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Operator
Good day, everyone, and welcome to The Estee Lauder Companies fiscal 2015 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.
Dennis D'Andrea - VP of IR
Good morning, everyone.
On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer.
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.
Our discussion of our financial results and our expectations are before the impact of accelerated retailer orders that took place in the fourth quarter of fiscal 2014 due to the July implementation of our Strategic Modernization Initiative, which would have occurred in our fiscal 2015 first quarter.
We will note the impact of this shift in orders on our fiscal 2015 first-quarter results and full-year expectations.
You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website.
I'll turn the call over to Fabrizio.
Fabrizio Freda - President and CEO
Thank you, Dennis, and good morning, everyone.
During the first quarter of fiscal 2015, we delivered a solid financial performance in spite a difficult global backdrop, highlighting the benefit of our broadly diversified business.
Like many companies, we operated against several macroeconomic and geopolitical issues, ranging from the foreign currency headwinds and slower growth in some of our markets to unrest in Hong Kong, the Middle East, and Ukraine.
We weren't immune to the challenges, but many of our brands, countries, and channels were resilient and even vibrant.
Our best-performing areas were our luxury and makeup brands; our online, travel retail, and freestanding store channel; as well as the European region, where we gained share.
Our sales rose 5% in local currency, meeting our expectations and continuing a pattern on profitable quarterly growth.
Earnings per share came in above our forecast.
Prestige beauty overall remains healthy, as consumers are constantly drawn to innovative products and the hottest trends.
Our creativity and ability to react quickly has enabled us to capitalize on many areas that we are winning.
Looking across prestige beauty, makeup is in the spotlight, generating the stronger growth.
Our three fantastic makeup-focused brands helped fuel this trend with great success.
Each one grew double digits.
M.A.C.
is our largest makeup brand and a true powerhouse and generated another terrific quarter, with strong momentum globally and standout results in the UK and Latin America.
We continue to build awareness and strategically fill distribution voids by opening freestanding stores and M.A.C.
creative product launches continue to attract consumers.
Lipstick were strong sellers, as were new and innovative kits and assortment of palettes.
M.A.C.'s Next Viva Glam spokesmodel, Miley Cyrus, is certain to bring attention to the brand and to its AIDS-related philanthropic causes when the new lip products will launch in January.
Bobbi Brown introduced exciting products that captivate the consumers, including a new version of its iconic Skin Foundation Stick and updated its counters with a new marketing campaign featuring its celebrity spokesperson, Kate Upton.
And Smashbox trends in the specialty multichannel generated significantly higher sales globally.
Makeup also lifted the Estee Lauder brand, led by its Pure Color Envy franchise, which launched last spring with lipstick and this quarter expanded into eyeshadow and is selling well globally.
Foundations were also strong for Estee Lauder, helped by its launch of Perfectionist makeup and strength in Doublewear.
Skincare remains our largest category, and we are creating products that appeal to multiple demographics and add incremental sales.
The most significant launches came from Clinique.
Its Smart Custom-Repair Serum had strong consumer reception.
It became the best-selling anti-aging prestige skincare serum in the UK, where Clinique is the number-one prestige beauty brand.
Clinique Sonic System Purifying Cleansing Brush marks the Company's first entry into the device category.
It is selling particularly well in Asia and travel retail and recently launched in the US.
We expect this new product to generate good momentum for Clinique in the second half of the fiscal year.
Several other brands also have exciting skincare launches coming up in areas with strong consumer interest.
Estee Lauder's new Enlighten line of products target uneven skin tone, and its high-end Re-Nutriv Ultimate Diamond Dual Infusion will strengthen its position in premium skincare.
La Mer and Origins are exploiting renewed interest in facial masks, with several offerings that treat different concerns.
La Mer launched Intensive Revitalizing Mask in many markets.
In the UK, nearly one-quarter of the units sold was to first-time consumers, which demonstrates the brand's success in creating innovative products that attract new users.
Our powerful product portfolio is filled with high-quality prestige brands.
Our mix -- the midsized luxury brands, which cater to more affluent consumers, enjoyed the fastest growth, both in the US and globally.
Sales from Tom Ford, La Mer, Bobbi Brown, Jo Malone rose double digits from both like-door growth and targeted distribution gains as they continued expanding to reach new consumers.
In their early stages these brands were among our smallest, but after rapid expansion in recent years they have not only grown in size, but have become significant contributors to growth.
Channel diversity remains one of our strengths.
Our E&M commerce business grew almost 30% globally.
The impressive increase came primarily from organic growth, where we added four brand sites and refreshed other sites with new technology and navigation.
Visits to our brand sites globally rose 22% in this quarter, and other metrics also shows important gains.
Sales from our freestanding store also rose sharply, reflecting our strategy to build our business in this channel globally.
Led by our luxury and specialty brands, our net sales in travel retail grew double digits.
Our retail sales in the channel, however, rose 4%, slightly below the growth in passenger traffic, largely due to major product launches the previous year from Estee Lauder and Clinique brands and a falloff in Chinese tourists in Hong Kong, where we have a very high share.
Travel retail is one of our important engines, and we expect to return to retail growth ahead of traffic because of strong initiative on the biggest brands, opening more doors and expanding distribution in high-growth midsized brands.
In travel retail our net sales exceeded retail sellthrough, because we needed to supply the new doors, and retailers were bullish ahead of Asian Golden Week holiday travel.
We expect a rebalancing of trade inventories in the second quarter.
Geopolitical issues are making global travel factors more volatile, which are reflected in our travel business.
This quarter the strongest retail growth was in the Americas, while the last two years Asia-Pacific had the biggest surge in sales growth.
By being flexible, we directed and will contribute to direct our investment to the biggest regional opportunities contributing to sustained growth.
Outside of travel retail our geographic strength was centered in Europe, the Middle East, and Africa, where we posted excellent growth despite the continued economic malaise in many European countries.
Our UK business remained excellent, with double-digit growth at retail ahead of net sales, with most brands contributing.
Our brands were strong in Western Europe, but grew even faster in emerging markets in the region, led by Russia.
Retail sales grew ahead of prestige beauty in many countries, enabling us to gain share.
Emerging markets are an important part of our growth story and continue to provide much of our fuel.
Excluding China, sales in our emerging market rose more than 30%, with superb results in many countries, including the Middle East, Brazil, Turkey, and South Africa.
This group is as large as China and continues to provide strong momentum, demonstrating the balance across our business and the scope of our geographic strength.
China remains our largest single emerging market, and last month I spent time there to get the first-hand update on consumer sentiment and current market dynamics.
The fundamentals driving increased consumption in China remain positive, and the country remains one of our major long-term opportunities.
Wealth creation and disposable income continue to rise among the growing middle class.
They are passionate about beauty products and aspire to prestige beauty brands.
Near-term prestige beauty sales continue to grow, and we are the leader; but the market has become more complex.
Competition is intensifying in prestige.
Promotions have increased, and the gifting of luxury items has decreased.
At the same time, Korean trends are gaining in popularity, and some Korean brands have carved out a masstige tier, attracting some of the consumers stepping up from mass.
In total, our retail sales in China rose 5% against a slight net sales decline.
We entered nine new tier cities and launched Origins on Tmall.
Online is the fastest-growing channel for beauty in China, and our e-commerce sales doubled, although it is a small percent of our business.
Sales of the Estee Lauder brand declined slightly in the quarter, reflecting the previous-year initiative and the high promotional environment I mentioned.
Estee Lauder is the top prestige brand in China in its distribution, and we are working on many exciting new initiatives to further build its momentum and adjust to the new competitive reality.
Nonetheless, all our other brands -- from Clinique to M.A.C.
-- had robust double-digit retail growth this quarter in China, creating a more balanced brand and category mix.
The recent introduction of Jo Malone in China is off to a great start and well ahead of our goals.
Makeup is gaining momentum, and our makeup brands grew solidly by embracing Korean trends and appealing to consumers with the most relevant product and looks.
As the global leader in prestige makeup, we anticipate China will become a more significant factor in our makeup business.
During the quarter, fewer Chinese traveled to Hong Kong, where last year more than half of our domestic sales came from Chinese tourists.
This was influenced by a change last fall that restricted group visas.
In light of the recent protests, fewer individual tourist visas were issued.
Despite fewer Chinese travelers, our Hong Kong sales in the quarter were flat.
However, starting in the final days of September, large protests resulted in businesses closing and kept people away from key shopping districts.
The situation has continued and is expected to sharply impact our business in Hong Kong in the second quarter.
Balancing the softer-than-anticipated results in greater China was positive news out of other Asian-Pacific countries -- namely Korea, Japan, and Australia, where both net and retail sales generated strong growth.
We have a strong turnaround in Korea, as our brands tapped into consumer preferences and leveraged local trends.
Many of our larger brands had positive growth, including Estee Lauder, M.A.C., Bobbi Brown.
And several of our smaller brands such as Jo Malone, Aveda, and La Mer resonated strongly in the market.
As a company we gained share in Japan in our distribution with Estee Lauder, La Mer, Jo Malone, and M.A.C.
showing excellent gains, while our online business grew double digits.
In Australia our sales grew double digits due to improved market conditions and growth in our brands across many channels.
The US remains our biggest market, and our brands hold the top 10 prestige skincare SKUs and 8 of the top 10 makeup SKUs.
Many of our brands showed healthy growth, including M.A.C., La Mer, Jo Malone, and Smashbox -- all of which gained share.
Although prestige beauty has accelerated overall from the pace a year ago, the majority of the growth is being driven by online as foot traffic in brick-and-mortar stores has slowed.
It was a challenging quarter for our multi-category brands -- Estee Lauder and Clinique -- in the US, which posted lower retail sales versus the previous year in brick-and-mortar department stores, where they generate most of their business.
This was partly because they were up against difficult comparison with the previous year, when they launched reformulations of important iconic products.
We believe fewer Chinese travelers also impacted the Estee Lauder brand in its home market.
Both Estee Lauder and Clinique, however, had good growth in their e-commerce businesses in the United States.
We expect the upcoming holiday season to be solid, with the consumer paying particular attention to value and attractive online shopping offers.
With that in mind, our brands will continue strong marketing investment against their recent product launches and have created compelling assortments of gift sets that offer desirable products with good value.
They are also working actively with their retail partners on their online sites to drive sales.
We are actively working to bring in growth in Estee Lauder and Clinique in the US in the second half of the fiscal year with multi-category innovations.
And we continue to support our retailers with compelling advertising, merchandising programs, and in-store activities to increase traffic.
We expect to generate sales growth of 5% to 6% this fiscal year, with a significant contribution coming from M.A.C.
and our midsized brands.
To maintain our steady annual growth, we are driving our portfolio on two main fronts.
We are strengthening and expanding our existing brands to keep them relevant in all regions; and, at the same time, we are actively seeding and nurturing the next generation, with an eye to create the next big brands of the future.
As part of this plan we recently acquired two small brands that have long-term potential to contribute to our continued growth.
Le Labo is a high-end fragrance and sensory lifestyle brand that emphasized craftsmanship and personalization, and Rodin Olio Lusso is a luxury oil-based skincare collection.
Both brands have a unique positioning and are targeted to the ultra-prestige consumer, which is core to our strategy.
With over 60 years of brand-building leadership, we are confident we can help these brands grow and prosper, like we continue to do successfully with many other acquisitions, such as Jo Malone and La Mer.
The founders of Le Labo and Rodin will stay with the Company, and together we will execute our collective vision.
We welcome their ideas and entrepreneurial spirit, which fit perfectly with the heritage of the Estee Lauder Companies.
We demonstrated this quarter that thanks to numerous growth engines, our ability to aggressively drive our best opportunities, and continued focus on managing cost efficiencies, we navigated short-term challenges and delivered solid growth and financial results.
We are making progress and are determined to deliver the savings through our SMI program that are embedded in our long-term margin targets.
Our July rollout of SMI Wave 4 has gone extremely well, and I want to thank all of our employees who have served this project with extreme dedication and terrific results.
With our diverse brand portfolio, balanced worldwide business, and increased exposure to fastest growth channels, we believe we will continue to deliver sustainable, profitable growth long-term.
We have the winning formula.
More than two-thirds of our businesses is growing solidly, and we are disciplined in our management of expenses.
We will continue investing in marketing programs and capabilities that are necessary to maintain our long-term growth and remain committed achieving our financial goals.
Now I will turn the call over to Tracey.
Tracey Travis - EVP and CFO
Thank you, Fabrizio, and good morning, everyone.
I will briefly review our fiscal 2015 first-quarter results, and then I will share with you our expectations for the second quarter and the full year.
To better demonstrate our underlying business performance, my commentary excludes the first-quarter and full-year impact of the acceleration of retailer orders that shifted sales from the first quarter of fiscal 2015 into the fourth quarter of fiscal 2014 related to our July rollout of SMI.
The impact of that shift was $178 million in sales and $127 million in operating income, equal to approximately $0.21 per share.
Also excluded is the year-over-year impact of restructuring and other charges.
Net sales for the first quarter rose 5%, as reported, and also in local currency, in line with our expectations.
Every geographic region and every product category contributed to constant currency sales growth in the quarter, demonstrating the benefits of our diverse portfolio.
Our gross profit margin of 79.6% was 10 basis points below the prior-year period, primarily reflecting the net of unfavorable mix, offset by favorable pricing.
Operating expenses improved 10 basis points to 62.7% of sales.
Advertising and marketing investment decreased 140 basis points, as planned, as we anniversaried heavy spending from last year's major skincare and fragrance launches in the quarter with smaller product launches in this year's quarter.
This favorability was offset primarily by a combination of higher retail store operating costs and investment spending behind key initiatives.
As a result, operating margin remained unchanged at 16.9%.
Earnings per share increased to $0.80, above the top end of our guidance range, reflecting more disciplined cost management.
All elements of working capital improved in the quarter, with inventory days to sell improving by 2 days to 193 days.
During the quarter we generated a $98 million improvement in cash flow from operating activities, primarily through working capital improvements.
We invested $79 million in capital projects, primarily to support new retail stores and new counters.
We utilized $207 million in cash to repurchase approximately 2.7 million shares of our stock, well more than the amount purchased during last year's first quarter.
We also used $78 million for dividends to stockholders, ending the quarter with $1.4 billion in cash and cash equivalents.
A small portion of cash was used in the second quarter as we acquired Rodin and Le Labo.
Additionally, this morning we announced a 20% increase in our quarterly dividend.
Let me now turn to our outlook for the second quarter and for the full fiscal year.
At this time we are maintaining our view that the global prestige beauty will grow between 3% to 4% this fiscal year, but we do expect, with the macro issues Fabrizio mentioned impacting Asia and other markets, it will now be toward the low end of that range.
Our sales for the full fiscal year, adjusted for the accelerated retailer orders, are now expected to grow 5% to 6% in constant currency.
This primarily reflects the recent retail disruptions in Hong Kong and a reduction in sales from Chinese travelers globally.
The US dollar has strengthened since we last provided guidance, and currency translation is now expected to negatively impact our full-year sales growth by approximately 3 percentage points versus the 2 percentage points we gave you previously.
Our estimate assumes weighted average exchange rates for the full year of $1.24 for the euro, $1.62 for the pound, and 110 for the yen.
We remain committed to both near-term and long-term margin progression.
For fiscal 2015 we now expect constant currency operating margin growth of approximately 30 to 40 basis points.
The reduction in expected tourism impacts our higher-margin channels, geographies, and product categories.
Now that we have successfully completed last major wave of SMI, we are actively engaged in driving the SMI benefits that we shared with you last quarter.
As a reminder, efforts are underway to leverage the new processes and tools we have implemented to enhance our forecasting capabilities, which should result in progressive improvement in the inventory levels needed to prove support our sales, fewer sales returns, and less obsolescence.
We are also working on improved management of the total cost of global and local product launches, which further enables our A&P effectiveness and our identifying additional procurement savings and productivity improvements.
We have reorganized our internal team to more fully integrate SMI value creation and our efforts behind other costs savings initiatives to maximize the realization of benefits behind the biggest cost opportunity areas.
As I have mentioned previously, these multiyear savings programs do enable us to reinvest a portion of that savings that are generated into capability areas, such as product innovation and R&D, digital and e-commerce, and retail capabilities and other areas critical to our success in sustainably delivering our strategic objectives.
The net benefits of these combined efforts are reflected in our forward three-year margin guidance.
These efforts, combined with our brand growth strategies, allow us to continue to support our long-term margin goal of 17.5% by the end of fiscal 2017, despite the short-term macro headwinds we are managing through this year.
For this fiscal year, we have adjusted our full-year EPS expectation to a range of $3.03 to $3.11.
This compares to our fiscal 2014 EPS of $2.95 before charges and the accelerated orders.
The 3 percentage points of negative currency translation on our top line this fiscal year equates to about $325 million or $0.13 of EPS.
Excluding this currency impact, our EPS is now expected to rise by 7% to 10% versus 8% to 12% previously provided.
Our expectations for reported full-year GAAP results are for sales to grow 2% to 3% in constant currency.
Earnings per share are expected to be between $2.82 and $2.90.
Regarding the second quarter, our sales are expected to grow 3% to 4% in local currency.
Translation could contract growth by approximately 4 percentage points.
While our marketing investments behind recent product launches as well as our promotional activities around holiday should help drive sales growth, the Hong Kong challenges are expected to have the greatest effect in the October to December quarter.
Our retail sales in Hong Kong fell more than 20% during the first weeks of October and declined over 40% in the affected areas of the protests.
To put this into context, as Fabrizio mentioned, more than half of our business in Hong Kong is derived from Chinese mainland visitors.
Additionally, the sudden slowdown in both Hong Kong and travel retail is causing some retailers to recalibrate inventory levels.
This pressures our net sales in the quarter but bodes well for reorders in the second half of the year.
We anticipate the second-quarter EPS will come in between $1.01 and $1.05.
The approximately 4% negative currency impact on sales growth in the quarter equates to about $0.05 per share.
When managing a broad, global business like ours, disruptions in any part of the world can and are likely to happen periodically.
Our agility in recalibrating our business while continuing to support our strategic objectives allows us to continue to deliver solid results without sacrificing our future growth potential.
Indeed, the growth expectations for prestige beauty continue to be among the most robust and consistent in the consumer sector.
Our position in prestige beauty is strong, due in part to the investments we continue to make in our brands and channels globally to enable their continued momentum.
And that concludes our prepared remarks.
We'll be happy to take your questions at this time.
Operator
(Operator Instructions) Nik Modi, RBC Capital Management.
Nik Modi - Analyst
A couple of questions.
Thinking about your travel retail business, you know, you've been building that business by conversion partly; and I'm just curious if you can give us an update on that strategy?
I think it was 10% of all shoppers going through duty-free were actually buying one of your products.
I'm just curious if you can give us an update on that.
And then on the acquisitions, should we be thinking about a Smashbox type of growth curve here, in terms of how it's going to contribute to your business?
If you can just frame how we should think about these acquisitions and its impact on the P&L?
Fabrizio Freda - President and CEO
Okay.
On travel retail, we are working very actively on conversion -- things like advertising in light boxes in the biggest airports, for example; working marketing activities, airport online activities connected; and, obviously, launches in merchandising on the launches of our new initiatives.
We started from -- about 10% of people we have converted.
We believe this is growing, and now we are in the range of 12%, 15%.
Over time this may continue.
Now, obviously, there is no perfect number of this, but those are numbers that we collect airport by airport with our experience there.
So it's difficult to do an average global number after this.
But we are sure that the conversion ability of our activity is increasing, and we will continue to work on this strategy, which I believe in the medium-/long-term is a very important piece of the continuous increase of sales in travel retail.
In terms of our acquisitions, those are very small brands that we have acquired really to grow for the long-term.
Our acquisition strategy includes the idea of taking some brands that we believe are outstanding, and particularly which are managed by outstanding entrepreneurs that we really love to get also in the Company, working with us on these brands, and to grow these brands over the long-term in their space.
Now, we have capabilities; we cover 140 countries.
We have great R&D capability.
We cover travel retail.
We cover online.
So we can give to the small brand access to opportunities they didn't have before.
And these will drive, we believe, outstanding growth over the years.
It's more -- think of La Mer.
When we acquired La Mer, it was a $1 million business; and today it is the brand that it is.
So that's the spirit, but it's not comparable to Smashbox.
Smashbox was already a midsized brand.
And, obviously, it's been growing, is doing fantastic, but is doing fantastic from an already bigger base.
Tracey Travis - EVP and CFO
So the impact on our P&L this year will be de minimis, and in the next few years relatively small as well -- although the brands are expected to have strong accelerated top-line growth.
Nik Modi - Analyst
And then just one question on skincare.
You talked a lot about the initiatives that you have in place, but this is a business that has been soft for the last few quarters.
And just curious, from a competitive standpoint, is there anything that we should be thinking about in a certain region or a certain competitor that might make your path back to growth a little bit more challenging?
Fabrizio Freda - President and CEO
I think that we have been growing a bit less in skincare in the last quarters than we used to.
And this is because we have a big business, and because some of our initiatives delivered below our original expectation.
But I still believe our skincare innovation pipeline is very solid.
The opportunity to grow skincare in the long-term remains big.
The way we are thinking is we are increasing the amount of innovation in skincare.
That's the concept.
We have -- the growth of the new categories in the skincare arena has been very interesting and very promising.
And we need to tap more into these new categories to grow more aggressively skincare, which we are going to do.
Operator
Ali Dibadj, Sanford C. Bernstein & Company.
Ali Dibadj - Analyst
So a couple of things I want to get some more clarity on.
One is to go back to skincare.
One of the drivers of innovation, I thought, as you mentioned in the last conference call, was R&D spend.
We haven't seen that tick up, so I want to get an update on that and if that's going to help your skincare numbers going forward.
And how much of that skincare weakness is related to the Americas -- which, obviously, if it was flat, the US was down.
We are starting to hear that some of the retailers are doing better in the mask area and want to know if you think that has an impact on your business.
And then two other questions, more long-term in nature.
One is, from the market rate, that you still believe in the kind of 3% to 4% range, albeit more towards the 3% range -- but you are taking down your top line by about 1 point.
Is that just kind of in the rounding?
Or do you think you are exposed more than the marketplace to some areas of weakness?
And then the last part -- I apologize; trying to squeeze it in -- the last part is this year you are saying 7% to 10% EPS growth, ex currencies, ex SMI.
As you look forward, can you give us a sense of what you think drives you back to double digit EPS growth, and how much of that is macro versus how much of that is stuff that you are going to do yourself?
Thank you.
Tracey Travis - EVP and CFO
Well, Ali.
So I'll start with the R&D investment.
Our R&D investment is -- we are making incremental investments this year in R&D.
Some of those investments certainly are geared towards skincare, so that certainly should -- is anticipated to help our innovation plan in the next few years and is critical to our strategic growth plans.
But we actually have been increasing our R&D investment the last couple of years and certainly plan to do so again this year.
Fabrizio Freda - President and CEO
Yes.
On the skincare, yes, there is -- in the US -- obviously, our skincare has not been growing strongly as it used to, so that's part of the issue that we are going to address.
We need to increase the amount of innovation in the US market to compete in a market that in skincare is becoming much more competitive, and that's the plan.
There is innovation in multiple different skincare categories, well beyond most moisturizers, serums -- which are the traditional ones -- as an example, masks, oils.
So the skincare has become more competitive, because innovation is happening at the same time in multiple categories.
We are adjusting and actually anticipating -- with some new, I believe, strong ideas -- these kinds of trends for the future.
The other theme that has been addressed in skincare is also linked to R&D.
And a big part of the skincare consumption of the world comes from Asia.
At the moment Asia/Asia travelers are a bit softer, automatically this is a negative input on the percentage of skincare sold.
Today there is this dynamic that we have discussed in the remarks that the softness of Asian travelers versus other travelers, for example, of other emerging markets has an impact on skincare.
The third effort -- there are some new trends in skincare, which are mainly Asian trends, that we can address.
And this, frankly, doesn't require necessarily R&D capability, but it requires the conceptual ability to transfer these existing premium products among regions.
And that's also something which is happening, and we will continue to do more aggressive there.
We'll push up our innovation programs in skincare.
Last question that you had was on the 7% to 10% EPS growth ex currency.
And that's a range.
You know, we had before an 8% to 12% range.
And in that range, obviously, what will influence this range is first of all the sales -- how the sales will go -- and, importantly, the mix of the sales.
Because some of our sales are more profitable than others, by channel, by category, and by brand.
So the mix of the sales is what is in this range.
The level of the sales and, importantly, the level of some of our cost-saving programs -- how much of these will be at the end impacting current fiscal year.
As Tracey explained, we are working very hard to ensure that the maximization of the saving year after year, in line with our SMI goals.
Operator
Wendy Nicholson, Citi Investment Research.
Wendy Nicholson - Analyst
Question really follows up on that question about the long-term growth rate.
But looking specifically at the margin dynamic in two of your businesses, you know, we've heard reports that your margins in the travel retail business are coming down just because of the extra investment spending you are doing there, just building out the light boxes in the airports, and all of that.
Can you talk about that specifically?
Just the margin trends within travel retail and where you see them going?
And then secondarily, I know your margins were up strongly in Asia this quarter.
And you talked about lower investment spending; I'm sure that's just a timing issue, but given what you talked about in terms of the increased competition, the heightened promotional activity, and what sounds like maybe a mix shift towards more makeup as opposed to skincare in Asia, should we expect Asia margins to kind of be flat to down?
Again, I don't care about the second quarter, but kind of over the next 18 months, 24 months, is Asia going to be an area for margin compression, do you think?
Thanks.
Tracey Travis - EVP and CFO
Okay.
So let me start, Wendy, with the travel retail question.
Our travel retail margins are not under pressure.
We have been investing in light boxes over the last few years, and our travel retail margins have been steadily improving.
So that is not an issue for this year.
We have invested in opening new points of distribution for some of our luxury brand -- our makeup brands as well as Aveda.
So a lot of the investment in travel retail this year is for new distribution, which certainly has proven to be productive and profitable for us.
So we certainly are bullish on the travel retail business going forward and don't expect margin pressure.
Fabrizio Freda - President and CEO
And on the Asia margins, I think in Asia the investments will continue, and we will continue to invest in building the markets.
Obviously, we will adjust the investment to the level of opportunities.
The moment like it was this quarter, where there was certain turmoil, certain softness, we felt it was not needed to push the investment beyond reasonable, because the consumers were not reacting anyway.
And also we are trying not to make Asia overpromotional.
So we have tried -- sometimes we accept lower volumes, like in this case in China, to avoid to become overpromotional.
So those are choices for the long-term and, I guess, may have an impact quarter by quarter.
But in the long-term we don't believe there will be margin pressures because of needed investments.
Now, the evolution of the mix by countries -- this is obviously -- could be a big positive.
There are countries which are more profitable and countries which are less profitable in China, so the mix is an element.
The other element is the cost savings.
Also in Asia we have opportune part of this cost savings that Tracey is refer to are also happening in Asia, where there is a lot of work going on at this moment on SMI value creation activity.
So the mix of all this, I believe, will allow us to continue over time to develop in the proper way our margin in Asia.
Tracey Travis - EVP and CFO
And the only thing I'll add to that, Wendy, is clearly this year -- and you said you weren't focused on the short-term, which is good -- some of the shortfall that we are seeing relative to our prior expectations because of some of the macro events, given the geography that they are impacting, do impact the skincare business.
So that is a high-margin business for us, as you know.
Fabrizio Freda - President and CEO
Yes.
And I think we were very clear in the prepared remarks -- you know, Hong Kong skincare is among the most profitable businesses in Asia and, frankly, around the world.
That's why it's difficult to offset it in the short-term.
Actually, it would be the wrong decision, in our opinion, to try to offset it in the short-term, cutting investments which are, on the contrary, good investments which will provide long-term, solid growth.
Operator
Caroline Levy, CLSA.
Caroline Levy - Analyst
My question is around the guidance for the full year relative to the second quarter.
Your comparisons are much harder as you move to the back half of the year -- be it sales or margins.
So if your second quarter comes in in your guidance range, what are the factors that you think that can drive sales growth and margin acceleration so much that you can get to the full-year number?
What's going to happen in the back half despite those tough comps?
Tracey Travis - EVP and CFO
So, Caroline, actually the second half is a bit easier for us from a comp standpoint.
So as we said earlier in our prepared remarks, we had major launches in the first quarter of last year related to Estee Lauder and Clinique.
And we had softer launches, certainly, this year relative to last year.
In the second half of the year, we have lots of good programs planned for both Estee Lauder, Clinique, as well as our other brands.
We have the benefit of new door openings that have happened during the course of the back half of last year and the beginning of this year that will help from a growth standpoint.
And we are assuming that Hong Kong situation is really a first-half issue, and that it will return to growth in the second half.
So those are the things that are embedded in our second-half earnings, both sales and profit, that lead us to provide the guidance that we did for the year.
Fabrizio Freda - President and CEO
Also, in the US there is also -- in the third quarter there is a low base of retail, because there was one less week in retail.
So the indexes will be helped by that situation -- by the low base last year.
Tracey Travis - EVP and CFO
And the Polar Vortex.
Fabrizio Freda - President and CEO
Yes.
And also, all of you will remember the toughest winter on earth that we had last year in the US.
And we have expectation that this has created a low base in term of retail opportunities for this very big market for us.
And, finally, there are many markets that last year were under pressure, like Korea, as we just said.
Frankly, this is very good news, that we are again growing in Korea; like Russia; like Australia.
Then there was the Venezuela issue last year in the second semester.
So our assessment is actually we have an easier base, as Tracey said, in the second six months.
Operator
Lauren Lieberman, Barclays.
Lauren Lieberman - Analyst
First, just talking again about the best retail, so in terms of the Chinese traveler impact, I know there are some stores where you have a dramatic -- really significant data suggesting the prevalence of Chinese travelers in that store in particular.
So is there any data, or even anecdotal, you could provide to say how much traffic was in some of these very Chinese-traveler-heavy particular retail outlets?
That's one.
And then, two, outside of that issue just a little bit around the retail environment in general in the US?
Because I know that some of the data across retail mall traffic centers have been weak.
So what are you anticipating as you look forward into the calendar fourth quarter for holiday?
And just what you think the overall health of the US luxury market is, outside of the Chinese traveler issue?
Fabrizio Freda - President and CEO
Okay.
Let me start from the overall.
So the market grew about 5% overall in the quarter that we just closed, which was better than July/September last year.
So the overall market in beauty -- prestige beauty -- in the US is growing and has continued to grow faster than mass.
So the fundamental phenomenon that we had been driving over time and discussed with many of you, that the idea of sourcing from mass and growing prestige faster than mass -- this is still happening and is happening in a positive trend.
The second reality is that the way the growth is happening, the amount of growth which is happening online and in E&M commerce is increasing.
We had strong growth of online in the US.
Our retail partners are having outstanding growth in their retail with us.
So the proportion of the growth that goes to retail is increasing.
As a consequence the pressure on brick-and-mortar productivity is also increasing, because there is less growth in the brick-and-mortar path.
And that's what you refer to the fact that traffic in some malls is not exciting.
And that's -- the two phenomena are related.
So it is very important over time, and we are doing this with many of our retail partners, to continue to look at the productivity of the brick-and-mortar; and to create traffic opportunities; and to continue to build traffic also in brick-and-mortar in the right way.
We believe holiday will be a great opportunity for that.
Tracey Travis - EVP and CFO
And then, Lauren, as it relates to your question on Chinese traveling consumers and their impact in the US: in the doors that are measured, where we know there is a disproportionate amount of tourists, we have seen a disproportionate impact in the first quarter related to softness and volume.
So you are correct.
Operator
John Faucher, JPMorgan.
John Faucher - Analyst
Tracey, you talked about sort of the significant cash balance that you guys have, and the cash flow was very strong in the quarter.
It looks as though working capital could be nicely favorable over the course of the year.
Can you talk a little bit about sort of your attitude in terms of looking at the dividend increase, in terms of your ability to really ratchet up the cash return to shareholders as you get what could be, let's say, a 20%, 30% increase in free cash flow this year?
Thank you.
Tracey Travis - EVP and CFO
Yes.
You know, I think -- and it's a great question.
So we demonstrated that last year.
As our cash flow -- our free cash flow increased during the course of the year, we increased our share repurchase activities.
So we have over the last few years had a good mix of both dividend increase as well as share repurchase increases.
Certainly, to the extent that we expect to continue to improve working capital this year, we would increase our share repurchase activity, as I believe I stated on the last call.
Similar to prior years, we are looking at redeploying our free cash flow into dividends and share repurchase.
We announced an increase of the dividend this morning.
And certainly the share repurchase activity will increase as our free cash flow increases.
Operator
Olivia Tong, Bank of America.
Olivia Tong - Analyst
A lot of your competition is non-US based, so they get the currency tailwind, while you have to deal with the headwind.
So I'm kind of curious how that potentially impacts your marketing and spending plans for the year?
Fabrizio Freda - President and CEO
So we plan to continue to invest in marketing and activities for the year.
That's the reason why we are adjusting our estimates in EPS is exactly -- to make sure that short-term issues will not impact what we believe are long-term investments.
So we will -- this fiscal year we expect our marketing investment to be ahead of the previous year in absolute terms and to remain more or less stable in terms of percentages.
And the reason why the percentages will remain stable is also because the amount -- the growth on our non-advertised brands, or when our brands with lower levels of advertising, like La Mer, the M.A.C.
in our portfolio, is obviously stronger than the growth of our heavy advertised brands like Lauder and Clinique.
So there is a mix reason why the percentage remains stable.
But the absolute level of spending is expected to increase, and we believe these investments will drive growth for the medium- and the long-term.
Operator
Bill Schmitz, Deutsche Bank.
Bill Schmitz - Analyst
Just a couple of questions.
For the second quarter, have you tried to sort of -- can you tell us what the difference is between shipments and consumption in your guidance?
And then I have a follow-up.
Tracey Travis - EVP and CFO
Between shipments and retail?
Fabrizio Freda - President and CEO
Retail will be ahead of shipments.
Tracey Travis - EVP and CFO
Yes.
So we had a little bit of the reverse in the first quarter, and I think I mentioned in our prepared remarks that we expect that that will cure itself in the second quarter, which is part of the reason for the guidance that we provided in the second quarter.
Fabrizio Freda - President and CEO
Yes.
And the two markets where the retail will definitely be ahead of shipments in our assumptions is travel retail in the US.
Operator
Michael Steib, Credit Suisse.
Michael Steib - Analyst
I have a couple of questions.
Fabrizio, just a point of clarification on the US: you mentioned sort of pressures on your brick-and-mortar customers.
Just to be clear, you mean by that department stores?
Or are you also saying that some of the special retailers -- the growth in those channels has slowed somewhat?
And then my second question really relates to -- now that SMI is complete, really, are there perhaps opportunities for you to accelerate some of the productivity initiatives that you've been working on to offset some of these weaker micro trends?
Thank you.
Fabrizio Freda - President and CEO
Okay.
So, yes, I was referring to our business in department stores.
That's where we had been challenged and we are going to improve our plans and work to go back to stronger growth.
I was referring to our business in brick-and-mortar department stores, not in specialty, which continues to grow very well.
Also, the business in (technical difficulty) stores continue to work strongly.
The business online continues to work strongly.
And that's the picture in the US.
Tracey Travis - EVP and CFO
And as it relates to SMI, you are correct.
You know, we finished the Group 4 implementation in August, so we went live in July.
The Hyper-Care this time was the shortest that we've had.
So, again, flawless execution by the team, as Fabrizio mentioned.
The team, along with many others in the organization -- really, throughout the globe -- are now focused on SMI value realization.
We've combined what had been our former cost savings efforts and initiatives, which was a separate group from the SMI group into one group.
They are focused on leveraging the capabilities that we have gained in SMI from process and system, the additional visibility to information that we have gained, and really leveraging that to drive cost savings opportunities in the biggest areas of opportunity, which I outlined in our prepared remarks.
The focus for us is on continuous cost improvement.
So it's not a program; it's actually a habit going forward.
And as we have spoken about in the last few calls, when we look over the next few years in terms of where margin expansion will occur, we expect less in terms of gross profit margin, more in terms of the expense areas.
So this is a strategic enabler for us.
And it is terrific to be able to now leverage this tool over the next few years.
We actually for this year, given some of the softness that we've seen, have identified incremental cost savings over and above the cost savings that we had embedded into our plan and into the guidance for this year, as an example.
Fabrizio Freda - President and CEO
And the reason why we have done is to defend the marketing investments.
Tracey Travis - EVP and CFO
Right.
Fabrizio Freda - President and CEO
As they keep on it.
Operator
Steve Powers, UBS.
Megan Cody - Analyst
This is actually Megan Cody calling in on behalf of Steve.
Just one question that we had was -- how much macro noncurrency deceleration was baked into your prior guidance versus now?
Tracey Travis - EVP and CFO
Macro noncurrency?
Megan Cody - Analyst
Yes, so, like, you guys obviously upped your FX headwind, but since you brought down your constant currency sales growth guidance, what kind of non-currency-related headwinds do you have baked in there?
Tracey Travis - EVP and CFO
So in terms of our updated guidance, about half of it was related to currency, and about half of it was related to the macro issues that we outlined for you in the prepared remarks.
So it's about half-and-half.
Fabrizio Freda - President and CEO
Yes.
If that was the question -- half currency, half Hong Kong, mainly.
On the other half that is not currency, a big, big percentage was the Hong Kong channels, right?
Tracey Travis - EVP and CFO
Right.
Operator
Chris Ferrara, Wells Fargo.
Chris Ferrara - Analyst
Thanks.
Can you guys just give a little more detail on an ex-SAP-shift basis, why were profits in the Americas down as much as they were -- down 29%?
And I guess -- and I'm sorry if you said this already, but, Fabrizio, where in the Americas exactly will shipments lag consumption into next quarter?
Thank you.
Tracey Travis - EVP and CFO
So the Americas sales, as you saw from our press release, were actually flat.
So, you know, that is difficult to -- even though certainly there were cost actions that were taken, it's hard to offset flat earnings.
And Latin America was up; the US was slightly down.
And that's how we net it out in terms of flat sales.
So that's the reason why we have the deleverage in the Americas.
We did, as Fabrizio mentioned, protect some of our marketing spend and some of the critical initiative investments like R&D that we are making in the organization.
Fabrizio Freda - President and CEO
Yes.
Tracey Travis - EVP and CFO
And in terms of where you are going to see the shipments lag, the retail really in the US is --
Fabrizio Freda - President and CEO
In travel retail.
Tracey Travis - EVP and CFO
In travel retail, yes.
Operator
Alice Longley, Buckingham Research.
Alice Longley - Analyst
I have follow-up questions about the second half of the year.
If I use the upper end of your guidance and adjust out the SMI shifts, it looks like you are projecting second-half earnings up 15%.
So I'm trying to factor in what gets better.
You already said that you expect Hong Kong to return to normal.
Do you expect -- you said on travel retail that you are losing share now but expect to gain share ahead.
Does your guidance bake in share gains returning in travel retail in the second half?
And also, on the Estee Lauder and Clinique brands in the US, does your guidance assume that those brands resume growth in the second half in the US, or maybe just lesser declines?
Thank you.
Fabrizio Freda - President and CEO
So, yes.
Let's start from the US.
What is in our -- again, we will try to remake your calculation to see what you said; that's not exactly the way we see it, but we will see.
But anyway, your point is right, anyway.
We need to have a much better performance in the second six months versus the base.
As I said, we have an easier base.
The second point I want to make on the overall is that although the majority of the growth of profit will need to come in the second six months, the absolute level of profit is the large majority is in the first six months.
So if you look at the numbers, you will see that the 60%, 65% of the absolute profit will be delivered in July/December, and only about -- maybe less than 40% of the profit will be delivered in the January/June.
So we have much more investment and cost flexibility to deliver the profit in the second six months than what we had in the first six months, just as a general statement that is plain, I hope, clearly, why we have the confidence that we have.
The second point is what should go better.
I think many things should go better.
As Tracey already explained, we assume that we will not have in the second semester the same Hong Kong issues that we have in the first -- in the second quarter.
Second, we are assuming that in the US we will deliver a better trend.
How this will be composed?
Will it be composed by continued outstanding business on our M.A.C.
and on our luxury brands around our rest of the world portfolio, and the stabilization or if there's lightly improvement versus stabilization on Lauder and Clinique.
So not a huge assumption, but a reasonable assumption of our two biggest US brands; while the rest of the portfolio, which is doing outstanding, is assumed to continue to do outstanding.
Then there is a continuous improvement in the traveling corridors, because, again, the base is different in the second six months and because there are many activity in travel retail that we are doing that we expect to make, as I said in my prepared remarks, to make travel retail to grow again above traffic.
And that's the key goal in what is in our assumption.
Third and last, or fourth and last, what is in our assumption is the delivery of the cost-saving opportunities that Tracey has commented on that, obviously, we have started.
Don't forget that July is when we went live.
So we have started many of the savings as soon as we can.
But more of them will impact the second six months of the year of the one that could impact the first six months of the year.
Operator
Mark Astrachan, Stifel.
Mark Astrachan - Analyst
Two questions -- one, I wanted to revisit the China commentary about the slowdown and then the share gains in the masstige.
I'm curious how you quantify the impact from some of those companies that are doing a particularly -- given long-term growth expectations from one of the larger Korean companies over the coming years.
So do you know what you need to do to offer competing brands to retake share, or to sort of stem what seems to be coming?
And then, secondly, just go back to Hong Kong -- some of your large prestige beauty competitors didn't call it out.
I guess I'm curious; like, is there something within your business that's a little bit different than theirs?
Do you have more retail doors, or is there some sort of more online presence?
More department store presence for one versus the other?
Maybe some sort of quantification there would be helpful.
Fabrizio Freda - President and CEO
Let me start from Hong Kong.
Again, as we said in our prepared remarks, the real big impact in Hong Kong started in September, early October.
So in the quarter we saw the initial softening.
In fact, we were in July/September stable in Hong Kong.
But it's our estimate is the impact that will have on our business in the entire quarter -- our estimate is based in what we have seen in the month of October during the protest.
So this is an estimate, and I cannot comment on why our competitor didn't bring it up.
It is an estimate based on an October observation -- which, by the way, was not the first quarter.
I think we made it very clear in our report.
The second thing is, yes, we have a very big business in Hong Kong.
We have a very high market share of Hong Kong.
And because our business is also so strong in mainland China, half of the Hong Kong business is done by Chinese.
So also the market share of the Chinese that come in is very high.
So as a concept we have a very high market share in Hong Kong.
And if Hong Kong gets a cold, we get a bigger cold than many of our competitors.
And there are other parts of the world that if that part of the world gets a cold, our competitor get the bigger flu.
So it is a matter of market share in certain areas.
By the way, we are very happy to have a very high market share in Hong Kong, because it is a superb market for the long-term.
And we actually protect our market share with the appropriate investment in the short term, because, again, we are there for the long-term.
Answering your second question -- is Korea and Korean trends.
First of all, let me say that I would like to say that we have been seeing this coming since a long time.
You heard me speaking about Korean trends as a big idea in the market since a long time.
So we recognize Korean trends, the fact that Korea is becoming an exporter of pop culture and trends in the Asian region and possibly around the rest of the world over time.
The same way we have recognized for years when trends were coming from America, and we have brought many brilliant American trends or Californian trends, like our Smashbox brand does every day, to the rest of the world -- or French trends, or Italian trends, or even British trends with our Jo Malone brand.
So we are able to recognize trends when they are, wherever they come.
And the way to compete with these Korean trends' reality is actually to embrace them and to bring them around the world.
Our brands -- Clinique, namely, has been one of the first brands in prestige bringing the BB creams and CC creams to the US, which is actually a Korean trend.
Today Smashbox and Clinique are a very high market share of BB and CC in this market in the US.
And there are more trends that M.A.C.
has brought around the world on Korean looks.
And by the way, this is one of the key ideas behind M.A.C.'s success in Asia, is the embracing of Korean looks of this brand, which is done fantastically well with amazing creativity.
So that's the first part of the answer is that our brands are embracing Korean trends.
The proof that we are doing this well is that, as I just said, we are winning again in Korea.
And the fact that the Estee Lauder brand is growing in Korea, and that some of our brands -- makeup brands like M.A.C.
or other skincare brands -- are winning big in Korea again means that we -- actually, on purpose we have used our activities to learn how to compete with Korean brands, leveraging local relevant Korean trends in Korea so that we can then compete effectively in the rest of the world.
The second part of your question was about Korean brands.
Yes, there are some Korean brands which are particularly successful, generally, in creating these mass/masstige players that are also sourcing from us, particularly in China and in Korea.
And, yes, this is also a very interesting phenomenon.
While the amount of competition in the luxury area for the moment is limited, and obviously is big in Korea, and limited in China, and not yet present in the rest of the world -- but I think we are ready to compete also with Korean brands in the future.
And we are prepared to manage this correctly.
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 1 PM Eastern Time today through November 18.
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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.