雅詩蘭黛 (EL) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2017 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.

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

To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges.

You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website.

(Operator Instructions)

And I'll turn it over to Fabrizio now.

Thank you, Dennis, and good morning, everyone.

Our company delivered an excellent performance in the third quarter.

Our business accelerated, driven by many brands, channels and markets that experienced strong momentum.

In constant currency, our sales rose 9% and adjusted diluted earning per share increased 28%, both of which exceeded our expectations.

The outperformance was generated from stronger organic sales growth largely in China and travel retail channel, a better-than-expected performance of our newest brands, Too Faced and BECCA; as well as disciplined expense management.

Once fiscal '17 began, we said our sales were expected to accelerate every quarter, culminating in a robust second half.

As we look to the fourth quarter, our sales growth should increase further, enabling us to deliver our financial and sales target for the full year and position us for a strong start in fiscal year 2018.

Our success this quarter came despite continued external macro headwinds in certain areas.

In the U.S., foot traffic continued to decline in brick-and-mortar department stores, our largest domestic channel, and Macy's closed 68 stores as expected.

In certain other countries, we faced difficult economic or political climates, particularly in the Middle East, Turkey and Latin America.

And the continued strengths of the dollar impacted our reported results.

Globally, we encountered stiff competition from both established and upstart brands.

The further we have achieved a strong performance against this backdrop speaks to our successful strategy, which is anchored by our increasingly diversified business model and multiple engines of growth.

We also are benefiting from our choice to stay focused on a dynamic prestige industry that has been growing steadily for many years and continues to grow faster than many other household and personal care sectors.

As global prestige beauty undergoes rapid change, we are embracing new opportunities, accelerating penetration of the fastest-growing channels, reallocating resources to the leading business drivers and pivoting for the future in our industry.

Consumers' appetite for beauty products is intensifying, particularly in the luxury arena and in makeup, which fueled outstanding growth in our high-end brands and continued double-digit growth in our makeup category.

In addition, we're enjoying superb growth in the fastest-growing beauty channels, with travel retail, online and specialty-multi, each rising strong double digits.

By geography, we grew strong double digits in certain emerging markets, notably China.

Altogether, we generated higher sales in every region and in our 3 largest product categories, fueled by an acceleration of our hero products, new product innovation and increased social media presence, new digital initiatives and greater penetration in the fastest high-growth channels.

At the same time, we continued investing in priority areas and capabilities under our Leading Beauty Forward initiative.

Our diverse portfolio of brands continues to be a strategic advantage.

We leverage each brand in the most appropriate prestige distribution channels to target different consumer segments.

This approach yielded outstanding results for our luxury brands, including Tom Ford, La Mer and Jo Malone.

Each generated double-digit sales growth in constant currency in every region.

La Mer's new hydrating serum and brightening mask were well received and benefit from an increase in traveling Chinese consumers around the world.

The brand gained share in Asia Pacific and maintained its leading position in luxury skin care there.

Among our largest brand, Estée Lauder achieved the solid growth globally for the second consecutive quarter, with higher sales in skin care, makeup and fragrances.

The brand was well positioned to capitalize on increased travel and consumption from Chinese consumers, which favorably impacted its business in travel retail, the U.K. and Asian markets, and lifted its skin care sales.

Estée Lauder's makeup category excelled in Asia Pacific, with increases in face, lip and eye products.

The Estée Lauder brand continue to support its 2 key hero franchises, Advanced Night Repair and Double Wear, with new products combined with more effective marketing and communications.

The investment paid off.

The 2 highly desirable product lines reached the new consumer, posted positive growth in every region, and increased double-digit for the fiscal year-to-date.

Around the world, Double Wear is the best-selling prestige foundation in many markets, such as the U.K. and attracts consumers across generation to the brand, including millennials.

We have successfully created new growth engines with our luxury and artisanal fragrance brands, and they continued to advance strongly, while at the same time, improve the profitability of the entire fragrance category.

Jo Malone and Tom Ford accelerated rapidly, particularly in Travel Retail, and we also see great potential for our newer fragrance brands: Le Labo, Frédéric Malle and By Killian.

This has the first full quarter that reflected the contribution of our newest brands, Too Faced and BECCA, and their sales exceeded our expectations.

We also started to expand their presence internationally.

Adding these brands to our portfolio accelerated our penetration in both makeup and in the fast-growing specialty multi-channel, and increases our reach with millennial consumers.

Indeed, many of our brands are expanding in fast-growing channels to reach new consumer.

Since today, they have wider choices of where to shop for prestige beauty products.

In this regard, we are excited our M-A-C brand will launch this month in Ulta Beauty, one of the fastest-growing specialty multi retailers in the United States.

Ulta's consumer are devoted beauty enthusiasts, and have been requesting the brand.

M-A-C will first be available on ulta.com starting next week, followed by about 25 stores beginning in June, with more than 100 doors planned by the end of December.

The locations will feature dedicated M-A-C makeup artist in a boutique-like setting, allowing M-A-C to provide its exceptional artistry services.

Expanding into specialty-multi globally is integral to M-A-C's strategies to grow its consumer base, continue to raise awareness, become more accessible and drive incremental sales.

Although M-A-C is the #1 prestige makeup brand worldwide, it is in less than 3,000 doors, a fraction of the location of most of its direct competitors.

In some cases, in even less than 15%.

M-A-C continues to make great inroads in specialty-multi internationally.

In Brazil, for example, M-A-C is the leading brand on sephora.com and will open in some of the retailers' top brick-and-mortar stores this August.

In Europe, M-A-C is increasing consumer reach by opening more doors with Douglas, as well as other specialty-multi retailers, including Kicks in Sweden.

Our Estée Lauder brand launched in Ulta last fall in 30 doors, and successfully tapped into a new audience.

During the first 3 months, more than 40% of consumers who bought its products were new to the brand, and over 65% of the new makeup consumers were millennials.

With strong sales results, Estée Lauder plans to roll out to more Ulta stores.

Clinique's experience in Ulta has been terrific, and it is building on its business there with more in-store boutiques.

By the end of fiscal '17, our 3 largest brands will have strategically expanded their consumer reach in the U.S. specialty-multi channel.

Several of our other brands have achieved strong sales in the U.S. specialty-multi, including GLAMGLOW, Smashbox, Tom Ford in Sephora and Darphin in Bluemercury.

During the quarter, we launched Jo Malone and La Mer into a few key Sephora doors, including its largest one that recently opened in Manhattan and also on sephora.com.

Initial response has been terrific.

Both brands are recruiting new consumer from these efforts.

Internationally, our business has also performed well in many specialty-multi retailers, including Mecca, Boots, Douglas and Shoppers Drug Mart.

More specialty-multi retailers are entering Korea, and Clinique and Origins have expanded their consumer reach to some of these new locations.

Clinique and M-A-C has launched in specialty-multi in Thailand with fantastic results.

We had outstanding results in travel retail, led by our business in Asia Pacific.

Our vibrant retail sales showed the strongest quarterly growth in over 3 years, and far outpaced passenger traffic growth in the quarter.

Sales increased in every product category.

Makeup sales surged, led by M-A-C, Tom Ford and several other brands.

Higher skin care sales were driven by Estée Lauder and La Mer and the greater number of Chinese and other Asian travelers.

And in fragrance, we still lead total beauty sales in the channel.

We achieved the superior results and share growth, led by Jo Malone and Tom Ford.

We believe there will be strong demand among consumers for our newer luxury and artisanal fragrance brands in travel retail, as we roll them out, enabling us to further penetrate the channel's most important category.

We also continue to expand the availability of other brands that aren't widely distributed in travel retail, and brought more brands into more high-potential airports.

Our sales from our e-commerce channels continue to grow at an exceptional pace, up 30% globally, more than twice the growth of e-commerce in general.

Sales rose double digits across brand, retailers and third party sites, and also grew double digit in every region, driven largely by increased traffic, order size and conversion.

Mobile-driven sales rose significantly, and are now a larger portion of our total mix.

We entered Hong Kong, a new market for our online business, with a brand size from GLAMGLOW.

And in China, our online sales soared, led by our brands on Tmall.

M-A-C plans to launch on Tmall this quarter, which should provide more fuel for our China business, and allow M-A-C to reach new shoppers in smaller Chinese cities, who don't have access to its products in brick-and-mortar stores.

Globally, we continue to successfully launch additional brands online in more markets.

Department stores are striving to provide consumers with strong experiences they can't get anywhere else.

International department stores, remains strong, particularly in Europe and China.

We continue to work our -- with our U.S. department stores to create in-store and omni-channel excitement and innovate with product, services, merchandising and education.

We are devoting additional resources to the top doors and promoting in-store events on retailers' websites, where, as I just mentioned, our business had been brisk.

Research shows that consumer who shop both in-store and online spend more than those who buy in just one channel.

We have been proactive with department stores to design strategies to reinvigorate traffic, while addressing productivity challenges in brick-and-mortar.

Now let me turn to our recent and upcoming innovations.

Across our brands, we are focused on the biggest global opportunities, which in Clinique's case means its core products, like moisturizers.

Its initial launch of Fresh Pressed Serum and Cleanser with concentrated vitamin C was a global hit that garnered terrific attention and demand, and validated the brand's plans to leverage the initial success with a more extensive rollout in the coming months.

The serum is used with the brand's moisturizers, which increases their sales as well.

Fresh Pressed helped drive improving retail trends for Clinique in China and travel retail.

In another move to strengthen its position in moisturizers, Clinique just introduced a supercharged hydrating formula of Moisture Surge, developed from property technology that is expected to elevate the best-selling franchise.

Clinique marketing will focus on the instant benefits of Moisture Surge, which has been growing in most markets.

Estée Lauder will begin introducing Advanced Night Repair eye concentrate matrix in July.

This product, which contains innovative technology based on scientific breakthrough research, repairs the visible signs of aging on eyes to make eyes look refreshed and features a custom-designed massage applicator.

It is one of the brand's highest-scoring products in testing with consumers.

For example, after 4 weeks of usage, almost 90% of women said their eyes looked more youthful.

It will be supported by a 360-degree campaign based on strong insights from consumers around the world.

In makeup, we are very excited about Estée Lauder Double Wear Cushion Compact for Asian markets, which would be supported by strong investment in China and Pure Color Love Lipstick, a global launch that is aimed at younger consumers.

M-A-C new Next To Nothing sheer Face Colour is a lightweight foundation that makes skin glow.

It is being supported with a major social media campaign that is already helping fuel M-A-C sales this quarter.

In fragrance, Jo Malone launched Star Magnolia Cologne, which is expected to add wide appeal, and Tom Ford created SOLE DI POSITANO, which evokes night fragrant Italian coast.

With the help of our Leading Beauty Forward initiative, we continue to reallocate resources faster and cut costs deeper to invest in talent and capabilities that will drive our business in today's evolving beauty landscape.

This includes social media, digital technologies, retail operations and analytical expertise.

To help leverage both new and existing brands, our brands continue to increase their social media activity and capabilities to engage consumers across numerous digital platforms, using influencers, brand ambassador and other compelling voices and technologies.

For example, Smashbox collaborated with a popular influencer to help promote its Cover Shot Eye Palette, and the collection became one of the brand's largest launch ever.

And in China, the Estée Lauder Brand significantly lifted its makeup sales by leveraging a combination of in-store and social media campaigns.

This kind of digital content created by influencers and third parties is measured in terms of earned media value.

In the third quarter, M-A-C remained the second-largest beauty brand among prestige and mask makeup players in earned media value in the U.S., as measured by Tribe Dynamics.

M-A-C has improved its earned media value share in makeup in each of the last 3 quarters.

Our brands are also creating inventive digital experience for consumers.

For example, a cutting-edge technology used by Estée Lauder and Smashbox lets consumer visually apply different lipstick shades either in real-time or in selfies.

Our performance this quarter further demonstrated our company strategy, built on multiple engines of growth and leading to agile resource reallocation when needed is sustainable and working.

Our company has the most desirable portfolio of prestige brands in the industry, and we are pivoting to strategically deploy them across fastest-growing channels and consumer segments around the world.

Importantly, we have the highest-quality workforce with extremely capable people committed to our company's success.

At the same time, we are reducing costs, redesign for better sales growth leverage, and reallocating our resources to make priority investment in the most attractive areas that are expected to drive our growth in both the fourth quarter and next year.

As a successful high-growth company in a growth industry, we have continued to increase our global share in prestige beauty.

And as we enter our fourth quarter, we are further building momentum to deliver another year of strong profitable growth.

Now I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning, everyone.

First, I will review our fiscal 2017 third quarter results, and then cover our expectations for the remainder of the fiscal year.

As a reminder, my commentary excludes the impact of restructuring and other charges, which are disclosed in our press release this morning.

Net sales for the third quarter were $2.86 billion, up 9% in constant currency compared to the prior year period.

Incremental sales from our most recent acquisitions of Too Faced and BECCA contributed approximately 4 points of this growth, and the balance was driven by strong performance in several areas of our business, most notably, travel retail, online, China and our midsized and luxury brands.

From a geographic perspective, every region grew sales, led by Europe, the Middle East and Africa.

Net sales rose 13% in constant currency in EMEA, led by a 30% increase in global travel retail.

The substantial growth in travel retail was supported by an 8% increase in international passenger traffic, as well as further expansion of our makeup and fragrance brands in the best airports.

Notably, our travel retail business in Hong Kong and Macau returned to strong growth in the quarter.

We are closely monitoring the political tensions that have curtailed Chinese consumers traveling to South Korea, but we do expect the slowdown in this travel quarter to be offset by Chinese consumers traveling to other Asian destinations.

The EMEA region also benefited from strong sales in Italy and the U.K., which rose high single digits, while most other Western European markets grew mid-single digits.

The region's major soft spot this quarter was the Middle East, where net sales fell again, as distributors continued to align their inventory to much weaker retail traffic.

This negative sales trend, however, did begin to ease this quarter and is expected to further improve in our fourth quarter, as we anniversary the turndown.

Excluding the Middle East, the total EMEA region grew 15%.

Sales in the Asia-Pacific region grew 8% in constant currency.

Growth was led by China, where net sales rose more than 20%.

Most of our brands grew double-digit in China this quarter, and our online business in China grew more than 70%.

We also achieved solid sales growth in Taiwan and Malaysia, and both Japan and Australia rose low single digits, while sales in Hong Kong continued to stabilize.

Net sales in the Americas rose 5% in constant currency.

Latin America sales grew 5%, led by strong growth in Mexico and Chile, while Brazil remained challenged.

Sales in North America benefited from the addition of our newest brands, Too Faced and BECCA, as well as double-digit growth in both the online and specialty-multi channels.

These increases were offset by continued declines in the brick-and-mortar business of department stores, as well as in freestanding stores.

Our gross margin declined 160 basis points from the prior year period due primarily to adverse product mix, including the impact of the fiscal 2017 acquisitions and the associated inventory step-up related to purchase accounting.

Obsolescence was also a slight contributor to the margin decline.

Operating expenses, as a percent of sales, improved 370 basis points, primarily due to lower selling and promotion expenses that reflected our changing channel mix, along with prudent expense management in line with softer sales in U.S. department stores and freestanding stores.

General and administrative expenses also declined, reflecting the benefits of our cost-savings programs, equity income from our investment in Have& Be Co.

company and the deferral of some IT and R&D projects to the fourth quarter.

As a result, operating income rose a strong 23%, and operating margin increased by 210 basis points.

Net earnings rose 24% to $340 million, reflecting the operating income improvement and the lower effective tax rate, partially offset by higher net interest expense.

Diluted EPS of $0.91 was 25% above the prior year and grew 28% in constant currency.

Earnings per share for the quarter included $0.02 of unfavorable currency translation and $0.02 of dilution from acquisitions.

EPS was higher than anticipated due primarily to the margin-accretive sales peak, coupled with disciplined expense management by our team, and the deferral of some projects to the fourth quarter.

With respect to cash flow and capital allocation, for the 9 months, we generated $1.25 billion in net cash flows from operating activity, and we invested $316 million in capital projects and approximately $1.7 billion in acquisition.

In early February, we issued $1.5 billion of senior notes, which we used to repay outstanding commercial paper and to refinance $300 million in senior notes coming due on May 15.

We also continued to return cash to shareholders, utilizing $363 million to repurchase 4.2 million shares of our stock, and $361 million to pay dividends.

Now turning to our outlook for the full year.

We expect to end fiscal 2017 with sales growth of between 6% to 7% in constant currency, and that reflects approximately 2 points of incremental sales from the acquisitions of Too Faced and BECCA.

Currency translation is expected to depress reported sales for the full fiscal year by nearly 2 percentage points, reflecting weighted average rates of $1.08 for the euro, $1.26 for the pound and JPY 109 for the yen.

Diluted EPS is expected to range between $3.32 and $3.37, before restructuring charges, including approximately $0.13 of dilution from currency translation and $0.07 of dilution from the recent acquisitions.

In constant currency, we expect EPS to rise by 8% to 9%.

Our sales in the fourth quarter are expected to rise 9% to 10% in constant currency, demonstrating the sequential acceleration in sales growth that we have anticipated throughout the year.

The strong fourth quarter increase is expected to come from approximately 4 points of incremental sales from Too Faced and BECCA, expanded consumer reach for our several brands, particularly in specialty-multi, online and in our international freestanding stores; further improvement in Hong Kong, as sales are expected to return to positive growth as travel to the area picks up; and easier comparison in the Middle East, as we lap the period of soft retail sales and destocking; and continued momentum in China and other Asia-Pacific market.

We are also committed to continue to invest behind our strategic priorities.

We do plan to invest increased spending in our fourth quarter behind new products and marketing activities; support for the rollout of the new distribution, such as M-A-C in Ulta; and some projects in IT and R&D, information technology and research and development that were delayed from the third quarter.

We expect fourth quarter EPS of between $0.35 and $0.40.

This includes dilution of about $0.03 from currency and about $0.03 from acquisitions.

We are successfully executing against our Leading Beauty Forward initiatives according to plan, as Fabrizio mentioned, and we'll continue to reallocate resources to strategic areas of importance.

In closing, we are pleased with our third quarter and year-to-date results, and are very proud that our organization continues to make great progress on achieving our long-term strategic objectives while pivoting and successfully reallocating resources when necessary towards the fastest-growth areas of our business.

In this dynamic, ever-changing global macro environment, our success is a true testament to the collective efforts of our dedicated employees around the world.

And that concludes our prepared remarks.

We'll be happy to take your questions at this time.

.

(Operator Instructions) Our first question today comes from Rupesh Parikh with Oppenheimer.

So my 2 questions are on BECCA and Too Faced.

First, I wanted to get a sense of what type of growth rates you're currently seeing in those businesses.

And then it sounds like they're both trending above expectations.

So just curious what's driving the above-expectation performance so far.

So the growth is very, very strong in these 2 brands, so it's very strong double-digit growth in each one of the 2 brands and in every segment they're operating.

And what is driving the success is -- actually, same-door sales is a success, which is driven mainly by same-door sales, and for the moment, a very small initial distribution deployment.

These 2 brands are really strong, and consumer demand is exceptional.

And their recent launches are among the most successful launches in the entire marketplace.

And on top of that, for us, the great news are that they attract really new consumers that in the past we were attracting less.

Particularly, Too Faced attract more younger consumers in our portfolio, which is great extra business for the company overall.

And importantly, they have dramatically increased our penetration in specialty-multi in the U.S. And this will continue internationally, which is a very important objective, because, as you all know, the specialty-multi channel globally is one of the fastest-growing channels in our sector.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

I just wanted to see if you can kind of elaborate more on basically the Clinique products into Ulta stores and how.

I understand you've been there for 5 years, and how that learning can be applied to the M-A-C relationship?

And along those lines, how you think about any cannibalization of the products within specialty-multi against department stores?

And second, if you could elaborate more on the fourth quarter guidance for margins because it seems conservative against your beat of $0.21, and just $0.03 increase over the low end of the guidance.

So if you can give us what you're embedding in terms of investment.

I understand from Tracey's comment that you had some R&D that might be pushed over to the fourth quarter.

So if you can elaborate more on the investments.

Thank you.

I'll start with the -- answering the Ulta question.

So Clinique is very successful in the Ulta channel.

And what we learned is that when Clinique is exposed with all the strengths of the product portfolio and strengths of services to a good growing traffic, the brand responds very, very well, and Clinique is growing both makeup and skin care aggressively in every Ulta door in which the brand is deployed.

In terms of what we can learn for M-A-C -- by the way, as I said in my prepared remarks, we plan to increase gradually the number of Clinique doors in Ulta in agreement with our retail partner.

And as far as the learning for M-A-C, absolutely, we have learned a lot for perfecting our upcoming M-A-C execution, also from the Clinique experience.

And particularly, we have learned the importance of the service aspect, of making sure that the brand is deployed with all the necessary SKU, assortment SKU and the curations of the SKUs to the consumer.

It's the concept of a curated assortment that really fit the consumer, which has been a big learning that will be absolutely applied to every one of our brands.

The good news that is true for Clinique, based on your question, but are true for every other -- our 3 big brands.

Also, Lauder is the same.

We really attract new consumers and a lot of millennial consumers, so the cannibalization is very, very limited.

This consumer are consumer that were not shopping the brands before in a large majority or they were lapsed brand users because they were not anymore going in channels that where the brands today are distributed.

So is -- the large majority of the business is net extra business.

Tracey?

And in terms of the fourth quarter, as we mentioned in the prepared remarks, we have some very strong launches coming up in the fourth quarter.

We also have a fair amount of consumer reach expansion into specialty-multi, as well as some of the opening of our freestanding stores and other points of distribution in the fourth quarter.

And that's where the investment is coming in, in the fourth quarter.

When you look at the -- our expense mix in the fourth quarter relative to last year, it's relatively comparable.

And again, our model, certainly, here, has been to start strong and stay strong.

So a combination of very strong launch and distribution activity in the fourth quarter, and certainly, supporting products to accelerate into fiscal 2018 is what the fourth quarter represents.

Your next question comes from the line of Joe Altobello with Raymond James.

First, curious if you guys have detected any change in overall market growth for global prestige beauty from the 4% to 5% it's growing at earlier.

And then secondly, a little bit more detail on the U.S. growth with and without Too Faced and BECCA and maybe what M-A-C did in North America this quarter.

So on the total market growth, no, we are not seeing a big change overall.

It's still between 4% and 5%, probably closer to 4% in this moment than to 5%, but still in the range, and -- but where we have seeing the change, and we see a change continuously, is where the growth is coming from.

And the growth is coming from, by category, is coming more from makeup than in the past, as you know.

And by recently, in this quarter, the growth is again coming from Asia more than in the previous quarters.

And then certain emerging markets have been more challenged than in the past, like, I don't know, Brazil or Turkey, obviously, and a few others.

And so we see a variation on where the growth come from, but what is interesting is actually the total growth is still between 4% and 5%.

And as far as the North America performance this quarter, as we indicated, the brick-and-mortar channels were pretty challenged, particularly in the U.S. in the third quarter.

Excluding Too Faced and BECCA, the North America segment was down in sales, and M-A-C was certainly a contributor to that performance.

The M-A-C team is working very strongly in the U.S. to accelerate performance of both in the department store channel, and certainly, in their freestanding stores and has some great programs coming up over the next couple of quarters.

Your next question comes from the line of Erinn Murphy with Piper Jaffray.

I guess I wanted to focus on the comments or (inaudible) you made on the earned media value for M-A-C picking up in the third quarter.

When you look back, what was driving that?

Was it new product launches?

Was it product placement with influencers?

And then I guess, just a housekeeping question in terms of the cadence of openings at Ulta, you talked about 25 in June and over 100 by year end.

Should we just kind of model the balance of that in the next quarter?

Or how do we think about kind of the next couple of quarters in the calendar year?

So let me start from this last question.

It's what I said.

You should not model it differently.

It's 25 by June and then 100.

And you can assume that the 100 will be equally split because it's a matter of capability opening, and the opening will be more aggressive as of September, obviously, because of organization and capability things.

But this is the total number that we are planning for at the moment.

The -- what was the -- the earned media value of M-A-C.

So what was driving the improved earned media value of M-A-C is, first of all, the M-A-C activation of many more influencers, and the activation also of M-A-C makeup artist as influencer themselves, which is a unique model created by the M-A-C brand, meaning, M-A-C is obviously activating external influencers, but also many of the variable makeup artists of M-A-C influence themselves and have been enabled by a lot of great quality asset to support to do this job around the world, and particularly, in the U.S. The other thing is activating this is M-A-C is back-launching hero products.

And as you know, a lot of these media value is driven by exciting new products.

For example, Next To Nothing launch, which I mentioned in my prepared remarks, is an activity, which is creating a lot of conversation in the social media arena, which is helping and supporting the brand.

We believe this trend will continue.

The M-A-C brand is very active among the various changes there leading in the U.S. market and internationally in increasing the numbers of hero products that will be part of their deployed portfolio of innovation.

Your next question comes from the line of Jason English with Goldman Sachs.

I guess I want to turn to margins.

Your guidance implies that EBIT margins are going to be down for the full year modestly another 3-year where you kind of fall short of your longer-term targets of 40 to 50 basis points.

Can you we go through some of the drivers, like, obviously, some deleverage in freestanding stores, department stores, et cetera?

Talk about the size of those, the path forward?

And maybe put a little more teeth on this Leading Beauty Forward program to give us some context of the savings, when they can flow, and what it means for the margins on the forward?

Is this sort of just the new reality that we should be -- we should get acclimated to sort of stagnant margins?

Or is there a path to improve on the forward?

So thanks, Jason.

With respect to our margins this year, and I think we had indicated this was the case last year as well, one of the things, as you all know, that we've been experiencing for the last 3 years is negative currency impact on our margins.

So in fact, if you look at the guidance that you're referring to, Jason, for this year, we have 80 basis points of improvement in margin that is being offset by a combination of currency, as well as our acquisitions.

And so we've had a bit of that experience over the last couple of years, as we have done a fair number of acquisitions, but most importantly, the currency drag on our margins.

So yes, we've had deleverage in freestanding stores, and that's had an impact.

We are offsetting much of that with some of the shifts that we are doing in terms of expansion into specialty-multi.

And you'll certainly see more of that impact in fiscal '18.

As it relates to Leading Beauty Forward, when we announced the program about a year ago now, we indicated that the structure of the program is efficiency, effectiveness and redesigning certain organizations to allow us to achieve greater leverage in the future, and leverage implies margin expansion.

So we've delivered 80 basis points of savings from just our cost-savings programs this year.

Leading Beauty Forward will take another chunk out of our cost base and also allow us to grow in a more leveraged fashion.

And so -- and we've got lots of great activity around Leading Beauty Forward.

When we announced the program, and certainly still maintain this, we said that we would not see benefits this year.

We will start to see some benefit next year, but it will not impact our margin guidance for next year.

And then you'll start to see Leading Beauty Forward bleed into our margin results over the following few years until it achieves its full potential, and that full potential is $200 million to $300 million.

We will invest a portion of that back, but a portion of that will also be dropped to the bottom line.

So it is the reason that we have so much activity around Leading Beauty Forward.

And as both Fabrizio and I mentioned, it is actually slightly ahead of plan in terms of some of the initiatives under the program, as the organization really rallies behind this to not only create some of these leverage structures from organizational standpoint, but also build some of the capability for the future support of our strategic objectives.

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

I have a couple of quick follow-on questions on M-A-C.

First, I just wanted to clarify that it did improve sequentially in the U.S. And then in Ulta, I imagine this will be incremental on the top line, but will it be a drag on your margins given some expected cannibalization of your more profitable M-A-C retail stores?

I guess, how do you balance that?

And then I was curious about potential halo effect that you might be seeing, broadly speaking, with your new innovation on some of your hero franchises or maybe as you further penetrate new channels such as specialty-multi with some of your big brands.

I guess I'm curious if you're seeing any evidence that Estée Lauder customer baskets are increasing, meaning that your customers are buying more of your portfolio brands and possibly spending more per transaction.

So let me start from this line.

I think we said it in prepared remarks and every time we comment on this new distribution.

The new distribution is bringing in new customers.

And so we have absolute evidence.

That's why we have tested our way first with 30 doors, then in certain areas internationally, the same.

We have done this very gradually with a lot of attention, and there is -- the large majority of consumers are new to the brands.

This is true for new distribution, both online in specialty, and this is true for a lot of our new innovation, which is focused on segments, where we have strategic opportunities or strategic gaps.

And that's actually has been the big strengths.

And the other information we -- that I've already shared, but I want to further clarify, is that the large majority of these new consumers are millennials.

And that's true in all these things that we have.

We have year-end data that comport all these learnings.

And then based on this data, we made decision on distribution evolutions around the world.

In terms of M-A-C in the U.S., no, we've seen some up and down performance as it relates to M-A-C in the U.S. So the expectation obviously is in the fourth quarter and beyond that the M-A-C performance, given certainly the expansion into specialty multi, along with as Fabrizio said, many of the programs that they're working on and the increase in some of the digital activity that they're doing, will start to gradually improve sales in the U.S. And also, as we said, M-A-C is quite strong, other than a couple of pockets in international, quite strong in international, particularly in Asia.

And again, in addition to some of the expansion into specialty-multi that's being done here in the U.S. and the work that is going on to grow sales in the freestanding store and department store channel.

They're also launching in Asia on Tmall.

So we expect next year to be a strong year for M-A-C going forward.

And then in term of profit dilution of the new distribution, I mean, M-A-C is very dependent from traffic.

And so if we -- where we are able to create good sales per door, M-A-C is a profitable brand.

And so our priority is to stay focused on really making M-A-C a good brand with great sales per door in every single distribution channel, and that will make M-A-C -- will keep M-A-C as a very profitable brand.

And in term of the overall dynamic, I want again to clarify this aspect with you.

M-A-C exposure to -- in this moment, the declining brick-and-mortar department store traffic is the key issue we are trying to solve.

M-A-C has enormous demand and attention from consumers.

It's a very desired brand.

Wherever M-A-C is exposed to traffic, it's performing well.

And that's the key issue we are trying to work on.

As we said, we have many international pockets where M-A-C is booming.

And we need to address the U.S. issue, as we have discussed.

And I hope you see many of the pivoting activity that we are doing to achieve this goal as fast and possible.

And the only thing I want to add to that is M-A-C is one of the strongest, if not, the strongest brand online in terms of growth.

Your next question comes from the line of Mark Astrachan with Stifel.

I wanted to go back to the overall category growth question and answer.

So obviously, good quarter sequential improvement, but still pretty decently below your large peers in terms of absolute organic growth.

So I guess, I'm curious to what do you attribute this.

How much is Americas, the M-A-C commentary that you've touched on?

How much is Clinique as a brand that hasn't been touched on, but it seemed like it declined in the quarter.

And then how do you think about improving those trends relative to peers?

Do you think this sort of normalize over time as overall growth moves back towards what you're calling 4% to 5% prestige beauty category growth?

I mean, our growth algorithm is 6% to 8%, and we are, obviously, on these trends, and the key point is this industry is not a zero-sum game.

All the big companies are growing, and depending by quarter and by year, some are growing a bit less or a bit more, but we all are growing.

So the key point is there is a strong category growth, and there is space to grow for a lot of the companies.

And the belief that small brands are diluting the growth of big companies is clearly not demonstrated by the facts.

Because big companies are growing, are growing their brands and enriching their portfolios, if there are some smaller brands which are doing very well, some of them get acquired by the big companies when they have the right rate of return.

And so I believe, actually, this is an environment where many big companies can grow, and can grow at the same time in this amazing part of the industry, which is prestige, prestige beauty.

Now what do I attribute in the short term in the last 6, 9 months?

Our growth below some of our competitor is frankly 80% U.S. department store traffic.

We are the company which has the highest exposure in percentage of our business and in our big brands to U.S. department store traffic, and that's the big thing.

And then there are either many, many other areas of the world, where, frankly, we are growing faster than many other companies.

And the last point I want to make, we are building market share.

So in a market, we continue to grow 4% to 5%, we continue to grow market share.

This was evident also in the recent [uni] monitor report for 2016 calendar, and is obviously proven by this first quarter numbers, where we are growing in constant currency 9% versus the market, which is probably closer to 4%.

So we keep growing market share.

We keep growing well in -- all over the world, and we do have an issue to solve -- to address, which is the U.S. department store traffic and our high penetration of this channel.

And we are pivoting to reinforce this channel, and at the same time, diversify our business in the needed way.

Your next question comes from the line of Olivia Tong with Bank of America.

First, we obviously talked a fair bit about M-A-C in the U.S. and the increase in Ulta and Sephora, but one of the things I want to know is how much of their issue for M-A-C in the U.S. do you think is a function of more competition in the makeup category versus just its retail positioning, particularly with younger consumers that M-A-C has captured for so long?

And then, perhaps, can you give a little bit more detail in terms of what other opportunities are there for other brands in terms of the specialty-multi distribution, not just the smaller, faster-growing brands, but also the larger ones?

And then following up on that, as more activity moves online into smaller format channels, what's the difference in terms of the purchasing patterns versus your traditional retailers?

Obviously, the consumer is younger.

They are clearly focused a little bit more on the smaller brands versus the larger brands, but what about like product category price points and things like that?

Okay.

So let's start again.

M-A-C is -- there've been some recent research issued that M-A-C is the #1 brand loved by teenagers in this market in the U.S. and just been published a research on this.

All our consumer data showed that M-A-C is among the preferred brands among the millennials, and frankly, all generations.

So M-A-C is a business built to be really very sensitive to traffic.

And that's the key thing we need to do.

The brand is in excellent shape, very desirable.

And as I said, to demonstrate this, there are markets around the world, where the brand has been growing 40% or 45% despite the competition being the same, and so it's a very specific opportunity.

Said that, there is definitely a lot of new competition, and every big brand has to face this new competition.

In this, I would like to make -- to do an observation.

What we see in the data is that this increasing competition done by an ever-increasing number of brands is an increasing competition in the moment of trial.

That is we don't see increasing competition in the area of loyalty and in the area of retention and repeat, which where the profit is.

Let me explain this.

We have, for example, in all our big brands, take Estée Lauder with Advanced Night Repair, take M-A-C with Studio Fix, the big hero products in this moment are getting more success and increased repeat despite the increased competition.

What is tougher is to get the attention at the trial moment because of demand in small brands is small activity out there.

But I would like you to think that the trial moment is not the profitable moment.

Trial is an investment.

Repeat is a profit.

And so at the end, the profitable brands are still the big brands with great hero product with great repeat, and not the many small brands that generate a lot of noise on trial.

Because unless they get the repeat, they will not be sustainable.

And so we are very focused on a sustainable long-term profitability strategy for our brands, and that's the way we're addressing the issue of M-A-C and the opportunity for all our brands.

So the second question was specialty-multi, which is an opportunity for many of our brands, but I want -- and I mentioned many of them in my prepared remarks exactly to give you maximum exposure to all the pivoting we are doing.

Instead of repeating them, I will like just to clarify one point.

Every brand has a unique distribution strategy in the Estée Lauder Company portfolio.

So we don't do things by channel.

We do things by brand.

So there are brands, which are designed to win well in specialty, brands which are designed to be in multiple channels, and brand that are designed to be more exclusive in a certain channel type.

And our broad portfolio brands give us the possibility to play these growing multichannel portfolio globally in an excellent strategic way.

The last question was on online, and yes, we see a very decent pattern in purchases online.

Purchase online tend to be younger and tend to be frankly very profitable because consumers are very loyal when they get into it.

There's a lot of good repeat.

But most importantly, the online sales allow us to reach consumers that sometimes we cannot reach with brick-and-mortar.

This is particularly true in emerging markets.

I just gave the good example in China, where a good launch of M-A-C in Tmall that will happen this quarter, we know by all our analysis, that will expose millions of Chinese consumers in cities of Tier 3 or 4 that today cannot buy the brand to be able to buy the brand.

And this is true for many other brands in our portfolio and many of our online activities around the world.

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

So I wanted to look at your 2 heritage brands, Estée Lauder and Clinique, and Estée Lauder looks like it's clearly stabilizing here.

There's another quarter of sales growth in both skin care and makeup globally.

What are you learning from that?

Because on the flip side, it looks like Clinique is still struggling a little bit both in skin care and in color, not just in the U.S., but it looks like globally as well.

So if you could help kind of figure out what could happen to Clinique and how you're learning from Estée.

You've mentioned some innovation.

Is that going to be the turning point in Clinique?

And then second thing, just maybe more for you on just more quantification on the drivers you've mentioned regarding SG&A coming down in the quarter.

How much of it was a shift in IT spend from this quarter to next quarter?

Was there an ad spend shift perhaps?

Versus how much of it was kind of more permanent in terms of actually the improved efficiencies from cost cutting or channel mix?

I'll start from -- okay, I'll start from the Lauder and Clinique question, and Tracey will take over.

The -- so first of all, Lauder is growing, so it's not stabilized.

Lauder has been growing in a very exciting way, in my opinion, this quarter.

And this is the second quarter in a row where the Lauder brand growing -- is growing globally.

What is driving that is successful innovation that is hitting new consumers, combined with an amazing work on relaunching hero products, and that's the key point.

I mean, Double Wear is a fantastic foundation product that millions of consumers around the world loves, but still, there are million of consumers that never tried this product.

And so the ability of the brand to continue with winning hero products is the key learning.

And this is working very well.

And for example, we have learned that Double Wear in specialty-multi attracts millennials despite being a foundation.

It's been there for many years, and being a fantastic product for many years attract new millennials to the brand better than these specific millennial launches targeted to millennial.

So we are now ready to leverage these new discoveries on Lauder and continue the acceleration.

The third thing which is -- has been the Lauder brand is the Lauder brand is more exposed, positively exposed, to the Chinese consumers and to the Asian dynamics than the Clinique brand, for example.

The Clinique brand on the contrary is more exposed to U.S. department store than any other brand in our portfolio, together with M-A-C U.S. And -- but globally, Clinique is more exposed in total.

So the key point is that Lauder benefited from the comeback of growth in Asia, and had been part of one of the brands driving the comeback of skin care in Asia.

And so the research of Asia, in Asia skin care, is obviously helping the Lauder brand, and in our opinion, will continue to grow to support the growth of the Lauder brand.

The learning for Clinique are the same.

It's more hero products, more activity on innovation that on top of building specific new products, build existing hero products.

The Fresh Pressed vitamin C launch is an example of that.

Vitamin C is a new product, per se, but at the same time, create a regime with existing moisturizer of Clinique, and so sell and build hero products, and we have tested this successfully in the last year.

The other learning for Clinique is that also Clinique need to accelerate the entrance in growing channels.

And so also Clinique is further accelerating the expansion in the successful specialty-multi channels, where it's playing and online, and so we will continue to do that.

And sorry, the last thing on Clinique is the makeup.

Clinique is also working to further activate their makeup innovation and activities in fiscal year '18.

This should further boost the brand.

And in terms of the beat this quarter and the margin leverage that we had this quarter, I would say that about 65% of it is a combination of the sales beat, as well as the mix of sales.

So favorable channel mix, as well as category mix, as Fabrizio was just saying.

We did see a pickup in our skin care category.

And as you all know, that is our most profitable growth category from a margin standpoint.

And then the balance of it was some shifts in terms of projects and as well as A&P spend.

So again, we mentioned there were some of the programs that are launching in Q4 that we are spending behind that were initially thought to launch in Q3.

The Cushion compact would be one of those for Estée Lauder in China, and so we are spending behind that in Q4.

So that's some of the shifts.

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

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That concludes today's Estée Lauder's conference call.

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