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Operator
Good day everyone, and welcome to the Estee Lauder Company's fiscal 2011 third 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.
Dennis D'Andrea - VP of Investor Relations
Thank you. Good morning, everyone. On today's call our Fabrizio Freda, President and Chief Executive Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us is Olivier Bottrie, President of Travel Retailing Worldwide. Olivier will give an overview of Travel Retail and discuss our strategies for growth in the Channel.
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 see factors that could cause actual results to differ materially from these forward-looking statements. We will also discuss certain of our results in non-GAAP financial terms, and you can find a reconciliation between GAAP and non-GAAP figures in our press release and in the Investor Section of our website. I will turn the call over to Fabrizio.
Fabrizio Freda - President and CEO
Good morning. Thank you for joining us. Our Company had another strong quarter, in which we continued to show fantastic momentum. Our growth was broad-based encompassing all regions and categories, and every category grew in every region. More than half of our brands grew double-digits. The luxury consumer is clearly (technical difficulty). This strength is driven by affluent shoppers in the US and (technical difficulty) markets, especially in China.
Demand for premium goods and services in the US is expected to rise 8% this year, according to a recent survey of affluent and wealth in America. In the US, premium brands are generating the strongest gains among consumer goods, and luxury travel is outperforming economy travel; however, luxury consumers are very demanding. They are willing to spend, but they expect excellent products and services and an experience that provides added value. This trend rewards our focus on high-quality products and reinforces our commitment to invest at point of sale in beauty advisors, online, and all other aspects of our high touch experience. In fact, our luxury brands Bobbi Brown, La Mer, Jo Malone, Tom Ford grew strong double-digits for the quarter.
The soundness of our strategy of launching fewer, bigger innovations and supporting them with stronger advertising and excellent high touch service is confirmed again this quarter. We continue to lead in the strategically important Skin Care category, with strong increases in all regions. Recent technologically advanced innovations include cleaning, Repairwear Laser Focus, Estee Lauder Advanced Night Repair Eye Recovery Complex, La Mer Radiant Serum, and Origins Plantscription. We are pleased with the success of these new products, and we have a strong pipeline of innovations ahead of us to sustain our leadership.
Importantly, we continue to nurture our other categories. Makeup, our second largest category also grew strongly in every region. Innovation drove sales at Clinique, which benefited from launches of Bottom Lash Mascara and Chubby Stick Lip Gloss. Our Makeup Artist brands continue to lead the category. M.A.C. and Bobbi Brown grew double-digits, and Smashbox contributed incremental sales. M.A.C. added 14 doors this quarter and is planning to open almost 30 more by our fiscal year end.
Our Hair Care category is improving. Following a successful test in 10 stores, Bumble and bumble has expanded to all stand-alone separate doors in the US. Bumble Salon network should benefit from the referral program at Sephora. The brand has also launched its first ever print ad campaign for its new Texture Cream in North America and Italy, followed by the UK this month. Aveda is seeing increased sales of its styling products and professional hair color, and we are encouraged about the fourth quarter relaunch of our Ojon brand, with a reformulated product lineup. The brand is running a trading campaign in Sephora in May to encourage trial of new products. The brand narrative, [if] we strengthen it, it is now focused on product performance as well as a strong sustainability platform.
Our Fragrance category grew this quarter, despite a tough comparison with a [three year] launch of Pure DKNY. Several of our recent launches performed well, including Coach Poppy and Estee Lauder Pleasure Bloom, as well as the premium Jo Malone and Tom Ford fragrances. During the quarter we announced that we had assumed a worldwide license for Zegna, which should strengthen our international Fragrance portfolio, especially in China and Europe. We continue to improve the profitability in this category, and it's now contributing nicely to our overall margin expansion.
Our turnaround brands have contributed to improved profitability in all categories, most notably Fragrance. The relaunch of Ojon is expected to further improve our Hair Care category, and several other brands have streamlined their distribution and focused their product assortment to grow their profitability. Our business is responding well to our pooled strategies around the world. We have been reinvesting a portion of cost savings and reallocating marketing dollars to advertising behind the most powerful innovations, in markets where we believe they have the greatest impact, both emerging and developed.
Fast-growing emerging markets and our ability to satisfy multicultural consumers continues to fuel our growth. China continues to grow strongly, rising 35% this quarter. Origins is well received in China, and its doors in that country are already the brand's second most productive in the world. It just opened its first free-standing store at the popular Raffles mall in Shanghai. Also, to promote its novelty new product Plantscription, Origins is running its first TV commercial in the brand's history, beginning in Hong Kong this month.
Through nine of our brands we now have added presence in department stores, freestanding stores, in Sephora in 38 cities in China. Our [online] initiative in the country extends our reach to more than 340 cities. Estee Lauder remains the top ranked prestige brand in its distribution in China.
Our business in Latin America is benefiting from greater focus. All countries in the region rose double-digits, and we are particularly pleased with our progress in Brazil. Our M.A.C. and Clinique brands continue to resonate with consumers. M.A.C. is expanding distributions (technical difficulty). Even better, Clinique has been a greater success in Brazil. The brand is supporting even better [Clinique] with strong print advertising, which is contributing to fantastic double-digit sell through.
Despite the turmoil in the Middle East, our sales continue to grow nicely, as most of our sales in the region have arrived in countries not directly affected by political changes. Turkey is a fast-growing emerging market in the European region. Our sales there jumped 34% in the quarter, and we continue to gain share.
We also gained share in South Africa, where improved consumer insight led to better product assortment and more effective marketing campaigns. In Russia, our sales [in every state] remain strong, rising more than 20%, which is about double to [their old] Prestige beauty growth. We see lots of potential and opportunity in Russia, and are committed to further growth in the region. We are developing infrastructure in the markets around Russia and investing in our full strategy, advertising and serving at point of sale.
Our excitement about our emerging market is not just about sales. It is also about profits, and in most countries, we are generating profitability that is not diluted. This is due in part to the way we have designed the business model, so results would be accretive to the Company.
Performance in more developed markets is mixed. In Japan, the devastating disaster that took place in the March has been disruptive, but the resilience of the Japanese people and our employees has been truly remarkable. I'm happy to say that all of our employees in Japan are safe. I want to take a moment to commend our management team in Japan and in the region for their outstanding leadership, steady guidance, and unwavering courage during this difficult time. In fact, there has been a remarkable outreach by our employees around the world to aid our colleagues in Japan. In addition, the Company's contribution to the Japan Red Cross, our local team has been quietly doing all it can to aid friends, coworkers, and families in the affected areas.
That said, the impact of the disaster was not significant to our overall financial performance through March. We expect the condition in Japan to reduce sales growth by about half a percentage point for the full fiscal year, and effect us for the next six to nine months. We will continue to monitor the situation. While the affected areas represent a very small portion of Japan GDP, the trauma and continued aftershocks have dampened consumer sentiment across the country. Retailers in Japan are operating, but there are limits on electricity, so some have shortened hours or dimmed lights. This is expected to continue through the summer.
This quarter we are particularly pleased with the continue retail momentum in the United States. Prestige Beauty grew more than 5% this quarter and continues to take share [from us] as new consumers are drawn to the Prestige Channel. In fact, beauty sales in US department stores and Sephora, measured by [MPD] Beauty Trends, outpaced those in food, drug, and mass outlets in each product category, and most significantly in the Skin Care and Fragrance.
Our North America team has been working hard with our department store customers to improve the consumer experience at point of sale. Clinique's Service-As-You-Like-It concept continued to roll out to top stores around the world. Estee Lauder is expanding its Beautiful Skin studios, and is also seeing success with merchandising towers showcasing its top 10 bestsellers.
In other distribution, our own stores have been performing well, particularly Jo Malone, Origins, and M.A.C. We carefully monitor productivity in these stores, pruning the less productive doors and adding new locations. This discipline helps to ensure that our retail stores are not margin dilutive to the Corporation. Among the large markets in Europe, we have seen the benefits from the successful SKU reassortment program implemented in last year's third quarter. Our retail sell through in Germany and France was very strong during the quarter. Retail sales in Italy have improved, although Spain declined modestly. Estee Lauder and Clinique continued to strengthen their position in many retailers, particularly in Skin Care. Greece remains difficult, as unemployment and poor consumer sentiment hamper sales.
Looking at another aspect of our business, a key strategy is to further leverage our digital opportunities. E-commerce continues to appeal to consumers around the world, and our online business grew almost 30% this quarter. During the quarter, we expanded our E-commerce capability in several brands. M.A.C. began selling online in China, and Bobbi Brown launched its site in Germany. Estee Lauder and Clinique started testing automatic replenishment programs on their sites, allowing consumers to choose what products they want to replenish, and at what intervals.
Bumble and bumble is now featured on Sephora.com in conjunction with the rollout of the brand in Sephora's brick and mortar stores. Beside links to the Bumble and bumble Network Salon Locator, affectively connecting 50 million Sephora.com customers to Bumble and bumble Salons, the brand is also launching a digital campaign in conjunction with these first ever print ads. Additionally, Ojon just launched its new interactive website, incorporating the brands updated position and new creative direction.
Beyond e-commerce, we are very excited about our [main] initiative in social networking. Origin ran a sampling campaign around the launch of its Plantscriptions Skin Care product, and counted 130,000 new fans on Facebook in just one week. Both Aveda and Origins ran Earth Month campaigns as well. Following overwhelming consumer interest in last year's Origins Rocks Earth Month concert, the brands made this concert accessible to more than 170,000 global viewers by live streaming the concept online. This type of activity expands consumer interest and helps to foster a connection to the brand.
Moving to our cost savings initiative, we continue to improve productivity and to eliminate non-added value cost through our PMT savings and the strategic shift in our product mix. Productions in promotional spending are being reinvested in activities with better returns. We've also passed another milestone in our strategic modernization initiative, with the first wave of our international affiliates successfully implementing SAP on April 1st. The UK, Germany, Singapore, Malaysia, Vietnam, Indonesia, and Philippines went live with few issues. We are pleased with our progress on SMI, and will transfer the learnings from these affiliates to the next wave.
Our ability to profitably leverage our current growth gives us the flexibility to invest more in new growth areas, building capabilities, and modernizing the Company, to further sustain and improve our long-term profitability. We are investing significantly more than we originally budgeted in pooled activities in our fourth quarter, increasing investment in our best opportunities to sustain our share growth in key markets and ensuring our success for the long-term. We will continue to focus our advertising on the most promising new products and the best performing markets and brands. Our ability to push harder in strong areas of our business helps mitigate the [decrease] from Japan, Australia, the Middle East, and continued softness in part of Southern Europe.
We have had strong nine-month performance With the month of April behind us, and only two months remaining in the year, we are comfortable raising our EPS expectation for fiscal year 2011 to between $3.55 and $3.65, despite the impact of Japan and the higher investments we are making. We are committed to providing a solid and sustainable return to stakeholders and to shareholders.
We believe that the path we've developed to increase and leverage [down] for profits will continue to provide good returns in the future. These dynamics reflect the power of Estee Lauder Company's strong organization and the amazing quality of our people. Now, I will turn the call over to Olivier to discuss our Travel Retail business.
Olivier Bottrie - Pres, Travel Retail Worldwide
Thank you, Fabrizio. Good morning. Let me first introduce myself. I have been with the Estee Lauder Companies for 15 years running its Travel Retail division for the past seven years. I also worked for the Estee Lauder brand in North America, and ran the international division of [Aramis and Designer] Fragrances Group.
To begin, I would like to give you some background on the Travel Retail Channel. With estimated retail sales in excess of [$30] billion in 2010, the Travel Retail Channel provides shopping opportunities to travelers for around the world, tourists, and business people alike. The [Good Skin] Travel Retail Channel grew an average of 7% annually over the past 10 years. Travel Retail was born as a duty and tax free channel. It has evolved into one of the most vibrant, rapidly growing, brand equity building global marketplaces.
The Channel provides a great platform to build brand new [owners], introduce new consumers to brands, and improve their travel experience. While historically, sales growth in the Channel, full of passenger traffic [moves quite quickly] the recent and rapid development of new airports and improved facilities in existing airport, allows both retailers and brands to focus on attracting an ever growing number of travelers into shopping and buying. Our retailers have done a great job situating the right mix of brands and improving store layouts and merchandising. This is reducing the correlation between traffic growth and sales growth. The emergence of the Chinese travelers eager to consume luxury products in the Channel is also changing the dynamic.
The beauty category enjoys a growing leadership position in the Channel, with over 30% of all sales. In the past 10 years, sales have grown at a rate of 10% annually. (Inaudible), fragrance sales have a dominant position, with a local share of 58%. However, their share has been declining, as Makeup and especially Skin Care have enjoyed the bulk of [ROH] growth in recent years, driven in large part by the rising Asian travelers, who are very attracted to the strong beauty brands.
The Estee Lauder Company is the fastest-growing company in the Channel. We are growing share estimated at 14.5% as of 2010, compared with 13.6% in 2009. This is a result of the remarkable growth of our brands in local markets and a specific (inaudible) and product offering point of sale presentation, communication, services, and consumer (inaudible). Working closely with our global brand teams and our colleagues around the world, we coordinate and support global product launches to leverage local market investments. Our [key] dedicated brand teams deliver specific products [to assess] the combination of existing products, (inaudible) pre-packaged skin care regimens tailored local needs, our unique [color matching] positions, a color palette, fragrance (inaudible), or even exclusive skin care items. These offerings answer the specific needs and demands of a traveling population. They also respond to the need for strong consumer relevance of our brands in the channel.
Business conditions have been excellent since the start of fiscal 2010, and we're poised to end the fiscal year with sales growth above 20%, versus traffic growth of only 8% over the same period. New products have been a key driver for all brands, and a disciplined implementation of our pull-push strategies are yielding remarkable results. The slow down in Japan travel since the terrible tragedy that hit the Sendai region, and the current turmoil in the Middle East are showing a limited impact on our performance to date. We are, however, monitoring the situation very closely going forward.
We believe that the overall channel and our business in it, are together poised for continuous long-term growth as a result of it increasing passenger traffic, combined with improved in-store penetration, sales conversion, and sales per transactions. As an example, there is potential to believe that 12% to 15% of all travelers who actually visit airport duty-free stores and actually purchase something in those stores. We are committed to building the category and partnering with the best retailers around the world to enhance the consumer experience and improve performance of the category.
International patterns of traffic is forecasted to grow around 5% annually over the next four years, compared with 3.5% annual growth for the past four years. Looking at total travelers, including outbound, inbound, and transit; over 400 million new travelers are expected in the next five years, from the base of around 2 billion passengers in calendar 2010. We should note that higher than average growth will be expected within Asia and to and from Asia, an area of trend for the Estee Lauder Companies. We also believe that airport shopping facilities will continue to expand and improve, providing a very strong platform to present our brands in the best possible way to the customers, as we enhance their traveling experience between pro services and product offering, in particular.
We're confident that the other companies could continue to grow faster than the boutique category in the channel, as a result of our strategies to fully leverage investments of our brands on new or existing products and our ability to capture a larger share of growing traffic for specific and targeted initiatives, combined with the overarching implementation of our high touch sales model. When engaged, for instance, traditional airport and [inflight] advertising, [targeted] consumer communication and enhanced sales propositions across all our brands. Our Travel Retail division is also extremely well positioned with ever-growing [contingence] of emerging consumers from China, India, Southeast Asia, Eastern Europe, Latin America, and the Middle East, and eventually, Africa.
In particular, our brands resonate very strongly with 18 million Chinese international air travelers who impact our business, not only in Asia but also the Americas, Europe, and the Middle East. Chinese air travelers are growing at a rapid pace of 11% annually, and the strong appeal of our brands in mainland China makes us uniquely positioned to take advantage of their appetite for high quality Skin Care brands. As you know, the Channel is subject to a number of risks that could impact air travel and through a series of slowdowns [could impact] in our business, political events, natural disasters, health crisis, current situations, and global economic recessions are examples of such risks to the business.
Market relativity is managed through regional and brand [preferred specification] and our integration in the Estee Lauder Company's global business. We are excited about our business and it's potential, and we believe we are on the right course to continue strong growth and continue the improvement of the travel experience of the consumers, of [Estee Lauder's] growth, and the Company's overall [financial goals].
In conclusion, I would like to thank personally our retailers worldwide for their continued support. I also want to thank my Travel Retail colleagues and all the branch, regional affiliates, [professional] teams in New York and around the world for passion, support, and collaboration. I will now pass the call over to Rick.
Richard Kunes - CFO, EVP
Thank you Olivier, and good morning everyone. As you know, my discussions on the quarter and the outlook exclude restructuring and special charges. We had another strong quarter, driven by broad-based growth across our regions and categories. Sales rose 16% to $2.17 billion. Excluding the impact of currency translation, sales were up 15%. Net earnings for the quarter more than doubled to $142.6 million, compared with $68.9 million in the prior year quarter, and diluted EPS was $0.71 compared to $0.34 year.
Sales growth was about six points higher than the top end of our guidance. Approximately two points was due to a weaker US dollar then we had forecast. Some of our retail customers ordered extra inventory ahead of the April 1st launch of SAP, in seven of our international sales affiliates, increasing our third quarter sales by another two points. These sales would have likely been made in our fourth fiscal quarter. The remainder came from stronger-than-expected sales, mainly in Travel Retail, North America, and China. The incremental sales, combined with well-managed operating expenses, were only partially offset by an impairment charge for Ojon, allowing the majority of the benefit to drop to the bottom line.
Compared to last year, all product categories grew. Skin Care, Makeup, and Hair Care saw double-digit gains, with the fastest growth in the Makeup category. Sales rose 22% in local currency, with improvements in every region.
The Makeup category benefited from an easy comparison to the prior year, when we recorded approximately $27 million in returns for product reassortment at certain European perfumeries. This comparison added about 4.5 points of growth to the Makeup category. The strong underlying category growth was driven primarily by our M.A.C. and Bobbi Brown brands and the addition of Smashbox.
In Skin Care, local currency sales rose 12%, driven by strong innovation at Estee Lauder and Clinique, as well as solid growth at La Mer. The category grew in all regions, with particular strength in international markets.
Our Fragrance business grew 2% excluding currency. The category was helped by recent launches, such as Coach Poppy, and excellent growth at Jo Malone. In Hair Care, sales rose 14% from new products at Aveda and expanded distribution at Bumble and bumble. Ojon sales declined in anticipation of the fourth quarter relaunch of its newly formulated product line.
On a geographic basis, all regions rose double-digits. Sales in Europe, the Middle East, and Africa rose 19% in local currency. The prior year included a $31 million charge for returns related to the reassortment of perfumery SKUs. The current year includes approximately $36 million in additional sales orders ahead of the rollout of SAP in the UK and Germany. Excluding both of these items, local currency sales growth would be approximately 9%. Travel Retail rose 19%, thanks to the drivers Olivier discussed earlier.
Many major Western European countries grew double-digits, including France, Benelux, and Nordic, as did most of the emerging markets in the region. Encouragingly, Italy rose high single-digits. Spain, Portugal, and Greece remained soft. We continued to see healthy sales growth in the Asia-Pacific region, which gained 13% in local currency. The region benefited from approximately $6 million in incremental sales in anticipation of the SAP rollout, adding 2 points of growth.
China, which continues to lead growth in Asia-Pacific, rose 35%, and Hong Kong grew more than 20%. Taiwan and Korea were up mid single-digits. Japan contracted by about 4%, partially reflecting the impact of the earthquake near the end of the quarter.
The Americas region has great momentum, with sales rising 12% in constant currency. Latin America rose 30%, while Canada was softer this quarter, partly due to the impending relaunch of Ojon products. Our Super Premium brands had the highest growth in the US, reflecting the strength of luxury consumers. Tom Ford, La Mer, Jo Malone, and Bobbi Brown all saw very strong double-digit increases. Our three largest brands also contributed to growth, led by M.A.C., which reported double-digit gains, following a strong reception for its Wonder Woman collection. Additionally, Smashbox added 2 points to growth in the region.
Our gross margin improved by 150 basis points this quarter to 77.7%. The increase was primarily driven by lower obsolescence charges of about 60 basis points, improved product mix of 50 basis points, and favorable currency of 30 basis points. These figures include the benefit of our cost-savings initiative of $30 million.
Operating expenses as a percentage of sales improved 150 basis points to 67.0%. The improvement was primarily due to lower selling and shipping costs of 180 basis points and improved administrative costs of 180 basis points. These improvements were partially offset by the impairment charges of approximately 170 basis points, higher advertising, merchandising, and sampling of 30 basis points, in line with our strategy, as well as stock-based compensation costs of 10 basis points. These figures reflect savings of $18 million from our cost reduction programs.
Operating income increased 63% to $232.6 million, and operating margin rose 300 basis points to 10.7% of sales. Our savings programs, including a more efficient organization, indirect procurement initiatives, and the ability and processes to leverage growth, continued to support our profitability improvements. Total savings from our cost initiatives were $48 million in the quarter, and we expect to save approximately $190 million for the full year. Net interest expense was $15.8 million this quarter, compared with $18.2 million last year, due to lower debt. The effective tax rate was 34%.
In the third quarter, we recorded $23.5 million in restructuring and other special charges equal to $0.09 per share. For the full year, we expect to record charges of between $60 million and $70 million. During the quarter, we repurchased approximately 1.9 million shares of our stock under our share repurchase program.
Net cash flows provided by operating activities for the nine months were $728 million, compared with $798 million in the prior year. The biggest driver of the variance was an increase in the value of accounts receivable, due to timing of collections and the extra orders received at the end of the quarter related to the SAP rollout. Our days sales outstanding were 52 days at the end of March, compared with 47 last year. Inventory days were 169 days compared with 157 days at the end of March last year. We have been intentionally building inventory to support our solid growth and improve our service levels. We do not anticipate unusual obsolescence issues in the future associated with the higher inventory.
During the nine months, we spent $224 million for capital expenditures, which includes our Company-wide systems initiative. We also used $250 million for the purchase of Smashbox and $148 million for our increased dividend. We expect to generate approximately $900 million of cash flow from operations and use about $350 million for capital expenditures for the fiscal year.
We are very pleased with the tenor of our business. For the year we now expect local currency sales growth of 10% to 11%. Our guidance builds in assumptions for the balance of the fiscal year of approximately 144 for the euro, 83 for the yen, and 164 for the pound. This scenario would increase reported sales growth by about one percentage point.
We are committed to reinvesting behind our strategic priorities. The timing, amount, and place of our investments is thoughtful, driving our overall strategy of leveraging growth. The first nine months of the year have gone very well, and we want to keep up the momentum into fiscal 2012. We are significantly increasing investment spending in our fourth quarter in the areas of TV, digital, and print advertising, merchandising, and sampling. We will also continue to pursue our cost savings programs. Additionally, we are beginning to lay the foundation for future efficiencies by investing in several systems initiatives beyond SMI.
By the end of the fiscal year, we expect at least a 170 basis point improvement in operating margin. At this time, we now estimate our effective tax rate for the year will be between 31% and 33%. Taking all of this into account, we are raising our full year non-GAAP EPS forecast to between $3.55 and $3.65.
We are now only two months from the end of our fiscal year, and we believe we have good visibility to support our revised EPS range. There are a few items to keep in mind when reviewing your models for the fourth quarter. First, the $42 million in retail orders we shipped ahead of the SAP rollout were recorded in our third quarter, but originally expected in our fourth quarter. This was just a move from quarter to quarter, not incremental business.
Second, we recorded a $31 million tax credit in last year's fourth quarter, which added about $0.15 to EPS. Third, we are wrapping up our investment spending, especially advertising, as I just mentioned. Lastly, Japan is expected to weaken sequentially, as this will be the first full quarter following the difficulties there, and could impact EPS by about $0.05.
Looking forward, as we build our plans, we will continue to consider the risks we see in parts of the world. Unrest in the Middle East and other factors have precipitated higher fuel prices, which increases the cost of travel and could dampen consumption. We believe the negative impact on our business in Japan will continue for at least the next six to nine months. And finally, austerity measures and weak economic growth in some European countries and elsewhere could hamper consumer sentiment. That concludes my comments, and we'd be happy to take your questions now.
Operator
(Operator Instructions) Our first question today comes from Chris Ferrara with BofA Merrill Lynch. Chris, your line is open.
Dennis D'Andrea - VP of Investor Relations
Can you please go to the next question then?
Operator
Your next question comes from the line of Alice Longley with Buckingham Research.
Alice Longley - Analyst
Hi. Good morning. Could you quantify the EPS impact of the $42 million in incremental sales you got in the third quarter, because we have no way of calculating the costs associated with those sales.
Richard Kunes - CFO, EVP
Sure. That sales shift was about $0.10 EPS.
Alice Longley - Analyst
Okay. And then that takes $0.10 off the next quarter, obviously. And then, could you elaborate - - that was a short question. So could you elaborate on the 180 basis points improvement in margins you got in selling and shipments? I think that line includes compensation for people who help out customers in stores and tell us where you are getting the bulk of that savings?
Richard Kunes - CFO, EVP
Sure. As you know, our business model is built on generating high volumes through as few doors as possible, if you will, so that productivity at point of sale. What we're see is tremendous results from a sales perspective, which is helping us to drive our productivity at point of sale, and just generally across the Company we are doing, I think, a pretty effective job of leveraging growth. So our growth has been ahead of what we actually thought we would achieve this fiscal year and what we are doing is very effectively controlling our costs associated with that. And at the same time, taking some of that additional profitability and investing it in advertising, in particular, magazine and television advertising which is helping drive our business especially in markets like China. So the business model that we've built is working pretty well for us so far.
Alice Longley - Analyst
Thank you.
Operator
Your next question comes from the line of Lauren Lieberman with Barclays Capital.
Lauren Lieberman - Analyst
Thanks, good morning. This is a question actually on Travel Retail. So, as you were talking about improvements in the selling environment and so on, I know historically, and it is in your P&L today, most of the margins of Travel Retail are so accretive, because a lot of the advertising and marketing cost is actually allocated to the regions themselves, not to travel. So as we go forward and there is more investment in advertising within the channel and merchandising within the channel itself, does that cost allocation and implied profitability change at all? Thanks.
Fabrizio Freda - President and CEO
This is Fabrizio. No, actually, first of all, Travel Retail will continue to exploit the power of our brands in the key markets, because consumers in the channel market when they travel, they love the brands. And the advertising in those markets will continue to influence positively Travel Retail. But what is the new trend, the new possibility this channel offers, is actually also using the channel for equity building, and I'd like Olivier to explain exactly how he is doing that with his team in that channel.
Olivier Bottrie - Pres, Travel Retail Worldwide
Well, again, what we want to do is to exploit the possibilities given to us with very low penetration and conversion rates that we observe in airports, in particular. So what we do is put a series of activities together, and [that includes] [travel] of course, as you mentioned, to also improving our conscience in airports, includes theaters and events, [obviously], again, to drive consumers into stores and improve conversion, therefore more sales. So your question on how this could affect profitability, in effect, we invest to get more sales, and as a result, actually, the profitability goes up.
Operator
Your next question comes from the line of Chris Ferrara with BofA Merrill Lynch.
Dennis D'Andrea - VP of Investor Relations
Chris is obviously having some difficulty. Can you please move on to the next question?
Operator
Your next question comes from the line of Connie Maneaty with BMO Capital Markets.
Connie Maneaty - Analyst
Could you talk about the next wave of rollout of SAP, which countries it's going into, and would you expect the same sort of sales shift that you saw this quarter? Specifically, which quarter does the next wave start in?
Richard Kunes - CFO, EVP
So our next wave start about 12 months from now, I believe. We are working on it now, as we speak. I don't know, counting off the top of my head, the countries involved. It depends on the retailers. So what we saw this time was because of their past experience with other suppliers, they were somewhat concerned, I guess, about whether we would have any problems going live with SAP. And what happened was actually that our implementation and go live went very well for us. So I don't know whether in the future now other customers will look at that experience and assume the same, or whether they will be cautious as well and also order in advance of us going live in their markets.
Connie Maneaty - Analyst
Okay. My follow-up question is this. What is the nature of the investment spending in the fourth quarter, and should we assume that level of spending going into the first half of fiscal '12?
Fabrizio Freda - President and CEO
Yes, the nature of the spending is basically advertising and sampling and key merchandising activity on the biggest new initiatives, and launches on the biggest brands in the main markets like China or the US. And we are increasing overall advertising by one full point, so 100 basis points, in the year on average. And in the quarter, we are increasing about 140 points. So we are really taking a big stance in building our business aggressively, building on our best brands, countries, and initiatives. And we have built a business model where this is supposed to continue. So, yes, we'll continue for the future, because in our business model, our pooled activities have a bigger role.
Connie Maneaty - Analyst
Does that suggest then that in fiscal '12 this investment spending would be up about 100 basis points over fiscal '11?
Fabrizio Freda - President and CEO
No, I didn't say that every year we will go up a point. I just said that we have increased a point, and this level is supposed to continue, and we will look for opportunities to continue to gradually take this amount up, depending on business needs and opportunities.
Connie Maneaty - Analyst
Great. That's helpful. Thank you.
Operator
Your next question comes from the line of Linda Bolton-Weiser with Caris & Company.
Linda Bolton-Weiser - Analyst
Hi. Just a follow-up question on the Travel Retail impact. That impact that you gave, the 0.5% for the fiscal year, does that include just your sales in stores, as in other channels in Japan, or does it include the anticipated effects on the Travel Retail? And can you also comment on whether - - we found some data points that about 15% of the Travel Retail sales globally are to Japanese travelers traveling abroad, and can you comment if that is accurate? And maybe you can just give some commentary about what - - I mean, are you seeing any impacts in terms of specifically the Travel Retail piece of the Japanese situation? That would be the first question.
And then my second question has to do with the America's strengths. I am wondering if you could give us some more detail on that, maybe department store sales, compared with alternative channels, because the number that you're showing there seems extremely strong. And I just want to better understand the growth that's happening there in the Americas.
Fabrizio Freda - President and CEO
Okay. Let me put the number first ahead. Japan is about 5% of our business. We are seeing about a 10% reduction because of the dramatic event and Travel Retail related to Japanese people. So Travel Retail in Japan and influenced by Japanese travelers is about 6% of the Travel Retail business, and on that front, we are seeing for the time being about a 20% to 30% impact. So the combination of those two elements, meaning the Japanese traveling, Travel Retail, and Japan Mainland is the $0.05 impact that we have quoted.
The next question is on the US, is that we see the specialty stores in the US continue to be the fastest-growing channel in Prestige, but department stores are also growing pretty fast in [and still] as I said, the combination of department store, specialty store, Prestige channel is growing at this point faster that drug en masse.
Operator
Your next question comes from the line of Wendy Nicholson from Citi Investments.
Wendy Nicholson - Analyst
My first question has to do on the Travel Retail business. One of the comments I think that Olivier made was that the market share for Estee Lauder is only about 14.5%, and that surprises me that is so much lower than what we see in terms of your department store market share. And I was wondering if you could split that out maybe geographically or some other way, because that just seems like an awful low number.
Olivier Bottrie - Pres, Travel Retail Worldwide
Well, it's slow but growing, so that's good news. We actually, as I said, we have the fastest-growing Company in the channel, and I think it's been like that for two years now. The reason why we have a global market share of 14.5% only is due to the fact that the (inaudible) within market historically is European [play] and a Fragrance [play]. As a Company, we are specialized in cosmetics and beauty, more than the Fragrances today, and our strength is really in Asia.
Now, as I mentioned as well I think in my prepared remarks, the trend is towards Makeup and Skin Care, and we have very good expectations, very good hope, we could going forward continue to gain market share in the channel and increase that share on the back of Makeup and Skin Care, as a company, of course, deploys also more investments acquiring brands to show a presence in Fragrances worldwide.
Wendy Nicholson - Analyst
Okay. And then given that - - it just seems like you've got a tremendous amount of headroom there, and that's great. And given the margin profile, Fabrizio, even if the fourth quarter margin is flat with year ago, which I think is again kind of what you are implying with the guidance, which seems really hard to believe, with foreign exchange and everything else, you are still going to end this year kind of halfway toward your 2013 margin goal, north of 13% already. Is there any reason for us to think that margins aren't going to be up in 2012 and then again in 2013, because it just seems crazy that you're not raising that 2013 margin target at this point?
Fabrizio Freda - President and CEO
We are not raising it at this point, because we are still analyzing n details all the elements, and when we have all the elements, we will continue to update our [guidance] in this sense. But if your question is, should you expect to continue to see our margin progress yes, you should. As we said, we had a very strong margin progress at the beginning of our program. We have today, in the middle, after two years of our four-year program, because the majority of cost savings, and the majority of mix improvement, and the majority of improvement on under-performing brands, that were a big part of our historical issue, all these things happened in the first three years.
Now, we will continue to progress, it may be a different pace. We said already, in a previous call, [we will see] only 60 points, so a 0.5 margin per year minimum as our ongoing ability to continue growth. So we will work on this, and then when - - in August we will present next fiscal year, we will also update our thinking on the long term.
Operator
Your next question comes from the line of Caroline Levy with CLSA.
Caroline Levy - Analyst
Hi, everybody. I just want to clarify quickly a couple points. In Europe, Middle East, et cetera, a year ago, I think you had a charge of $31 million, and so if I were to add that back to last year and take out the pulled forward sales this year, it looks like the growth in Travel Retail would have been about 7% for EBIT. So that would be adjusting out the charge from last year and taking out the pull forward sales. I just want to know if I'm getting that wrong, or is that the right calculation?
Richard Kunes - CFO, EVP
You are doing the right for calculation for the region, but not for Travel Retail. None of that was associated with Travel Retail, so the $31 million charge last year was associated with the SKU assortment in perfumeries in Europe. So that was a charge. You're absolutely correct on that. And the shift in sales was all at a sales affiliate level, the UK and Germany this year where sales from the fourth quarter were moved into the third quarter, so those would be the two adjustments that it would make.
Caroline Levy - Analyst
So Travel Retail was obviously very strong, but it sounds like than the other business the EBIT was down. I'm just wondering how much was discretionary, because you felt like you had the money to spend. Were margins under pressure ex-Travel Retail?
Richard Kunes - CFO, EVP
No, you are right. It was based on spending patterns, but it has nothing to do with our profitability improvement within the region. I think if you look on a year to date basis in Europe, I think you will see that our numbers are up substantially, and I think you'll still see, for the full year, a substantial in the profitability of the European region, and quite honestly, throughout all of our regions.
Operator
Your next question comes from the line of Bill Schmitz with Deutsche Bank.
William Schmitz - Analyst
Good morning. Can you talk more about what's going on with Fragrances? I just kind of read some of the guidance here, and are you going to exit more brands, is that why sales are going to be slow? It was kind of written cryptically. And then I have a follow up.
Fabrizio Freda - President and CEO
No, we are not going to exit more brands. Actually, we are building more our Fragrance portfolio. As we announced, we have Zegna also included in our portfolio for the future. We are investing in improving our Fragrance business around the globe. As we said, we made excellent progress in Fragrances in the last year, so now they are contributing to our profit improvement year-to-year in a substantial way, and our high-end fragrances like Jo Malone and Tom Ford are among the fastest growing brands in our portfolio, so actually, we are in good shape there.
William Schmitz - Analyst
Okay, great. And then must my follow-up question is, you kindly provided us with sales and operating impact of the pull forward of those SAP-related pre-buys. It looks like the margin in Asia was 83% in those incremental sales and something like 72% in Europe. Why are those margins so high?
Richard Kunes - CFO, EVP
For us, Bill, you see our gross margin, and there is really very little expenses associated with it. So when they ordered additional -- at the end of March ordered additional stock, there was no expenses associated with it, so it was pure gross margin to us, and the same happens next quarter when those sales don't happen. So we don't change our spending plans as a result of that. Those say sort of constant, so that's what generates that huge margin.
Operator
Your next question comes from the line of Joe Altobello with Oppenheimer.
Joe Altobello - Analyst
Thanks. Good morning, guys. Just a couple of questions. First, over the past few years it seems like you benefited nicely from the trade down within the Prestige channel to opening price point brands, like Clinique, like Estee Lauder. Are you still seeing this in a big way? Because it seems like those brands did well this quarter, but also the super premium brands did well, like La Mer, for example. So are you just gaining share across different price points, or are you seeing trade up?
Fabrizio Freda - President and CEO
Actually, what we are seeing is really the strength of our broad portfolio of businesses or brands, because what we are seeing is that our Clinique and M.A.C. brands, for example, which are at the entry price points of Prestige, they continue to benefit from the trade up actually, from [mass] into Prestige. They are at the entry of Prestige, and they are the brands which are growing, thanks to the ability or our model to attract people and consumers also from [mass], drug, and other channels around the world.
On the contrary, our high-end brands, meaning the most luxury brands in our portfolio are currently benefiting from the fact that the luxury consumer is back, and they are looking now for quality and for high-quality brands, and in our portfolio, we have brands to offer in that area. And those brands are now growing faster again, where those brands, as you know, during the recession have been weaker than they are today.
Joe Altobello - Analyst
Got it, okay. Just one second one. In terms of the de-emphasis on promotional activity, or the pull strategy as you call it, are promotional levels now sustainable, or are there additional reductions next year that should be re-deployed into advertising?
Fabrizio Freda - President and CEO
I think that we are on a journey. We will continue to rationalize our market spending, including our promotional spending, and to reinvest part of these rationalizations into activities with higher return, and again, advertising, particularly digital, and to a certain extent, also printed TV, depending by country, we'll continue to gradually increase.
Operator
Your next question comes from the line of Jason Gere with RBC Capital Markets.
Jason Gere - Analyst
Thanks. Good morning. The first question, just the language in the release, just on the Americas, Europe, the outlook remains cautious, and that may be just your normal language, but I was just wondering if, in the context if you could talk about inventory levels may be at retail? First, second, the competitive environment, maybe in the department store right now. And then third, I think Rick you mentioned something about fuel prices. I was just wondering any type of studies you've done. Typically, we think of fuel price as affecting the low end consumer, not the high-end, but I was just wondering what type of studies you have done to kind of analyze that? Thanks.
Fabrizio Freda - President and CEO
Okay. Let me - - so, we are cautious in Europe because some markets are under pressure, so we definitely continue to see soft markets in Greece, in Portugal, in Spain. Specifically, we continue to see soft markets also in Australia, and obviously in Japan, and in some of the Middle East countries, which are closely affected by the political turmoil. On North America, actually, we're not cautious. We see that the North America business market trends are pretty positive in this moment, as I said, driven by the fact that the luxury consumer is back.
Richard Kunes - CFO, EVP
Regarding fuel prices, at a certain point in time, we realize that our customers, for the most part, are not - - probably have the disposable income to buy our products regardless of the fuel prices, but at a certain point in time, fuel prices start to work on the consumer confidence and start to affect people's spending patterns and the way they look for their economic well-being, if you will, and it starts to affect the overall economy. There is a point in time, gas is at $4.40 or $4.35, I think I saw on the way in to the office this morning, so gas is starting to push up, and all we're saying is that if that continues, if that price dramatically changes, there could be an effect on the consumer sentiment, which would obviously affect our business.
Operator
Your next question comes from the line of Ali Dibadj with Bernstein.
Ali Dibadj - Analyst
Hey, guys. How are you?
Richard Kunes - CFO, EVP
Hi Ali.
Ali Dibadj - Analyst
Couple of questions. First off, just around your guidance. I guess I still struggle with it. First off, for next quarter, even if you pull out the kind of sell [forward], if you pull out the increase in advertising expense et cetera, I just have trouble believing, I guess, in a down quarter. I guess in that context more broadly, I guess I am certainly questioning guidance, I guess, in a broad sense, in terms of what you have done over the past several quarters. How should we think about guidance? How much credence should we give guidance? Any guidance on that would be helpful, I guess.
And as a piece of that, if you could address the impact of foreign exchange on the bottom line this quarter. It sounds like it's a little too low for at least our numbers for next quarter, and kind of the impact you have on the bottom line versus the top line. And then I have a follow-up for Olivier please, on Travel Retail.
Fabrizio Freda - President and CEO
So let me first try to give you some specific numbers, and then you can judge our guidance in this case. First of all, the high end of our sales guidance would be in terms of sales growth for the last quarter. It would be about 12% if you have to adjust for the shift in orders that we had ahead [of SMI go live] in April, and for the impact on Japan in the quarter, which is about 2 percentage points in the quarter. So if you adjust for this, the top line will be about 12%. Now, 12% is in line with the first nine months, more or less, and so it's in line with the 10%, 11% we see [for the first]. So we don't see the fourth quarter to be two different in terms of apples to apples comparison, in terms of top line.
In terms of bottom line, you need to, again, keep under account the fact that we are investing 140 points more behind advertising opportunities for a specific choice that I have been, frankly, repeating, that we have taken the flexibility to invest in our biggest opportunities for the long-term. And we are taking the opportunity to build and consolidate our strong market share gains in places like China and Travel Retail, now that we can, now that the market is strong, because that's the right moment to do it for the long-term. And we are taking advantage of the right windows when they open. And so yes, you are going to see an important increase in advertising investment; that should benefit in turn also our top line in 2012. And you need to keep under account that last year, we had a $31 million tax credit that we do not have in the last quarter of this year, that should increase the quality, at least, of the earning will be different. Now I don't know, Rick, if you want to add anything.
Richard Kunes - CFO, EVP
Yes, Ali, the exchange benefit that we had versus our estimate, we mentioned 2% of sales. That was worth about $0.04 from earnings in the quarter.
Ali Dibadj - Analyst
Okay. And just the longer-term guidance on Travel Retail, and now that we have one of you on the phone, we might as well take advantage of it. Can you talk to us a little bit about what you saw, the category in Travel Retail growing? You talked about traveler growth, but the category has been growing over the past X number of years, and how you see that going forward? You did again mention the traveler growth going up a little bit, but if you could give us some sense of that? And then if you would, just aggregate that. So you talked about traveler growth, obviously you talked about penetration, which I guess his distribution, you talked about conversion. How should we think of those buckets over the past couple of years for you, and how should we think about those as the pieces of your growth going forward? Thanks very much.
Olivier Bottrie - Pres, Travel Retail Worldwide
Thanks. First of all, let me qualify penetration. Penetration is a ration of travelers in stores. Basically, it's a percentage of travelers visiting stores. When we talk about a long-term outlook, a key factor of our growth in the future is, of course, traffic, but as I explained we are able now to update traffic quite handsomely through techniques and activities that actually drive penetration and conversion.
The category, which is a tough question, has been steadily growing in the industry over - - (inaudible) is number one in the channel, and it's been growing, as I said, in the past 10 years at 10% annually, while the overall channel, including all categories, has been growing 7%. And again, that trend we see it would continuing in the future if only due to the rise of Asian travelers, and more specifically, Chinese travelers, who happen to be avid consumers of Skin Care brands and spend much more on average than the typical Travel Retail consumer.
Operator
We have time for one more question, which comes from the line of Mark Astrachan with Stifel Nicholas.
Mark Astrachan - Analyst
Hi, everybody. I'm wondering if you could talk a bit about what's driving the sales growth sustainably and meaningfully ahead of just global Prestige Beauty? And then somewhat relatedly, I'm curious if you see any gaps in the portfolio, where you think there is an opportunity to expand this into new categories, price points, et cetera?
Fabrizio Freda - President and CEO
First of all, we believe we can continue to drive our sales growth ahead of the market by about a point minimum every year. That's what we said for the long-term. Now, we are doing better than that in this moment, thanks to the many great success in the activity we are running. But that is the minimum [stand] that we have given ourselves for the long-term. Now, why we believe we can achieve that and why we are doing better than that today, is because in reality, we are putting focus on the biggest opportunity. We have chosen to play in areas which are the fastest growing areas.
We put our boat in the wind very well, and the wind is coming from China, the wind is coming from the other emerging markets, the wind is coming from multicultural, multi-ethnic consumers. The wind is coming from high-quality brands, and importantly, we gave a great contribution to create new wind in our core channel, which is US department stores, which is now growing again, and is growing also because of the many important efforts and new business models we are deploying in this channel. So we can grow faster because we are particularly well-positioned in the fastest growing segments of the entire global market. And by the way, Travel Retail is part of this.
The second question is what are the gapping opportunity in the portfolio. Definitely, we have put a huge priority on Skin Care, and I believe it's just the beginning of the journey. Particularly, there's more and more opportunity to continue to leverage the Skin Care category in Asia, and as Olivier just explained, in the fast-growing Travel Retail channel. And that will be an area where we'll continue to focus, continue to [enforce] our position, among others.
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 12.00 noon Eastern time today, through May 12. To hear a recording of the call, please dial 1-800-642-1687, pass code 61746037. 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.