.

Long term, we are working to realize our strategy which we believe will deliver sustainable profitable growth.

That concludes our comments for today and we'll be happy to take your questions.

(Operator Instructions) Our first question today comes from Wendy Nicholson with Citi Investment Research.

Good morning.

My first question has to do with the guidance for local currency revenue growth, because in past quarters when you've had an unusual ship-in or a shift in the sales from one quarter to the next you've called that out specifically.

But since you didn't this quarter, I'm wondering if that means there wasn't that much advanced sell-in or shift in timing.

And if that's the case, then it seems like the lack of a positive revision to your local currency guidance might just be a little bit extra conservative at this point since travel retail and Asia's coming in better.

It sounds like things are just doing better generally so I'm curious why you didn't raise that guidance for the full year.

Wendy, there was a shift but you're right it wasn't a terrific amount of money.

I think it was about $10 million to $20 million of holiday shipments that went in the quarter that we didn't expect.

Travel retail was a little bit stronger in the quarter but it is pretty volatile.

And we did have in the first quarter a very successful launch, better than anticipated, of the Advanced Night Repair so that was, in a sense, one of the expectations why the quarter was ahead of expectations.

But again, that's a sell-in activity, that's not a sell-through, if you will.

So we believe that there is still some good reasons for caution around the Christmas season, upcoming, and Thia can talk a little bit about what she sees in North America but I think it's proven for us to be cautious in the outlook coming up for the Christmas season.

Wendy?

Yes.

I was hoping to hear from.

Was she going to add some more commentary there?

I certainly will.

Our retailers are still being very conservative.

We don't see sales exceeding last year in terms of the purchases that they've made but certainly improving from last year's comps.

Okay.

And just sounds like in travel retail, you don't feel like, for example, you've stuffed the trade.

We've been watching the IATA data and it's gotten a lot better, so in terms of expecting things to get worse from here incrementally, it just seems awfully, awfully conservative on your part.

Which I guess is fine, it's a great place to be, but at the same time we want to have a realistic outlook for what you think you can do this year.

Sure.

And the airline miles projections that are out there continue to be lower year-over-year, so we see that continuing through at least our calendar year 2009.

The second half of our fiscal year shows a slight improvement in the airline miles being traveled so our forecasts are a little bit better than that internally but that still doesn't indicate a great growth in the second quarter.

Wendy, this is Fabrizio.

Just one additional comment on travel retail.

Passenger traffic is declining at 5.2% calendar year '09 to date.

In 2010, the expectation is this will start to rise.

This is already an assumption which is in our numbers, in our projection for the future.

So there is an improvement which is in our number.

Now, this quarter, the improvement has been well beyond our expectation.

But we believe that we have the assumption of an improvement in the future which is realistic.

There is also a risk in travel retail which is if for any reason there will be a moment where the H1N1 pandemic should come out, the travel retail business will be amazingly affected, as we know from our history.

And our risk in this area will become huge on the other side.

So to be honest, in this very volatile environment, we are taking a prudent approach, trying to be balanced between projecting some realistic upside but also considering some existing risks to avoid to then be caught in the middle and not be able to deliver what we want to deliver.

So we believe we are balanced but you are right that this quarter we were surprised for a very positive travel retail business.

Terrific.

I'll take it.

Thank you very much.

Bye-bye.

And your next question is from Alice Longley with Buckingham Research.

Hi, good morning.

I have a sales question as well.

It's about the second quarter, just to pinpoint this idea that maybe you're being quite conservative and this is looking at US department stores.

Last year I believe your sales at retail were down 7% but your shipments were down 19%.

And if you do the math, your sales at retail could be down another 3% in department stores, but just to replenish the products that people buy your shipments would be up 11%.

I'm not assuming inventory build-up, I'm just talking about replenishment.

Is there some reason that would not happen?

What we're seeing in terms of the retail is the retailers are very concerned that the customer is not coming back in the same velocity that she was a year ago.

So we are not building inventory.

No, I understand that.

But just because your comp is so easy, down 19% last year, just simple replacement of what people buy, even if what people buy is down, make shipments up 10% or so.

I'm not sure, maybe I'm missing something, I'm not getting mathematically.

Last year, our comps were down because that is where we started having some serious destocking and some lower sales.

So this year we, first of all, the destocking is continuing, although much more moderate and honestly only at the top of the high end retailers.

But destocking continues.

There is not any restocking happening at any level and sales in North America specifically continue to be relatively soft.

So the only thing which has happened, and again, in the case of the quarter, we have been surprised for the positive also on this one, is that as MPD has published the September data has been slightly better than the July, August and in the previous periods.

But this slightly better is still a negative number versus previous year.

So negative is negative.

That's a fact.

Now, this is obviously difficult to predict with optimism at this phase.

If it's in front of us, a very important period which is Christmas, which the necessity remains very high.

Okay.

I'll go over the math with you later.

Just one other question.

Alternative channels, can you tell us what that comp was in this quarter overall?

I don't have, Alice, the numbers for all the alternative channels but our retail stores and our salon business was as soft as our department store business here in North America.

Our Internet business was pretty positive.

I think that all of them together in the US were down still in that low to mid-single digit number so not terribly different than department stores.

Your next question comes from Neely Tamminga from Piper Jaffray.

Good morning.

Great start to a good year.

Just a question here for Thia since we have her on the call.

Could you talk a little bit about My Macy's, the My Macy's initiative, and how some of those changes have affected your own business.

And then maybe also talk about with an eye toward holiday, how the My Macy's initiative might change things in terms of order flow or ability to respond to the product.

If you could just walk us through that, since it is new out there.

That would be helpful.

Thank you.

I would be happy to do that, Neely.

We actually started this North America and affiliate structure the first of July and although it might be you new to us, it's not new to us as a Company.

It's the best practice of what we've done, been building on for years.

And so the affiliate supports what we've always been which is a brand-driven company.

My Macy's fits perfectly into this because we're able to leverage these brands individually in these 69 districts that have been established.

We also have the advantage of a North American supply chain and forecast and demand planning now which really helps our customers -- and You talk about Macy's -- more easily navigate through the various brands that we have.

We're working very closely with Macy's to reignite growth in that channel, and the transformation is much stronger by leveraging our corporation and not just the individual brands, and it makes us much more nimble in dealing with Macy's.

Another important capability is in the area of consumer insight which certainly they have announced at Macy's in terms of how they're supporting stronger initiatives in this.

So this is reigniting great partnership between our two companies in this area.

And we also see great progress in terms of online.

In terms of holiday, we are very, very fluent with My Macy's in terms of the upcoming holiday season and we still believe there are some risks attached to what's going to happen in terms of whether it's job loss or whatever, she isn't coming back in the same way that we thought that she was two years ago.

Good luck.

And your next question comes from Linda Bolton-Weiser with Caris & Company.

Hi, thanks.

Fabrizio, maybe you could describe a little bit more in detail how the cost budgeting process is working and how you're controlling that with regard to your affiliates and businesses.

In other words, if they really belt tightened and really held back on spending but yet they have an annual budget, shouldn't that all come back by the end of fiscal year?

Or do you reset budgets?

How are you doing it with regard to changes in the macro environment?

Can you give a little more color on that.

Yes, sure.

Basically, what we are doing here is brands are managing to a mix of opportunity and risks.

So speaking about brand budgets, the brands in this moment, each one of them, have in front of them different situations, by region, by country, and this situation has suggested the majority of brands to avoid spending too much in the first quarter in order to be ready to balance an economy downturn or the flu explosion or the possible travel retail downturn and some brands took this decision.

But they took this decision to wait to spend because of the risk management or, in other cases, to wait to spend to put demand on bigger opportunities which are emerging in our strategy and analysis, and on some very appealing innovation opportunities we have in our pipeline.

So this has made some of the spending not be happening in the first quarter but this part of the spending will happen in the successive three quarters during the fiscal year, and we are allowing this budgeting process.

Although it is very transparent within the Company and with senior management, we are allowing this movement as far as they are appropriate in terms of putting the money on the biggest opportunity and managing risk in the appropriate way.

Second part of the process of cost management in the Company is about all our cost restructuring and all our activities.

We call it the P&T activities, meaning the activity we put together and to the senior management team which is managing, delivering of the cost savings that we have committed for the next four years.

This part of the cost is managed by, as I said, the senior management team that we call the P&T and they are, each element of the cost, each project of cost savings has a project team assigned to it and is connected with all the regions at the brands.

Those are composed, as we have discussed many times, by a mix of restructuring projects, cost of goods saving opportunities in our procurement, et cetera.

Those are progressing very, very well.

We are very happy.

It's two big positives.

First of all, we are delivering the savings in line with growth.

In fact, this first quarter we ended up at the top of the range that we had in mind and want to deliver.

And on top of this we are doing this in a very integrated fashion in the Company, which requires an important culture evolution to work more in teams and to connect more of the people and this is happening.

To help this, the new rewards system that is in place as of July 1st where people are not only rewarded for delivering their own goals but they're also rewarded for delivering the total corporate savings and corporate results by working in a team is also helping this cultural revolution.

Thanks.

And your next question comes from Andrew Sawyer with Goldman Sachs.

Thanks, guys.

I was wondering if you could help us a little bit more on the marketing spending time.

Longer term, could you just give us a sense on the 13% long-term margin, what you're targeting or what you're thinking about in terms of advertising and promotion as a percent of sales?

And then just secondarily, as we think about, it sounds like roughly $0.30 or so of your beat this quarter came from the marketing spending side.

Any sense of sequencing and how you think the divisions or the business units will spend that back over the next three or four quarters?

Thanks.

I think the spending patterns for the rest of the year is going to be up to, as Fabrizio was describing, those risk elements that are out there and how they develop and whether they develop at all.

But it will be more or less spread over the remaining three quarters.

One thing on the savings initiatives that we have and the spending patterns year-over-year, you have to remember that last year we had that belt tightening exercise that took place mostly in the second half of the year where we took out about $250 million out of our spending that we said a big majority of that was going to be temporary in nature and would have to come back.

In a sense, we had some really good results relative from a spending perspective in the second half of last year but this year now we have a more, if you will, systemic and sustainable cost reduction program, as Fabrizio mentioned, that is implementing over the course of the year.

So we saved $48 million in the first quarter.

We anticipate about $50 million for our second quarter.

And we said between $170 million and $200 million for the year.

So there's a little bit of an offset year over year on when those fundings would happen.

Longer term, I think we don't want to get into the details on a line by line item what our spending will look like in 2013 but we do intend to get to that 12% to 13% operating margin.

There are some efficiencies in our advertising and promotional spending that we hope to obtain as part of those initiatives but I think it would be a little premature to say what that would be as a percentage of sales now.

Just separately, could you also talk a little bit about the topic of media deflation, how you guys are thinking about that, whether you're going for more impressions at the same price or letting the deflation drop through.

Thanks.

In most of our vehicles that we use, we are not seeing price reductions, per se.

Many of those prestige magazines have taken a decision to say we're holding our billing rates.

And we noticed quite honestly the size of those magazines somewhat shrinking as people spend less money but we haven't seen savings from a rate perspective in that.

Us as a company have spent less than we did year-over-year for the economic conditions that we're currently within.

But we haven't seen any real savings from a rate perspective.

If I can give a perspective on that.

We are going to make efficiencies in our advertising spending and these efficiencies will mainly come from being able to target the consumer more accurately and to spend the money only against the target consumer and to avoid dispersion.

Second, the mix of advertising around the globe is evolving and these changes country by country.

For example, as all of you know, digital marketing is taking a bigger role in all the communication spending and in most of the markets.

We remain very committed to prestige magazine advertising but we are also having some interesting results from, for example, television advertising in some emerging markets.

So we are making a lot of learning on the mix of advertising too and we are making a lot of of learning, how to spend more efficiently, targeting better our consumers.

This will drive higher return from our advertising spend and will improve over time the return on investment for every advertising dollar spent.

That said, I'm not sure that our goal is to reduce the total dollar of advertising.

On the contrary.

Our goal is to continue to support our brand as aggressively as we can afford.

And as soon as the sales trends, the consumer demand attitude will change, we plan to invest more in advertising according to our needs.

Thank you very much, guys.

And your next question is from Bill Schmitz with Deutsche Bank.

Can you just talk about the tenor of earnings now.

So seasonality.

Because if I look at this quarter you did $0.85.

I think the second best first quarter was in fiscal 2005.

I think you did $0.41 and obviously the macro back then was much better.

You could launch like a carrot top fragrance and sell 2 million units and you got the overhead absorption from that.

Is this the new normal in terms of that first quarter and that seasonality is gone and earnings will be more smooth across the year?

Or it was just we really accelerated cost savings this quarter and we pulled some costs and we're going to go back to normal next year?

This year, quite honestly, everything went in our favor in the first quarter.

We beat our sales expectations and we beat those by high profitability TRD business, by the launch of a very profitable new product, Advanced Night Repair.

If you look in cost of sales, our inventory improvements helped drive down our obsolescence numbers.

We also had some exchange benefits in there.

Our operating expenses, as Fabrizio described them, were lower than we had planned because there's a level of conservatism in the spending patterns and caution by our affiliates which will probably happen in the next year.

The exchange rates went in our favor, the tax rate went in our favor.

The stars were aligned somewhat in this quarter which gave us -- and we're quite happy -- terrific results, but that's why we temper that around the risk that we see in front of us, and also the fact that this is the first quarter of a four year program that we have in place and we have a ways to go to get to 12% to 13% operating margin.

So we're happy but we're also realistic in what the future holds for us.

And this, I think Fabrizio used the term, this was probably the easiest quarter in a sense.

It's in the beginning of our program and we have a lot of work to go and a lot of change within the Company to achieve our long-term goals.

Okay.

But nothing's really changed structurally about the seasonality of the business, so the first quarter should still always be the weakest quarter and the biggest working capital use quarter because of the holiday season?

Is that fair?

Not this year, but going forward.

That's fair.

Exactly fair, but there is some improvements that we're making to the business which are one part of the strategy which are here to stay.

Let me clarify.

What's going right this month is that we have higher than expected sales and on this phase we didn't spend money.

They came in September, last part of the -- before we spent the money.

This obviously doesn't happen every quarter.

When you plan the sales and you spend the money against it, the sales that come planned normally are less profitable than the ones that come unplanned.

So that's part.

The other thing that happened, however, is that we are dramatically improving our mix and particularly we are shipping more skincare as part of our mix and this is here to stay, hopefully.

At least this is part of our strategy.

We'll do our best to make this stay.

The second key thing, we are improving all our so-called underperforming brands which means that every single brand that last year was below Company performance, this year is delivering much better results.

This goes from the extreme of Prescriptives that, as you know, we announced a complete restructuring to other brands which are simply dramatically improving their results this fiscal year versus previous year.

This hopefully is here to stay and is a fundamental change.

There is another which is all about spending.

As we said, we've been cautious in spending in the first quarter because of risk management in this very unusual volatile economic environment.

This again, on the contrary, may not be true next quarter or next year if the economical environment will be different and more predictable, our spending will probably be different and more predictable.

So there are elements which are I believe, A, an evolution of our business model in line with our strategy, other elements which are uniquely happening in this quarter will not happen probably in the future.

That's great.

Can I just ask you what percentage, if you know this, what percentage of your brands are gaining market share and improving profitability?

I know they're two separate numbers.

I don't know if you have the data because maybe it's not as current as you need but do you know what that number is?

By brand, Bill, we do not.

Not at the moment.

We make our (inaudible).

We are improving market share as a Company overall, globally and a majority of our strategic markets, our key brands, our main brands are growing market share in the majority of the markets, so we have a possible trend here.

Lastly, Rick, what do you think about share repurchase going forward?

Cash is clearly building.

Cash is building.

We suspended our program while there was so much volatility in the credit markets.

The program, we still have 22 million shares, I think, authorized by the Board, that we could repurchase and we'll evaluate that based on what we see in the credit markets and what wee see for use of our cash.

Okay.

Great.

Thanks so much, guys.

And your next question is from the line of Victoria Collin with Atlantic Equities.

Hi, good morning, guys.

I wonder if you could talk a little about the fragrance division, the swing to profitability there.

I wonder if you could give a bit of color on whether that was coming from simply cutting excess costs within the business or whether that's been supported by the new launches and the resizing and the repackaging that you put out on existing brands.

And then secondly, if I could quickly ask if you could give me a recap on travel retail, percentage of sales and operating profit for that subsegment.

Thanks.

Let me answer the question on fragrances.

I think the great improvement in profit that we are seeing in fragrances is the result of the very hard work, excellent work that the fragrance team has put into this in the last 12, 18 months, under exactly the strategic direction of improving the business model we are using in this category.

This is a mix of stopping investing on areas where we had limited opportunity, where we were not getting appropriate return and on the contrary, continue investing, actually in some cases accelerated investment, in areas of bigger return.

This has been combined with a lot of activity of cost cutting.

Some of the cost reductions are unique and specific to the category.

Others are part of the big restructuring plan that we have announced for the Company.

Both of these partially impacted the category.

And finally, the strategic refocusing on classics and on the ability of growing our business on classics with the right profitability, versus maybe, in some cases, too many new small activities which have relatively low success rate.

The rebalancing of those two elements is also helping the direction.

So we are very encouraged by this direction and we believe will be soon as the economy allows us, we will be focusing also on growing this category again.

We should also say that, as you know, fragrance has been the category which is the most affected by the market trend, by the economic strain.

The markets are really going down in most of the world in a very big way.

So within fragrance, as soon as the market comes back, we will see the benefit of that.

And then Victoria, your question on the travel retail business.

In the quarter it was about 9% of our sales but historically that's represented about 7% of our overall sales mix and the profitability, as we said, is about 20% of the Company's profits.

Okay.

That's great.

Thanks very much, guys.

Well done.

And your next question is from the line of Lauren Lieberman with Barclays.

Good morning.

A question on, you were just talking about the spending plans at all the affiliates and what I'm still really curious about is for the decentralized decision making because heading into the quarter, into the quarter you've just reported, there was a thought that more money would be spent than it was.

Now we are in the process of going into holiday and it's not clear to me what you know currently about your affiliates' plans for spending around holiday, or let alone into the rest of the year.

But I'm just a little stuck on just how much can swing intraquarter, given that you actually communicate guidance and expectations once the quarter's already started, especially when we're in the middle of the holiday, we're at the crux of the holiday season right now.

This is Fabrizio.

Maybe I've given the wrong impression here.

When we say affiliate, because the spending happens there, we were not speaking where the decisions are taken.

Our process is a brand-led decision, global brand-led decision making process on expenditures.

The brand leads the decision process and today in our new metrics there is a big dialogue with affiliates to decide when and how to spend the money but then the money gets spent in the affiliates in a large majority.

So this decision is a very transparent decision making process.

Since now about eight months, within the Company, we have continuous teams.

We meet once a month to discuss the spending of the next month.

This is a very thorough process where we align forecast, the financial forecast and the demand management of products so we have very thorough processes now in place.

So if I gave the wrong impression, the decision was taken by the affiliates, I'm sorry this was the wrong concept.

The decision was taken in a very transparent way from the management team, brand affiliates and agreed with me and with Rick at the top and so we know exactly what's happening out there.

And I believe that the decision of prudently postponing or the adjustment of spending was the right decision for a series of reasons.

As we look into the rest of the year, I'm very comfortable with the notion of where the gross margin upside would come from and the benefits you experienced from mix and a lot of that should really continue, given the emphasis on skincare, improvements on inventory, so obsolescence will be a more positive point factor.

But still on this operating expense line, one, when we started the year we talked about belt tightening needing to come back.

The proposition that the money that was saved was really very reactionary and the money would need to be spent in order to continue to stimulate growth.

And then the fact that there was this holdback this quarter.

So is it, all of it still comes back or gets reinvested?

With the exception of gross margin because I understand how that sticks and continues.

If the operating expense line where, how much of this is truly sustainable change or is it all just going to get spent back and it's a matter of timing?

Rick can give you specific numbers behind the concept.

But there is, as you know, there is some change which is really sustainable and this is clearly the change which goes with the cost savings, in this quarter $48 million of sustainable cost savings.

The change fundamentally from the way we are working.

There are other costs which are obviously the reflection of the mix, as you said, more skincare, other elements of the mix like less underperforming brands, et cetera.

Those are obviously sustainable changes.

There is an element of improvements also in the investment in the marketing as we gain efficiency and we have better rate of return on investment in promotion, advertising, all these areas and this is progressing.

However, there is also a management of risk in this moment, in this very volatile environment, which is not necessarily a sustainable thing for the next five years, is what we need to do now in this unique economic environment.

And as I said, we have in front of us the possibility that Christmas will go normally or will be a problem.

We have in front of us the possibility that there is a flu epidemic which means travel retail in Asia may be particularly affected and even the Christmas shopping may be particularly affected if this has to happen.

We have the possibility of having, at least we believe, the competition will become more aggressive as soon as the economy improves.

And a lot of our competitors, many who have been as prudent as we have been if not more, creating for us some space that may not be available in the rest of the fiscal year if the economy starts going better.

On top, as I said, there is obviously an internal cultural change we are going through to deliver and to exchange in our cost savings with sustainable change of business model and cost savings which is a process which doesn't happen in one day.

It contains some elements of risk in some regions, in some areas and in some groups.

So the combination of this risk management make us believe that we need to be prudent in trying to guess how much of this will be always going like this quarter which is meaning everything played in the right direction at the same time.

So that's it.

So I think it's about at least an attempt to manage with a prudent and strong approach this transformation of the direction we are taking.

And you mentioned that are we spending it all.

Well, we're not actually.

We took our estimate up $0.45, $0.50, depending on where you want to start from from an EPS basis.

We are anticipating that we're going to have better results.

We did say our operating margin was probably going to be 100 plus basis points higher than we had come into the year thinking.

We are reflecting a lot of that in profitability and we are balancing that with all the risks that Fabrizio just mentioned.

Okay.

Thanks a lot.

Your next question is from the line of Chris Ferrara with Banc of America, Merrill Lynch.

Just wanted to see if I could understand the relationship between where specifically the sales upside came in and with the fact that you really didn't spend a lot.

Because on the surface it looks like sales were not particularly dependent upon your spending levels this quarter.

I know that's probably being a little too not thoughtful about it but just on the surface that's what it looks like.

So what's the nature of the underspend relative to your budget and does that tell you anything for going forward as you thing about ad spending for the year?

Okay.

So Chris, you asked where did the sales come from and we mentioned that they came from travel retail which is a highly profitable category and business for us.

We just talked about it representing roughly 20% of the Company's profits on a normal basis and also from the launch of, the biggest launch that Estee Lauder as a brand has ever had which is the Advanced Night Repair, which is a sell-in kind of activity, so you have to remember that.

But it is a very profitable piece of business for us, as well.

Those two upsides for the sales really drove a lot of profit for that.

As far as the advertising spending, I think we already addressed that and that is that we intend to invest in the balance of the year and we were somewhat cautious in what we were spending in the first quarter.

And it's not so much the actual print advertising because that's committed to but it's all the other activities that go on around that that we were cautious on in the first quarter and we anticipate those coming back in the balance of the year.

I'm sorry.

I guess I'm not being clear.

What I'm trying to get at is you got significant top line upside, partially from travel retail, partially from a successful launch despite the fact that you didn't spend as much as you had anticipated.

Maybe it speaks more to where you didn't spend as much.

Of the underspending relative to budget, was any of that or was a lot of it advertising and promotion?

This is Fabrizio.

Again, let me clarify.

The selling of Night Repair of Lauder, as we have underlined is a sell-in.

Sell-in is not influenced by advertising.

It's a sell-in of an activity.

The product also started pretty well, but in the month of September, the majority of the extra is a sell-in.

Travel retail is not influenced by advertising in the short-term basis.

Obviously travel is influenced by the equity of the brands on the long-term basis but on a month by month basis, it's not influenced by advertising in the regions.

In the countries.

And finally, the other big extra that we got is Asian skincare in general which is a very profitable item for us is skincare in general and this actually is influenced by advertising.

It's a mix feature again and so we got some upside this quarter which were happening independently from the spending part in advertising.

This may not be true in the future because there are other parts of our sales components which are heavily influenced by our advertising spend.

Great.

That's really helpful.

Sorry for being dense on that.

Just one other quick one.

Rick, I think you mentioned that FX on the SG&A line was actually a positive for the quarter.

Did you mean positive relative to your forecast or positive in the absolute?

And if it's positive in the absolute, why considering currency was still a drag just not as much of one for the top line.

In our operating expenses, Chris, we have the impact of gains or losses on the contracts that we have so it was versus last year.

We did not have anywhere near the losses in those contracts that we had last year so it was a net benefit year-over-year.

We have time for one more question.

Your final question comes from with [Ali Dubaj] with Bernstein.

I love that pressure.

A couple long-term and short-term.

One is, Rick, if you could just help with the sustainability of margins issue that we're all having, I think.

If you could repeat the margin improvement that you see, just clarify whether that's on a recurring or reported basis.

I think you said 200 to 250 but I just want to make sure I heard that right, on operating margin.

Sure.

What I had said was that this fiscal year with the guidance that we've given I think you'll do the math and it says that 100 to 120 basis point improvement in operating margin from where we plan to come or year-over-year will be about 220 to 240 basis points.

Okay.

Yes.

That's helpful.

And then, my experience has been when you start doing some of these cost reduction plans, in some sense you see the water go down and you see some other opportunities.

I'm not pushing you for the 2013 number right now but are you seeing more opportunities of that 12 to 13, seems like there's more potential in it.

How do you think about that, how do you log ideas as you see more opportunities in the Company?

I think I answered these questions.

When we first discussed in the February quarter conference call the strategy that longer term we have visibility of this company to get to the 14%, 15% margins so we will see when and how after, by 2013, we arrive the 12%,13% range, we will discuss how to continue to go forward.

Honestly, it is a bit premature.

I think we have so much work to be done to get to the 12% to 13% and this is the first quarter of 16 which are in the announced strategy.

So it's a very good one.

And that's why I'm honestly very happy we have this good start but it's a bit premature to be discussing the original goal.

The other important things that I want to make a big distinguish is the 12% to 13% by 2013 year will need to be reached in a sustainable way, meaning changing the fundamentals of our business model and cost structure and particularly confirming our ability to grow the top line in a very strong way over time, particularly when the economy will go back to normal.

The combination of those three things is what will determine the sustainability of the 13%.

So in this first quarter, we have seen that when the key fundamentals of this new strategy play together, all positively, it seems to work in the right direction.

But I think it's premature to say that we can sustainably imagine it to go higher than the 12%, 13% before we have much more road behind us.

And then just another longer term, slightly different tack.

I do think it's a strategic controversy you're going to have to deal with which is just around how do you actually manage becoming more and more of a retailer over time?

There was a little bit of a slowdown in your free-standing stores.

Now it feels like it's picking up again.

How do you manage that from an internal perspective?

And secondly, at what point does the growth fill the white space potential that you have and it becomes cannibalistic either to the current brick and mortar retailers that are established there.

You may want to answer that question US, Western Europe and then developing world.

Yes, first of all, we have no intention to become more and more of a retailer.

That's absolutely not part of the strategy.

By the way, there is only one of our brands whose business model is designed by the way fantastically around having a certain amount of retailing stores.

The large -- all the other brands, they are not designed in this way.

So really that's not our strategy.

By the way, there is only one of our brands whose business model is designed (by the way fantastically) around having a certain amount of retailing stores.

All the other brands, they are not designed in this way.

So really that's not our strategy, that's not our issue.

And then in terms of cannibalization, we are very hard at work to ensure that does not happen.

We can build our stores and alternative distributions at the same time and they don't cannibalize each other.

Actually we have a strategy and we do this only when they do not cannibalize each other because again, our business is very much driven by productivity per store, sales per door, and where the productivity per store, the sales per door are not the right one, our profitability is very difficult to be reached.

So we look at this very carefully.

And then anyway, the issue, if there will be an issue is only in the US, in Europe, in Asia.

Really those issues don't exist in the sense that the amount of our direct retailing is minimal, probably not significant at all in our business.

That concludes today's question-and-answer session.

If you were unable to join for the entire call, a playback will be available at 12 noon Eastern time today through November 13th.

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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.