雅詩蘭黛 (EL) 2019 Q3 法說會逐字稿

Good day, everyone, and welcome to the Estée Lauder Companies Fiscal 2019 Third Quarter Conference Call.

Today's call is being recorded and webcast.

For opening remarks and introduction, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Good morning.

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 the actual results to differ materially from those 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; the net gain on liquidation of an investment in a foreign subsidiary; goodwill and other intangible asset impairments; changes in contingent consideration; the finalization of provisional charges related to the U.S. tax law enacted at the end of calendar 2017; and a new accounting standard for revenue recognition, which benefited our results this quarter.

All net sales and EPS growth numbers are in constant currency and exclude the impact of the new revenue recognition accounting standard.

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 now I'll turn the call over to Fabrizio.

Thank you, Rainey, and good morning, everyone.

We delivered another quarter of outstanding results, thanks to strategic investment in our best opportunities, combined activity and data-driven insight that fueled our innovations.

Our double-digit constant currency growth in both sales and earnings per share came from being well diversified across categories, brands, geographies and channels, our multiple engines of growth, all while staying 100% focused on prestige beauty, one of the fastest-growing consumer areas worldwide.

Our net sales growth accelerated to 12%.

We continued to gain global share.

We invested some of the savings generated from our Leading Beauty Forward initiative into targeted advertising, which helped support our increased sales and leverage our cost structure.

Our diluted earnings per share rose 17%.

As you'll recall, when we reported last quarter, we were cautious in our outlook as it related to several macroeconomic and geopolitical factors around the world -- the globe.

These include a prudent stance on the United States given the industry slowdown in December.

We also anticipated that the uncertainty surrounding Brexit would continue to dampen consumer spending in the U.K. Lastly, we factored in a gradual moderation of growth in China and Travel Retail due to trade tensions and economy slowdown risks.

While some of these risk materialized, particularly the softness in the U.S. and the U.K. markets, slower growth in China and Travel Retail did not happen, which contributed to our overachievement in the third quarter.

The key areas that had been driving our strong performance this year continue to be vibrant.

They included the Asia-Pacific region, the skin care category, the Estée Lauder La Mer and Tom Ford Beauty brands and several other brands and the Travel Retail and online channels.

In addition, most emerging markets grew, in particularly, we continue to attract and retain consumers in India and Russia with locally relevant products in compelling social media.

In total, our strategy is working and produced again exciting results.

Skin care continue to be our largest and best-performing category, which reflected global trends.

With increasing demand for skin care around the world, we devoted more resources to this area, and our sales rose sharply.

Our makeup business climbed solidly, with strong results across many brands in our portfolio.

And our fragrance sales were healthy, driven by our high-end artisanal and luxury brands.

Having confirmed the strengths of our business this quarter, we are raising our full year sales and EPS guidance.

We now expect sales growth of 10% to 11%, well above our long-range goal and the industry, and EPS growth of 18% to 19% for fiscal year 2019.

During the quarter, 3 of our 4 largest brands grew globally, demonstrating the popularity of established loyalty-driven brands offering high-quality products backed by decades of science and creativity.

Our largest brands continue to enjoy strong repurchase rates for their hero products by also attracting new, younger consumers with compelling innovations and digital storytelling.

One of our stronger brands was our namesake Estée Lauder, which has now delivered 8 consecutive quarters of double-digit growth.

This quarter increase was the strongest one yet.

Estée Lauder sales rose in every region, and its skin care, makeup and fragrance business each grew double digits globally.

Estée Lauder had terrific initial success with a new product, Micro Essence with Sakura Ferment, which launched in Japan before rolling out globally.

The idea for this innovation came from local insights in data analytics and was created as a watery lotion that provides a strong skin foundation for a translucent glow.

The formula and benefits are locally relevant to the target Asian consumers.

In the lotion's first months on counter, sales of the Micro Essence franchise more than doubled and listed entire brand.

Importantly, the lotion attracted younger consumers.

We estimate over 30% of the new consumers buying the product in the first 6 weeks were millennials.

It is now rolling out in the rest of Asia and in key traveling corridors.

Clinique overall sales declined slightly.

However, its skin care category increased globally, driven largely by Clinique ID, an important innovation that has successfully attracted new consumers, younger and multi-ethnic consumers, and it has performed particularly well in the specialty-multi channel, making it a big win.

Clinique ID strengths the brand dramatically different moisturizer franchise, enabling users to customize a moisturizer with 1 of 5 treatments, creating a truly personalized experience.

In addition, the brand's social media TBD around the world won a Webby award.

In makeup, Clinique introduced a new foundation, Even Better Refresh, which incorporates repairing and hydrating skin care benefits, and in the U.S. it helped increase sales in its entire Even Better franchise, which is one of its core hero lines.

On M·A·C brand -- our M·A·C brands grew globally on the strengths of its each international business, driven in part by terrific consumer response in Travel Retail where it launched its first campaign specifically for the channel across all regions.

M·A·C China sales soared, and it was the #1 prestige makeup brand on Tmall.

Several new pure-play platforms in Europe, including ASOS or Lookfantastic contributed to its strong e-commerce sales.

M·A·C also continued to make progress in specialty-multi and opened Sephora in Canada where it quickly became the #1 lipstick brand.

Our fore brand with annual sales over $1 billion is La Mer, which grew rapidly and gained share in many markets, including France, Italy or across total Asia.

Recent innovations and engaging social media program recruited new and younger consumers.

As an example, La Mer relaunched one of its core products called The Concentrate.

During the first 4 weeks in China, the sales of The Concentrate grew by 60%, and more than half of the consumers were new to the brand, drawn in by successful digital marketing.

La Mer also enjoys one of the highest repurchase rates and that trend continued with large base of loyal consumers who are devoted to the brand and to its products.

Our 2 fastest-growing channels continue to rapidly expand.

Travel Retail delivered outstanding results and its growth drivers were well diversified.

We had double-digit net sales gain from each one of our top 5 brands.

The 2 largest geography region within the channels and the skin care and makeup categories will strengthen our leading position in prestige beauty in Travel Retail.

We developed many activities with focus products that capitalize on higher traffic during the Chinese New Year.

Our Estée Lauder brand, for example, opened pop-up locations in key airports even outside of Asia to reach traveling Chinese consumers.

Our retail sales growth during the quarter was far ahead of passenger traffic growth, a trend we expect to continue as we bring more brands into more airports, increase conversion, leverage our increased brand investment in local markets.

Our sales were also boosted through our accelerating online pretailing business, which more than doubled.

Another fast-growing channel, our global e-commerce business, continue to strive.

And for the first time, half of our sales came from mobile devices, with the highest penetration in Asia Pacific.

Tmall continued to be a large contributor to our online sales in China, and we have recently successfully launched Tom Ford on Tmall, now our 10th brand on that platform and our strongest launch on Tmall so far.

We see terrific runway ahead of our online business expand.

With many more brands to roll out in dozens of countries, M·A·C, for example, became our first brand online in Vietnam, launching on Lazada with a store-in-store online model, followed recently by Clinique.

Looking at our geographies, Asia Pacific continue to be the major contributor to growth.

Nearly all countries grew, led by China, Hong Kong and Japan as well as Southeast Asia, particularly in emerging markets.

This performance strengthened our #1 position in prestige beauty in the region.

Skin care, makeup and fragrance all grew more than 20%.

Our net sales in China rose sharply, with across-the-board gains in categories and channels and virtually all brands grew by double digits.

Retail sales also increased strongly.

In total, our emerging markets grew double digits, India while still more had excellent growth.

We strengthened our #1 position in prestige beauty also there.

Recent launches of our Aveda brand and makeup collections from Tom Ford contributed to the country's growth.

Clinique and Estée Lauder has signed Indian brand ambassador as they make a bigger push in the market.

Clinique new spokesperson, a Bollywood actress, will promote the brand globally.

We continued advancing our strategy in North America, which includes increasing our presence in fastest-growing channels, and our retail sales rose in specialty-multi and online.

The Estée Lauder brand's retail sales improved, helped also by a successful gift with purchase program at Macy's.

The brand sales rose sharply during the event even with fewer doors than in the past years, reflecting strong desirability in social media engagements.

M·A·C retail trend is improving.

It's continuous expanding in specialty-multi, as mentioned.

Our innovation continue to resonate strongly, with a greater focus on strengthening our most important brand franchises.

This fiscal year sales from our new innovations tied to our hero product comprised nearly 40% of our total innovation at over last year.

Our innovation toolbox includes data analysis, rich insights about global and local consumers and a long history of scientific discovery and creativity that we combine to capitalize on big, fast-growing and new opportunities.

Our strategy to create fewer bigger launches is working beautifully.

The average size of our top 30 product launches is 30% higher than last year.

In addition, our speed to market is faster.

In the third quarter, we had 17% more products in skin care makeup launched under 12 months than in the previous quarter -- year quarter.

Products launched within last year are expected to account for 30% of our sales in fiscal year '19, a new record.

Among our latest innovations launching now is Clinique Moisture Surge eye concentrate, which expands one of the brand's large hero franchises.

In makeup, M·A·C is expanding the shade range of its new Powder Kiss lip collection that was created by using analytics to understand consumer needs, combined with creativity for the brand's makeup artist and runway trends.

The result is a unique formula, a moisturizing lipstick with a matte texture that we are supporting with advertising.

And in a new development, consumers can now buy these lipsticks and other M·A·C products directly from the brand's Instagram's post.

M·A·C is our first brand to use this technology, which simplifies shopping through social media.

During our Investor Day we spoke about importance of our social input in charitable activities.

And today I want to highlight the incredible work of our M·A·C brand.

This is the 25th anniversary of its VIVA GLAM campaign, which has raised nearly $0.5 billion to help people affected by HIV and AIDS in more than 100 countries.

Every penny of every VIVA GLAM lipstick sold goes to the cause, which is a vital part of the brand DNA and actively supported by its makeup artists and consumers alike.

In the last 9 months we achieved outstanding results while continued to transform our business to adapt to a changing global landscape in competitive beauty environment and to be always well positioned to leverage the biggest future opportunities.

Without losing our advantages of scale and scope, we are instilling a more entrepreneurial mindset to ensure we stay agile and act decisively.

This gives us the best qualities of a well-financed, structured organization with a challenging spirit of a start-up.

This is unique positioning and is just one of the many characteristics that makes our company distinctive.

We are proud of our performance this quarter and fiscal year and confident we are well positioned in the biggest and best opportunities to keep advancing our strategy of winning model.

We have an amazing portfolio of diverse and desirable brands.

We have the prestige beauty leader in 2 of the fastest-growing channels, Travel Retail and online, and our wide geographic footprints enable us to invest where we see the greatest rewards.

Our innovation has never been more robust, and our hero franchisee instill high loyalty and attract new global consumers.

All of this is made possible by our talented employees, led by our exceptional leadership team, who many of you met during the Investor Day.

Our results this quarter proved once again their ability to execute so effectively.

The diversity among our leaders and the breadth of their ability make them the best in the industry, and they're essential to our success.

As we wrap up the fiscal year '19, we are mindful of ongoing geopolitical risk, yet confident in our ability to continue executing with excellence across brands, countries and channels, and we have demonstrated throughout the year.

In closing, long-term prestige beauty has strong fundamentals backed by positive demographic trends.

Even if an economy slows, we believe our industry will be less affected than most consumer goods businesses, as we have shown in the past.

Prestige beauty is an affordable luxury, and our aspirational brands have high consumer loyalty and enviable pricing power, putting us in a unique position as the best diversified pure play to deliver long-term sustainable and profitable growth.

Now Tracey will discuss our financials.

Thank you, Fabrizio, and good morning, everyone.

First, I will review our fiscal 2019 third quarter financial result and then I will discuss our expectations for the balance of the year.

As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of this call.

All net sales growth numbers that I will discuss are in constant currency and using comparable accounting methods, unless otherwise stated.

Also, as a reminder, we adopted the new accounting standard for revenue recognition, ASC 606, this fiscal year on a modified retrospective basis.

For the quarter, the impact increased our sales growth by 3 percentage points, our operating profit growth by 21 points and our diluted EPS by $0.27.

I would encourage all of you to look at the bridges that we've included in the press release this morning as we do have a lot of adjustments, but I will talk to the adjusted numbers as I go through the quarter results.

Net sales for the third quarter rose 12%, with growth in our international regions and all product categories.

From a geographic standpoint, our Asia Pacific region had robust net sales growth this quarter.

Net sales rose 27%, with all major categories rising double digit.

More than half of the markets in the region saw double-digit growth led by a sharp increase in China, reflecting the continued strength of prestige beauty.

Nearly every one of our brands rose strong double digit in China, as did all distribution channels.

Among the larger markets in the region, Hong Kong rose double digit, Japan grew high-single digit and both Korea and Australia delivered solid mid-single-digit increases.

Net sales in our Europe and Middle East and Africa regions rose 20%, led by strong double-digit increase in our global Travel Retail business, which Fabrizio just described.

The EMEA region also benefited from growth in emerging markets led by India and Russia.

Growth in Western European markets was mixed.

Modest increases in markets like Italy, Greece and Switzerland were essentially offset by modest declines in France, Benelux and the U.K. Net sales in the Americas declined 6%, reflecting a deceleration in prestige beauty and brick-and-mortar retail in North America.

We continue to achieve solid growth online across both retailer.com and brand.com sites.

Latin America sales declined overall as growth in Brazil and Mexico was offset by declines in other markets like Chile and Venezuela.

Skin care again led product category growth this quarter.

Net sales were 21%, with very strong contributions from the Estée Lauder and La Mer brands internationally.

Estée Lauder sales were driven by continued success in hero franchises, notably Advanced Night Repair, Nutritious and Revitalizing Supreme as well as preliminary sales from the launch of its Micro Essence with Sakura Ferment in Japan.

La Mer saw success from its Arrive Hydrated travel campaign and its New Year holiday program in Asia.

Our Origins brand also delivered terrific results in Asia and Travel Retail, reflecting the strong performance of its Dr. Weil Mega-Mushroom franchise.

Net sales in makeup grew 7%, led by strong demand in Asia and Travel Retail.

Key drivers of the growth included Estée Lauder's Double Wear and Pure Color franchises, La Mer's luminous cushion foundation; Tom Ford's beauty, lip and eye makeup and M·A·C's locally relevant activation, Strike of Kings and Tmall Super Brand Day in China.

Fragrance net sales rose 5%.

Higher net sales of Estée Lauder, Tom Ford, Jo Malone and Le Labo fragrances were partially offset by declines in certain designer brand fragrances.

Our hair care net sales rose 1%.

Higher net sales from Aveda's recent launches in Asia and targeted expansion in EMEA were partially offset by soft sales from Bumble and bumble.

Our gross margin declined 160 basis points compared to the third quarter last year.

The new accounting standard negatively impacted our gross margin by 135 basis points.

Favorable mix impact and pricing were offset by higher obsolescence, negative currency and tariffs.

Operating expenses as a percent of sales improved 410 basis points or 70 basis points, excluding the impact of the new accounting standard and currency translation.

Increases in digital advertising to support innovation were more than offset by savings and selling in other expense areas.

Operating income rose 28%, and operating margin increased by 260 basis points.

Excluding the impact of the new accounting standard, operating income rose 6%, and operating margin contracted 30 basis points, entirely driven by negative currency.

Diluted EPS of $1.55 increased 33% compared to the prior year and grew 40% in constant currency.

Earnings per share for the quarter included $0.09 of unfavorable currency translation.

Diluted EPS, excluding the impact of the accounting change, was $1.28, an increase of 10% compared to the prior year or 17% in constant currency.

During the quarter we liquidated investments held in a foreign subsidiary and realized a net gain of $71 million before tax, which was supported in other income in our GAAP financial statements.

This equates to approximately $0.15 of EPS.

Also in the third quarter we recorded additional impairment charges of $52 million for goodwill and other intangible assets related to the Smashbox brand.

This reflects the continued softness in the brand's makeup sales, driven by slower-than-expected growth in key retail channels for the brand.

For the 9 months we generated $1.76 billion in net cash flows from operating activities below the prior year due primarily to higher inventory levels to support international growth and the timing of payables and receivables.

We invested $441 million in capital expenditures, and we generated $1.22 billion from the liquidation of investments discussed a moment ago.

We continue to return substantial cash to shareholders as we repurchased $1.34 billion or 9.7 million shares of our stock, and we paid $453 million in dividends.

We are obviously pleased with our third quarter results.

Now let me turn to our outlook for the fourth quarter and for the full fiscal year.

Global prestige beauty is a vibrant category that is currently growing above historical rates.

With the outstanding performance we've seen year-to-date, we are again raising our full year guidance.

However, we are mindful of a number of macro risks that remain concerning.

These include uncertainties caused by political tensions and instabilities as well as soft economies in certain markets.

Given the strong performance to date, we are raising our expectation for full year net sales growth to 10% to 11% in constant currency, excluding the impact of a new accounting standard.

Currency translation is expected to negatively affect reported sales growth by 3 percentage points, reflecting rates of $1.14 for the euro, $1.297 for the pound and $6.808 for the yuan for the fiscal year.

We expect the full year impact of the new accounting standard to be immaterial to net sales growth for the full year.

We are raising our EPS expectations to a range of $5.15 to $5.19 before restructuring and other charges.

This reflects approximately $0.22 of dilution from currency translation and $0.06 accretion from the new accounting standard.

In constant currency and with comparable accounting, this reflects EPS growth of 18% to 19%.

For the fourth quarter our sales are expected to rise by approximately 9% to 10% in constant currency and using comparable accounting.

Currency translation is estimated to dilute sales growth by approximately 2 percentage points and the accounting change is forecasted to dilute an additional point.

Therefore, we expect reported net sales to grow between 6% and 7%.

We expect to increase investment substantially behind advertising and promotion to leverage our strong momentum and support our successful new product launches as well as to increase investment behind recruitment in the U.S. This investment should also provide us with a strong start to our fiscal 2020.

EPS is forecast to be between $0.45 and $0.49 before restructuring charges.

This includes an approximate $0.04 dilution from currency and $0.04 from the new accounting standard.

With 2 months left in the fiscal year, we remain encouraged by the momentum in global prestige beauty and our ability to effectively execute our strategies to generate profitable growth.

Our outstanding performance represents continued investment behind the greatest opportunities in our business as well as our commitment to long-term sustainable growth.

The additional financial flexibility we have gained through our Leading Beauty Forward program, the increase in strength of our operating cash flow and the great -- greater returns we are achieving from our advertising investments position as well for continued success.

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 the line of Erinn Murphy with Piper Jaffray.

I guess I was hoping to understand a little bit more about what you've been seeing in the North American market.

I mean the down 6% was worse than I think a lot of us were expecting.

So maybe if you can unpack some of the drivers, whether you're still seeing Bon-Ton, maybe it was the pressure of government shutdown.

And then relatedly, could you talk a little bit more about what specifically you're seeing in the specialty-multi channel here in North America?

And then where your investment as you think about Q4 kind of being driven?

Okay.

Erinn, let me start as it relates to the Americas and really the U.S. prestige beauty market.

So the prestige beauty was soft in the quarter.

Actually, the share results that we get suggest that it was actually down in the quarter.

So when I think it's a combination of the things that you mentioned.

Obviously, we're anniversarying the tax rebate.

There was a lower level of promotion, which we believe is healthy but clearly affects sales growth in the quarter.

And we saw a bit of -- from our business we saw a bit of destocking, but our business really trended with the market in terms of the performance in the market.

Specialty-multi globally was up.

It was up about 6%, and -- so we are still seeing good growth from that channel.

Fabrizio, if you want to add anything?

I just want to -- as you mentioned also, Bon-Ton was also still in our number, the PUC, so that's still one -- probably last quarter in which we have an input of Bon-Ton.

What I want to add is that at the end the market was really down, the measured market.

There could be some part to the market, actually in makeup that was in the nonmeasured market.

But at the end, the measured market and particularly brick-and-mortar was a tough quarter.

Now we are pretty confident of our improvement plan in North America.

And in fact in quarter 4, we are going to invest behind some exciting innovation that we believe will attract new, fresh, traffic.

We are going to continue expanding in the fast-growing channels, specialty and online particularly.

We have just completed a field restructuring that will improve our ability to go to market.

And we will start executing with excellence, the new consumer targeting and granularity of marketing that we presented to the -- in the Investor Day.

So there are a lot of opportunity to first stabilize and then bring back to growth, also, the U.S. market in the future.

Our next question comes from the line of Michael Binetti with Crédit Suisse.

Congrats, and thanks for all the detail here today.

Let me follow on Erinn's question I guess a little bit here with -- it looks like the -- in the Americas, the operating income in the quarter, it looks like the negative numbers almost fully explained by the Smashbox decision you made on the impairment.

Could you give maybe give us a little bit more of your thinking on Smashbox?

And you've obviously taken some accounting to that to try to rightsize the brand and the financials here, but what do you think the brand needs going forward?

And are we getting to a point where it can stop being as much of a drag to those U.S. numbers?

They look like they're quite a bit better when we exclude that.

And then separately, I was wondering if you might be able to give us a little bit more behind your comment that -- I know you said you've got some new innovation coming that drives recruitment, can I take that to mean that in the U.S., within the negative 6%, the new customers -- the new customer acquisition numbers have slowed as well.

Any idea what the diagnosis looking backwards is there?

And what the epiphany is that you think you can spend back against to help reverse those trends in the fourth quarter?

I'll start answering the second question and then we'll clarify the Smashbox thing is -- no, actually the consumer acquisition is what we are bringing back up, particularly young consumers and millennials.

We are making progress on most of the brands in acquiring new millennials and Gen Z consumers in the United States as well.

As Tracey mentioned, in this last quarter there was a less proportionality on average and an overall lower market, meaning it was just less traffic in the stores.

But in term of our brands acquisition is pretty -- is improving.

And as all my comments about our intention in quarter 4 and next year is actually to accelerate that, and we have a lot of tool, the granularity of targeting, the new innovation to better expose to grow to channels and all the other elements we are putting, including extra investment in advertising that we're putting in our United States turnaround trend -- plan.

So we're pretty positive on the mid-, long-term input of those activities, also, in consumer acquisitions.

On Smashbox, I want to clarify that Smashbox is not the main reason for the decline.

Smashbox is a relatively small brand in our total portfolio.

From a sales perspective, right?

From a profit perspective, you're right that the impairment certainly did impact the profitability of the Americas segment.

But from a sales perspective, as Fabrizio mentioned, it's not the main driver.

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

I actually wanted to touch on your skin care margins in the quarter, which were still very strong.

So hoping you guys could bucket maybe some of the key drivers for us in a bit more detail.

And then help us understand what the contribution might have been from the fast growth in certain geographies such as Asia versus maybe improvement you're seeing in the product mix from some of your innovation.

So let me start.

Again, the margins on skin care are so strong, I would say, first, because the skin care category was up 25% in constant currency.

So when you got that kind of growth in the category, we see tremendous leverage across the board.

That would be the first driver.

Clearly, we're seeing great success as we called out in APAC and Travel Retail, and leveraging that success in those regions certainly helps from a margin standpoint as well.

But it really -- when we've got a category growing at 25% that certainly justifies the kind of margin expansion that we're seeing in the skin care category.

We've also had some terrific new innovations in the skin care category this year that we're quite excited about.

So our innovation has continued to step up every year and this year in Estée Lauder, and La Mer and Clinique, we've had terrific, terrific innovation in Origins as well.

So all of our skin care brands are doing quite well globally and certainly the strongest impact being in the Asia Pac and Travel Retail regions.

And the only thing I want to add is that our improved focus on hero products, meaning on the main product and main SKUs on every brand is also driving profitability over the medium, long term because creates bigger products that can be better leveraged and better optimized, and this trend will continue.

Our next question comes from the line of Robert Ottenstein with Evercore ISI.

This is Javier.

The question has to do again with North America.

If you can help us understand the channel mix now in the U.S. with all the brands that you bought that tilt towards specialty channel.

So basically if you can help us understand how important department stores is.

What was the impact of Bon-Ton in the U.S.?

Whether you can give us a sense of what was the growth in U.S. department stores ex Bon-Ton?

And also, basically how you are doing in the specialty channel?

What is its exposure?

What is the growth rate?

Any other questions?

So Javier, department stores are still about half of the business in the U.S. and obviously the growth that we're seeing is primarily in online and in specialty.

But about half of the business is still in department stores -- well over half of the business is still in department stores in the U.S., so it's still an important channel of distribution for us.

The segment would have been negative without Bon-Ton.

Bon-Ton was about $16 million of revenues in this quarter last year and obviously no sales this year.

So that's the situation in the U.S. as it relates to the sales growth.

Yes.

And I just want to add that we -- today, we have 75% of our business outside of the United States, and we are super well diversified by channel, category, brands.

And another thing I want to clarify because I think we are basically looking at markets like the United States, the U.K., China, and we have a segmentation by geography.

But if you look at our results this quarter by channel, globally, every single channel is being growing.

So you were asking about specialty-multi.

Specialty-multi, we grew by 6%, 7%.

Department store globally we are growing 2%.

And TR and online and freestanding stores, the way we look at, which is direct to consumer, which is a mix of brand.com and freestanding store, all growing double digit, very strong double digit.

If we look by categories, we have been growing every single category, skin care, makeup, fragrance, hair care.

And within skin care, as the previous question, every single subcategory of skincare, like moisturizers, serums, everything is growing double digit.

In term of by brands, 80% of our brands, the exception is Smashbox and GLAMGLOW, but all of our brands are growing more than double digit, the large majority of them.

So there is a lot of different engines of growth going on in our business in this moment, segmenting the business the way we segment it, also the way we operate it.

Our next question comes from the line of Lauren Lieberman with Barclays Capital.

One of the things I wanted to ask -- I'm sorry, I know Fabrizio you're -- you just now emphasizing that U.S. is 25% of the business today, but I was still curious, I'm sorry, about channel mix because the mention of the sales restructuring struck a chord with me.

I think for a few years I've sort of been thinking about your investments in the U.S. as being sort of fully support traditional brick-and-mortar being both your freestanding stores and department stores while at the same time investing well ahead of the revenue build in kind of in specialty-multi and online in totality.

And with mentioning the sales restructuring today suggest to me that all these kind of newer channels have reached scale to where you can perhaps start reallocating resources in the U.S. in a way that better suits the future growth.

So I wanted to just I guess ask, one, is that a reasonable way about thinking where we are in terms of long-term channel mix shift?

And then secondly, brand performance in the U.S. within those faster growing channels versus the channels where the traffic isn't?

Where -- what's your feeling on market share performance for your brands in those faster-growth channels versus the more struggling parts of the market?

You are welcome.

First of all, speaking about channel mix.

As I said, we -- Tracey just mentioned, we are -- 50% today we are in department stores and the remaining is in the fast-growing channel.

So we are tilting on a better balance, so diversified by channel, also, in the United States.

That's our strategy.

This will continue to be.

We are now better penetrating specialty.

We are very strong online across the front both in retail.com and in brand.com.

Our freestanding stores are a significant channel in the United States.

And obviously department store continue to be important part of our business, and in some areas we are growing and some department store are making some significant progress on the business.

The real difference is brick-and-mortar versus online.

So the brick-and-mortar are now growing and the online is growing, even online in department store, online in retail.com.

So all the online is continue to accelerate, and that for us is very positive because we see good market share in this area.

Our brands are very successful in this area.

So your other question was, are your brands successful in these new channels?

Absolutely.

I would say that our brands are even more successful in the new channels, but it was less true in the United States, but that's true globally.

I think at Investor Day we demonstrated our success in new channels, like online globally, Tmall, Travel Retail, specialty-multi globally is really happening, and we are definitely capable to drive this brand.

Now we have a very big portfolio of brands.

So some brands are better tailored to win in specialty, other brands are better tailored to a typical more department store environment.

And finally, some brands are more prone to win online.

And we manage this portfolio actually also to make sure that we always match the right brand with the right channel and with the right consumer target, and that's an art.

That is not an average behavior.

It's really a segmented way in which we manage our portfolio brands, and that's why portfolio brands is a big competitive advantage.

Last comment, your comment of our field sales force restructuring.

Absolutely.

It was time to restructure our investment in field in order to match and to go in parallel with the new distribution strategy and with the new balance of the different channels.

And absolutely this is -- as part of this plan, we are increasing the resources and the focus and importantly the skills on the new channels in order to make our performance also in the new channels as strong as our historical performance is and has been in department stores.

Our next question comes from line of Steph Wissink with Jefferies.

Fabrizio, I just had a question for you on your comment on trailing 12-month launches that are 30% of sales, which I think you mentioned was the highest level.

Can you give us some context of how that number has trended over the last few years?

And then how that connects to the advertising spend that you're doing, kind of, fewer bigger launches with more focused advertising?

Yes.

This is a great trend that we have evolved in the last years and is the fact that we have now multiple brands and every brand has its own innovation program and the fact that we innovate in skin care and makeup and haircare and fragrances.

And within every of these categories, like skin care, we have very clear innovation programs by subcategory, example moisturizer rather than masks, et cetera.

So our granularity or our granular ability to look at opportunities make us now innovating across all these multiple global segments.

That has increased the percentage of successful sales that we do via innovation.

This strategy, combined with hero product strategy, meaning bigger innovations and fewer innovation and leveraging our historical franchises like Advanced Night Repair, (inaudible), Clinique.

The combination of those strategies is making our innovation stronger, more abundant and at the same time more profitable and efficient.

And that's what I'm trying to say is the magic of our new innovation program.

How this is linked?

And by the way, how was in the past?

Last year it was 20%.

This year it would be 30%.

And when we started our strategy 9 years ago, we were around 10%.

So we have tripled our innovation power in the last 9 years.

And how this -- and by the way, this is indicated also by our results, I believe.

And how this is linked to our advertising investment is we -- the advertising -- what has changed with the arrival of the lot more digital advertising is that in the past we had few advertised brands, Clinique, Lauder, some fragrances and that was it.

The other brands will leave out of word-of-mouth and other activities and in store and obviously a lot of in-store activation.

Today, every single brand is advertised.

And that's what's creating is also the acceleration.

So our advertising brands -- our advertising investment today touch all our brands.

And all our brands reaching scale and levels to justify a part of the budget in advertising.

And that is a -- obviously is a top line accelerator, particularly when combined with innovation.

And last, which is probably behind your question, yes, a lot of our advertising is focused on our innovation.

Our next question comes from the line of Dara Mohsenian with Morgan Stanley.

So Fabrizio, it's where to see this level of corporate top line growth that you're expected to post this year.

It's even rarer to see it continue in subsequent years when you cycle more difficult comparisons, so I'd love to hear your view point on sustainability of the strong top line growth as we look out to next year.

And specifically, are there any signs of a potential slowdown in some of the key momentum areas that have been driving your business?

And then also just from a longer-term perspective, can you talk about how you've managed the business this fiscal year to sort of take advantage of the top line growth and use it to propel longer-term growth as you look beyond this year?

Yes.

Our -- the idea of growing ahead of market is definitely sustainable.

We believe we will continue to grow ahead of market and continue to build global market share.

And the reason why this is a sustainable long-term view for us is such a -- many of the things I was explaining is because we are exposing our business to the fastest-growth currents of the world.

Thanks to Leading Beauty Forward, we have changed a lot of in fixed cost and created variable OpEx.

And these variable expenses, we can tailor them where the biggest opportunity are at the speed of light.

This was possible in the past.

So the first thing that make us sustainable that we can invest and allocate resources very fast with a lot of agility wherever the opportunity is.

And so even in a world which is more volatile and where the opportunity changes faster than in the past, we have now the agility to react at the same speed.

And so this ability to match resources to opportunities is our strength.

In this moment, the biggest opportunity, China, we are able and willing to invest in China in a great way.

If this has to change or moderated will be other opportunities as we have demonstrated in the past where we will invest more.

In this moment, our priority is to turn around the United States, we are going to invest in the United States.

And within the United States, on the biggest opportunity, which are in the channel, by category, by channel and by consumer segment.

So this ability to granularly locate the opportunity and invest, allocate resources on them is a sustainable long-term capability that we've built in our business that I believe will continue to drive our business ahead of market for many years to come.

In terms -- want to add anything, Tracey?

No.

I mean, the only couple of things that I would add, Dara, is clearly, if you look at our history over the past few years, you see that the fourth quarter is our lowest operating margin quarter, and it is somewhat related to the timing of some of our big innovation and also related to -- once we have seen how innovations perform during the course of the year, we take the opportunity to link up more behind them.

And that provides us -- has historically, at least our experience, provided us with a strong start to the next fiscal year.

As Fabrizio said, we do expect that we will continue to grow ahead of market.

The market last year, based on our information, grew around 7%.

As we communicated at Investor Day, we do expect that the market will settle down at some point in the 5% to 6% range.

So we do expect that our -- the growth that we've seen, the double-digit growth over the last few years in the next few years would slow as we expect that the market would slow.

But we in all cases believe that we will continue to grow ahead of the market.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Congratulations on the terrific results.

As you think about your categories and just the makeup category, can you talk a little bit about how you see that progressing on the makeup side?

What would change the direction of operating income there?

Is there anything, whether it's products, whether it's channels, geographies where there's a differentiation in how it's performing?

So let me start, Dana.

Obviously, the makeup category is impacted by some of the challenges that we discussed with Smashbox.

We are seeing the M·A·C brand pick up, but obviously the M·A·C brand has been slow in the last year or so.

So that has impacted the profitability of the makeup category.

And fundamentally, again, when you think about architecture of our P&L, growth drives a lot of margin expansion.

So to the extent that we see the makeup category growing globally, which we are growing relatively in line with the makeup category.

But to the extent that we see that category pick up, certainly we'll see operating margin pick up.

We expect operating margin will pick up anyway, given some of the innovation that we've got planned for some of our makeup brands like Too Faced, like M·A·C and some of our other brands as well, BECCA, et cetera, in the next few quarters, so we do expect that, that will be an improvement.

But we do have some brands struggling in the category that's dragging the operating margin down.

Yes.

And our strong brand, whether it's growth or demand, the operating margin is very, very attractive and so is the matter of mix of brands that will correct over time.

But also want to clarify, the market on makeup, as we go up and down, I mean, now is the skin care moment but 2 years ago was the makeup moment.

And by the way, this is different by region.

In the U.S., clearly, makeup is not a growing segment in this moment, but in Asia is the fastest-growing segment.

Just to be clear, makeup in China in the last quarter grew faster than skin care, and not -- I'm not speaking about our business only, I'm speaking about the market.

And so makeup is a very strong category with a lot of future and when reached certain level of growth will have the same positive impact, allowing us to leverage our cost structure that skin care has.

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

Wanted to revisit the U.S. again and maybe ask the questions in kind of a -- bit of a different way.

How do you think about the brands and the channel mix today?

Obviously, department stores still half the business.

Do you think you have what it takes to improve performance as it is?

Is it just a -- you mentioned increasing spend, but is that enough?

Do to think you need to do more selectively if available to go into different brands, channels, M&A that would buy things that can help you in that?

Do you think maybe expanding into more active areas, things maybe a bit more on trend from a consumer standpoint?

And then just more broadly, when do you anticipate the U.S. gets back to growth?

Yes.

As we said, we believe we have a great plan, as I said.

The plan is about continuing exposing different brands to the right channel, the right target group.

As you said by brand, certain brands are really playing well in specialty and they are playing well with the specialty customers.

Other brands are perfect for the department stores.

It will continue to be as exposed in the majority to department stores, which are very important channels.

All of these brands are doing fantastic online, and we are continue building their specific targeting online.

The innovation and the new exciting innovation that attracts consumers is going to be a key driver -- continue to be a key driver of acceleration.

And the other will be segmentation, the ability to speak in a granular way to different segments of consumer, including multiethnic consumers around the U.S. is our plan.

And we believe this mix of distribution, activation, innovation and granularity of marketing and the new era segmentation combined with the better field sales force, better focus by channel is our answer to restart growth.

Obviously, we need to assume that the market overall will start growing back again, and that's what we also expect that the market will go back to growth.

And when this will happen, which we believe next fiscal year, we do have the potential to go back to growth.

The last thing -- sorry, I wanted to say, I want also to clarify that even that -- if that happen, the input in the short term on the overall trend of the total company is not very big.

The real total -- the significant input of the company is not in that turnaround from slightly decline to slight growth.

Our final question comes from the line of Olivia Tong with Bank of America.

I want to talk a little bit about the operating expense, because excluding the change of the accounting impact, there was quite a nice momentum there.

Did Leading Beauty Forward has an inflection point, because historically you've reinvested a significant portion of that?

So maybe it's just timing, but normally you don't follow with that much of it through, so just trying to understand that a little bit better.

No.

We did have a great quarter of leverage, Olivia, in the third quarter, you're right, and Leading Beauty Forward absolutely contributed to that.

So as we had announced previously, we actually have increased our expectations for the program, given the number of programs that have been added to Leading Beauty Forward, and it is giving us more flexibility in our expense base.

So we did see more leverage in some of the areas outside of advertising and promotion than what we had expected.

And so yes, we have more flexibility.

We are still investing, though, a good portion of the savings of Leading Beauty Forward.

Fabrizio mentioned digital advertising, the digital capabilities in order to be able to do digital advertising, so the talent, the technology that we are investing in to be able to both create the digital advertising as well as investing a lot more in our analytics capability as well.

So we are using some of the savings to reinvest back in the business to build capabilities that we need to have continued growth over the next few years.

And that's working out well for us in the short term and we believe in the long term as well.

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

If you are unable to join the entire call, a playback will be available at 1:00 p.m.

Eastern Time today through May 15.

To hear recording of the call, please dial (855) 859-2056.

Pass code number 68669966.

That concludes today's Estée Lauder conference call.

I would like to thank you all for your participation, and wish you all a good day.