The Estée Lauder Companies Inc. (EL) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Olivia Tong, Bank of America's cosmetics, household and personal care analyst. Along with Dara Mohsenian, Morgan Stanley's household products, beverage and food analyst, we'd like to thank you for joining us for a discussion with Estée Lauder. This is part of a series of in-depth video discussions we're conducting with C-suite management teams across the staples group this summer and a joint effort between Bank of America and Morgan Stanley. Before we begin, we have a quick disclaimer. This call is for Bank of America and Morgan Stanley's institutional client base. This call is not for members of the press. So if you are a member of the press, please disconnect. Some of the statements Estée Lauder will make may be considered forward-looking, and factors that could cause actual results to differ materially from those statements are contained in Estée Lauder's Form 10-K disclosures, including risk factors. Estée Lauder assumes no responsibility to update forward-looking statements, and please refer to Bank of America and Morgan Stanley's websites for important research disclosure.

Thanks, Olivia. We're very pleased to have with us today Estée Lauder's President and CEO, Fabrizio Freda; and Head of Investor Relations, Rainey Mancini. The format of the call today will be Q&A from Olivia and myself. [Operator Instructions] The call will run for a little less than an hour. And with that, I'm going to turn things over to Olivia to start us all.

Great. Thanks, Dara, and thank you, Fabrizio and Rainey, for joining us. We really appreciate it. Let me start with a question around the current environment. So clearly, this is a dynamic time for the Estée Lauder company and the beauty industry as a whole. So can you give us a sense of what you think needs to occur to drive an industry recovery? Do you think, in some cases, it's just a function of time and the virus passing being a big piece of that? So if you could talk about the challenges to restore your business back towards its prior health and how this has changed your long-term view of industry's trends…

You're welcome. And so the COVID situation is, in reality, accelerated trends that were very visible before. And so in terms of the long-term view of where the industry is doing -- is going, I believe that the industry will come back to the historical level of growth after COVID. Because the historical level of growth of the total industry -- for industry, I mean prestige beauty in general. They are driven by demographics. They're driven by participation of women to the workforce. They're driven by the advent of the Asia consumer, which is very focused on beauty in general, skin care in particular. So the long-term trend have not changed. And this -- sorry, I see -- are you still hearing me?

I'm still here.

Okay. So the long-term change is -- the long-term trend is not changing, but we'll be probably looking different from when COVID arrived because COVID has accelerated some changes that were already visible before. For example, COVID has accelerated the online penetration in every single market. We closed our online in the key online markets of the world like China, U.S., U.K. in the last quarter at the 40% level penetration. I mean it's amazing. This was obviously forecasted to happen but was forecasted to happen years later. Second thing that's accelerated is skin care. And as skin care is accelerated, we'll continue to accelerate because it's driven by the Asia consumer habits. And also it's accelerated the need of the improvement of productivity in the brick-and-mortar area around the world, mainly in Europe and North America but frankly around the world. And this also was evident. What's going to happen? It's just happening much faster because of the COVID impact. So I believe the long term will be very strong for the industry. Our position in the long term of beauty is also going to come out of COVID, in my opinion, strengthened because we are going to come out of COVID with a stronger online penetration, with a stronger skin care growth and percent of the business, with a stronger ability to do travel retail in Asia in the right way. And we can expand on what this means later. And many other characteristic of efficiency and cost efficiency that we have already brought to the business in the past, we need to bring it forward, but we are bringing it even more and even faster to the business because of our reaction to COVID and because of the learnings. For example, our capital investment is less in brick-and-mortar than it was in the past, but it's more in technology and less in the office space, the way we managed it in the past in the world and it's more in other areas like data. And so there is a change, but the strength is even more for the long term. The unknown is how fast the long term will happen, meaning how long the COVID impact will continue to be so drastic as it's been so far in particularly impacting the brick-and-mortar in the West and in this area and the travel around the world. So how long this impact will continue? That depends on the COVID, depend on the vaccine, depend also frankly by the ability of the different governments around the world to manage the COVID with limited impact on society and many other factors. Some of them are in our control. We can't limit and mitigate -- we are mitigating as much we can, taking care of the safety of our employees, the safety of our consumers and being best practice in terms of managing in a COVID environment. But there are many factors which are not in our control. And so the unknown is how fast this will go back to normal and -- but even in this period, we are mitigating the risk in the best possible way.

That's very helpful. Maybe if we can talk a little bit about those unknowns. Maybe if you could provide some color on some of the trends you're seeing, particularly in areas that have been a little bit [ impacted ], U.S., travel retail. Can you talk a little bit about your level of visibility, looking around the world at this point in the COVID environment? How long does it take for sales that were in travel retail to come back, whether it's because of recoveries or the consumers move further to purchasing in their home?

So starting from travel retail, your question is -- travel retail is driven by traffic. And the traffic will obviously -- today, the traffic in the West is very, very limited. And particularly the sentiment of consumer while they travel is less about happy shopping. It's more about going as fast as they can through this experience in this moment. So obviously, in this moment, traffic is not strong at all. But on the other side, travel retail is also driven by conversion, meaning, as I said many times, 10%, 15%, depending on which part of the world, of travelers buy anything. And in this moment, what we are seeing particularly in Asia is a dramatic step-up of conversion. So there are clearly less travelers, but there is much more conversions of these travelers particularly in Asia. And also what we have learned in the last years is that also in travel retail, the online in travel retail, which is called pretail, is helping conversion enormously. What is pretail? If you have a ticket, you are going somewhere, you can go in the evening before online with your ticket and buy online the product that you want, and you'll find them in your airplane, on your chair, so avoiding all the -- going through the store. That is the power in our numbers, for the moment limited but even to double conversion. So just imagine that when the traffic will be back and the conversion potentially will continue to increase, 20%, 30% a year, this explain why there is such a very strong -- the world before COVID, such a strong growth of travel retail and why I believe this will come back when traffic will go back but will come back reinforced by stronger conversions and by better online habits. The other interesting thing on travel retail is that in the meantime, the travel retail negative, meaning the loss of travel retail business is being mitigated by the increase of domestic travel within China. Probably you heard about Hainan being a very important domestic travel destination. That is duty-free in China. And so it's subject to the travel retail rules, and we manage it and all our competitors as travel retail. And in Hainan, first of all, there's been a good increase of traffic as the COVID abated. And second, the government as of July has [ trapped all ] the right by duty-free of the travelers. So there are a lot of news why it's been allowing more and more consumers to try to cope with their consumption needs, buying during the domestic travel. So that's the situation today, but it's obviously only a mitigator of the losses in the short term. Your question was more about the long term. Let's say when travel will come back -- and again, I cannot give you a date. I wish I had. But when travel will come back -- but I can tell you it will come back in a big way. I'm the first one that cannot -- I'm looking forward all my team to travel. And every person I know is in the same spirit. So if we come back as soon as conditions will allow -- but we'll come back stronger because there will be higher conversions. And we'll come back stronger. There will be new domestic travel avenues like Hainan that were not present at this level before COVID. So travel retail will boom back is my point of view. Again, the question is when, and I leave the answer to all of you, and we can make hypothesis together.

Maybe we can switch over to e-commerce, Fabrizio. You mentioned it a couple of times in response to the previous questions. Obviously, it's ramped up significantly. Can you just talk about how a customer on e-commerce through Estée Lauder longer term versus a customer that's through traditional brick-and-mortar? It strikes me as very different than a typical CPG company just given the replenishment cycle in beauty, ability to cross-sell and also the fact that you have more DTC exposure and more sort of data on the consumer set. So I'd just love to hear a brief review of sort of the value of that e-commerce consumer and how it might be different than your -- the rest of your business or a traditional CPG company.

Yes. I have to say the e-commerce is one of the most exciting stories of the post COVID and the COVID -- and even during COVID as a mitigator of the closures. First of all, we see a tremendous number of new consumers, meaning people that are shopping online our brands that did not shop before. So we see them for the first time. The numbers are staggering. In the April, June period, our new consumer number grew by 195%. So it's an enormous amount of new consumers. Interesting other good news, this consumer -- we don't have the data always but -- and totally in some markets with some facts in others, this consumer tend to be older than the existing consumers. In other words, many of us, of my age at least, that before, we're using e-commerce and digital a bit less. During COVID, we are all obliged to discover it. And you know what? We are all liking it. And so the amount of new consumers is now including a generation in beauty. Maybe it's a slightly older generation but that in beauty is a very important generation, internal wealth and internal consumption, so a significant number of new consumers, also a significant number of very active consumer in term of spending and importance of beauty. The second thing we are seeing is that online is driven by -- on the existing consumer that, as you know, were mainly younger millennials and younger that were really still very much into e-commerce and digitalization of their experience. These consumer are increasing their exclusivity online. So while this consumer in the past may have purchased 60% of their things online and 40% in brick-and-mortar. And then during COVID, they went to 100% online. And what we see that in the post COVID, they maybe go to 80% online but they don't go back to the 60%. So there is an increase of exclusivity of the online channel for certain concerns. The third important data point we see is a dramatical increase of engagement levels. How do we measure engagement? Example, the time that people spend on our site, the amount of services they use and the interaction with our brand and the frequency on which they come back, all of these measures are really increasing strongly. I'll give you some measures. For example, our increased frequency of purchase on some of our brands like Origins was 3x as much in the last quarter for these kind of consumers, meaning the historical consumers. Or we put new services. Example, on M·A·C, we put an eyeshadow finder. And the average time spent on the site historically is 9 minutes. 9 minutes is a huge amount of time, by the way. But for the eye finder, it was 16 minutes, the average. So all these new technologies that we have now brought online in an accelerated fashion versus the original plan, like try on -- virtual try on, chats, we consult online, experiences of different services online, sampling, et cetera, all these kind of new services are increasing the time of interaction. And remember, there is -- our online is, by now, about 60% direct to the consumer, meaning we have the data of the consumers. We have access to this time with the consumers. So -- and this is for us media equivalent. So imagine 0.5 billion people giving you 16 minutes. If I had to buy 0.5 billion contacts for 6 minutes each, we speak hundreds of dollars on media. And on the contrary, we get this for free on our brand.com. So this engagement level, which is, at the end, a hidden media value, which is not in our P&L but it's in our results, is an enormous, important part of what's happening in the development of the e-commerce that we call the skyrocketing engagement levels and media platform leverage that we are doing with e-commerce. Then I should say maybe importantly that all our e-commerce platforms, brand.com, platforms like Tmall or Lazada for us, pure plays or retail.com, macys.com, rather than [ douglas.com ], all these platforms are, on average, all accretive for us from a profit standpoint, some more than others but they are all accretive to the company overall. So all this entire growth of e-commerce over the long term when the short-term negative impact on the fixed cost of closures impacting in COVID and the many other costs impacting in the short term in COVID, this will be accretive to the company. And so it's a very, very good direction. In summary, consumers more engaged, sales increase and higher profitability than the past. So this is a big deal.

Great. That's very helpful. And just a couple of follow-ups. On those new customers, do you have sense for repeat purchases so far? How that might compare versus where you've been in the past? And typically, are new customers -- sort of pre-COVID, is that a big piece of e-commerce? Typically, is it single digits or is it 10%, 20%? Just sort of rough type of framework if you have that would be helpful.

Yes. New customers in -- not during COVID -- during COVID, it's been enormous. And so I don't think it's the right thing to model. But new customer, it could be around 20% of the customers in a normal year. Now it's more than that and so significantly more than that, as I said. And so the -- and then sorry, the other question you had, the first part of the question?

Those new customers that have come in, do you have...

Repurchase rate.

Are they sort of repeat -- yes. It's probably early, but how does that compare versus the past?

But I already give you a few data there. First of all, repeat rates, repurchase rates on our brands are normally outstanding and they are very different. By skin care, makeup, fragrances, they are very different numbers, obviously. And so you need to benchmark with the respective category. But take as an example, we have hero products in skin care on our top brands that approach repurchase rate on the 50%, 60%, which is unheard of in consumer goods. What I mean with that is that out of 100 consumers that try the product one time, half of them will buy it forever. So you can invest anything you want with the repurchase rate of the same. Now this level of repurchase data are not driven by marketing or online or brick-and-mortar. They're driven by product quality. So 80% of the repurchase rate, at least defined the way I have defined it, so how many people that tried the product come back to you regularly, a fund like this, the big drivers is product quality. I know many women or men that will try a new product because of marketing, because of the experience in the channel. I don't know anyone that buy the product the second time if the product didn't work. And so this repurchase rate is about the art of doing great products, which is obviously the core of the company. The repeat rate that you are referring to, which is -- I think the closest measure is what I gave you before, is the increased frequency of purchase, that the only measure we can really see in the short term in a few months. So we see an increased frequency of purchase of 2 or 3x depending by brand, which will definitely, over time, turn into higher repeat purchase in general. For the moment, this increased frequency, obviously, we'll know at the end of the first year if we can call it increased loyalty or not. But this increased frequency is already skyrocketing. We've never seen something like that. But obviously, it's driven also by facts. So imagine some of it will stick. That's my hypothesis, and we are working to make it stick. But the reason why it happens, frankly, we don't deserve credit because of marketing. Do you know why it happened? People are closing their homes, and they were -- could not buy this product anywhere else. I told you before, even the loyal e-commerce consumers were not 100% exclusive to e-commerce. They will buy maybe half of the time in a store. This store was closed. So if -- they doubled their frequencies just because the store was closed. If they trebled the frequency, it's just interesting sign of their intention. But the real question is what will happen when the stores are opened. Will they go back to the historical frequency or not? Now if you want some initial indication, the markets where the store were opened first was China. And in China, we do not see yet the same frequency in store, but we see a dramatically increased frequency online even after the store are closed. So at least in China, I have a clear sign that some of these online increase will stick forever.

Right. And then the 60% number you gave for DTC, that includes some of your partners, right, but the websites where you have a lot of control yourself. Your own brand sites, is that a big chunk of that 60% number? Should we think about them fairly equally? I know that data is probably dissimilar that you get from both, but just rough framework.

I prefer not to give you the specific numbers because we don't -- but it's a big number. If your question is, is your brand.com direct-to-consumer is a very big and very much growing number, we said in the last quarter, our brand.com business in April, June, has doubled in size. So it's a very big number. It's a very big number. And what I put in direct, to be clear, is brand.com plus platform like Tmall, Lazada and others, and all the areas where we control the store and where we have the full sales and then pays whatever cost or fees. But we control the stores, we control the promotionality, we control the pricing, we are in control of our business. And most importantly, we own the consumer data. Or if we don't own them exclusively, there could be in some situation, we have access to the consumer data. So that's the profile of direct.

Fabrizio, if we could switch from channels now to products. Skin care has grown pretty much stronger than other categories of late even pre-COVID-19. So would you expect skin care to continue to be the main driver of growth even in a post-COVID world? Or as consumer activity recovers, do you expect that makeup starts to see a bit of a surge and rebound a bit quickly? And how does that align with your innovation plans? And what are the margin components of that?

A lot of questions in one. And so skin care and makeup particularly, but I'll call also other categories. So skin care, in our compass, we were already speaking about skin care being one of the categories that would have had the best results over the following 10 years. And this has been only reinforced by COVID. So skin care has been accelerated by COVID because people closing their homes, their need of pampering, their need of hydration, their need of taking care of the skin was very strong, while maybe the need of interacting with others that normally serves the makeup motivations have been less strong. So COVID definitely accelerated skin care. But this is not just an event for 1 year in a COVID situation. This is a 10-year long-term trend because it's driven by, first of all, the Asian consumers being one of the biggest engines of growth of the entire industry globally. And the Asia consumers' percentage of consumption in skin care is much higher than any other parts of the world. So just mathematically, the growth of Asia brings skin care along. The second reason since skin care is frankly growing in every market of the world, not only in Asia. In Asia, numerically is more important, but in every single market because the trends of, we call it, skinification, meaning using skin care not only as anti-aging, but using skin care also to add a beautiful skin this evening, today, now and the benefits -- historical benefit of skin care, also in the West like anti-aging like wrinkle prevention or wrinkle elimination, et cetera, are still there, and they're very important. But there are now new benefits like even skin tone, like -- benefits like luminosity of skin, like of -- a benefit of mattification or absence of oily skin. All these benefits are not done by product used for 7 weeks and then you see results. They are a form of makeup, and they get used instantly. This product has been skyrocketing in term of channels. And so today, you have skin care with an anti-aging historical stronghold. And you have also immediate-benefit skin care, which is growing. And then you have the push of COVID in the short term that has further amplified this. But the long-term trend is here to stay also after COVID. The second question was makeup. Now makeup is very much linked to the need of interaction with others, also to the moment of self-indulgence to the interesting women in interpreting their mood, their point of view, what they want to do that day. So obviously, the higher is interaction with the world, the higher is the good mood. And the pleasure to be in a social environment, the higher is the consumption on makeup. So obviously, COVID was not the right moment. And then you add further masks, cover part of the face -- and lipsticks, by the way, which historically was one of the most resilient categories in any recession, are now declining because under the mask, you don't wear a lipstick. At least most women don't wear lipstick under a mask. And so that changes are happening. But my point of view is that makeup will actually boom back the moment that social interaction will go back because -- I'm sure all of you are feeling the same thing and just was recently also finally traveling for a short period. And everyone in that were just longing for coming back to stores but -- even if we all realize it's still a difficult moment, but we are all tired. And so we all want to have back our social lives. So the moment this will happen, makeup will boom back, and we will see actually, my opinion, bouncing back retail sales. What -- however, independently from the preferences and the fit between the different categories and the external environment, one thing which I found interesting -- you remember that in Estée Lauder, we will speak about the lipstick index in the past. I explained recently in the call the lipstick index that was actually invented by Leonard Lauder many years ago. The meaning of that was the during recession times, beauty is a pretty resilient category because we are affordable luxury, and people don't give up the lipstick just because of recession. It's always been true. Now it's not true. Lipstick is not selling, but the index is still valid. It's just been substituted by moisturizers. And that's why I called it the new moisturizer index, meaning the concept is still the same. Beauty is a very resilient category, and people don't give up their basic beauty habits so easily. This time, they didn't give up their moisturizers. Historically, they were not giving up their lipsticks.

That makes sense. Maybe we can talk a little bit about [indiscernible] hero products? Can you talk about their importance? What percentage of sales do they now make up? How about the margin profile? And as you grow that, what it looks like in the company?

I don't hear you super well. Do you hear me well or...

I can hear you fine.

Okay. Good, good. So the question is on hero products, correct?

Correct.

Okay. So now hero products is a very important strategy for Estée Lauder Companies. And to be clear, it's not a strategy invented by the company. It's a strategy designed by the consumers themselves. Because how do we define hero products? It's not just a nice product that we sell a lot. It's -- to be a hero product, you need to be a product that has a high consumer base, so there are many consumers which are interested in that categories, in that product; and a very high repurchase rates, meaning that is a product that has high loyalty level. So when you have products which have high penetration and high loyalty, they are defined hero in our portfolio and they are treated like hero, meaning they are managed with the right level of innovation frequency to keep them always state-of-art technology, the right level of investment to look for new consumers continuously because imagine that when -- as I said before, you have the purchase rate at 40%, 50%. Every investment you do, the return on this investment is fantastic. So hero products get very much attention in investment because they have great return on investments. The other thing that hero product get is global expansion. We -- when a product is a hero, meaning high penetration, high repurchase in a certain market, it's very likely there will be hero in many other markets of the world. And that's why we make -- the hero travels more faster than others because we are more sure of the success. And so when you combine the fact that hero products are penetrating well, getting great repurchase rate, they travel well country by country. They have a great return on advertising spending. And they are, because of all of this, among the most profitable SKUs in the company. You realize why the focus on hero products has been substantial to us and has been enduring COVID, one of the big help to mitigate also the losses and before COVID and now hopefully in the post-COVID environment will continue to be one of the best drivers of our growth and of our success.

And then just a little bit more near term. Obviously, there's been a kind of volatility right now. And given that monthly volatility, can you just discuss your view on underlying consumption growth right now? Just helpful to discuss your view on the recovery path and all that movement right now.

Yes. What we are seeing is that just an objective view of reality. We believe that April, June was probably the worst quarter in term of the amount of closures that we had to face and the impact of all the negative things on our cost structure. If you imagine that the quarter we just closed, we had the impact of the closure of the stores including some impairments, the accounting rules imposed us to have manufacturing cost. When you add -- when we had to close the factory for protecting our employees, there was a cost associated with that. At the entrance of COVID, particularly makeup was -- had a lot of inventories. And then makeup collapsed. So the absolute level of products, particularly in makeup, was obviously much higher than originally estimated. So basically, it was the moment where all the venues were coming together both in term of cost, short-term cost, onetime cost and in term of closures and because of this, in term of low consumption. We believe that from there, we will have a gradual recovery. And we discussed this already in our guidance of the quarter 1. And we said also that from there, we expect consumption to get better every quarter a little bit. Now the rhythm of this getting better will be heavily influenced by the COVID, the second wave, yes or no, looks like second waves are coming and are coming more in the areas of -- specific areas of countries, specific regions, specific groups. So for the moment, there is not yet any global second wave. Thanks, God. But there are more waves here and there. That seems to be managed depending where -- managed in a less disruptive way than of the initial waves. But anyway, there is still a lot of issues caused by the virus. And so the recovery of consumption will be gradual. And we believe that in absence of a second wave and assuming a continuation of improvement and assuming the arrival of vaccine in the first 6 months of 2021, then we can expect the consumption to get more into the normal areas towards the end of this fiscal year -- of fiscal year 2021, so in the -- let's say in the first part of calendar 2021 gradually go towards normalization. Now the other important thing to clarify that, that expectation of gradual recovery is very different by market. As you have seen already now, without depending from my long-term estimate, China has recovered in the speed of light, was the first to recover. We were growing in April, June, already 50% in China. So this is extraordinary. And on the contrary, you've seen on the other side, the U.S. is the most impacted and -- by the lack of consumption but in a country where the virus is there and there are many other issues around the demand. So the consumer sentiment is not very strong for the time being. So I don't think that this recovery path that I was illustrating will happen globally at the same time. It will be very different country by country, region by region and that's why -- for us, even be more difficult to predict. But that will be the rhythm, I believe. And I'm pretty optimistic that when this will be solved, we will end up in a stronger situation than where we start.

Makes sense. Dara, do you...

Yes. Maybe we'll stick to China here. Obviously, really phenomenal growth levels for a few years in the prestige beauty category in China. Ex COVID, setting aside the pressure in recovery, but as you look out longer term, do you think the structural drivers behind that really can continue over the next few years? How sustainable is that growth? And maybe you can specifically touch on premiumization and per capita consumption within that answer and how sustainable those factors are in terms of increases.

Yes, yes. So the short answer is, I believe that China is driven by long-term trends. And the -- as we presented several time, including the Investor Day, very clearly, these numbers are still valid for the long term, meaning the amount of new middle class that -- just the amount of people that will enter the middle class in China is 10x what will happen in Europe or in U.S. in the next 5 years or more. So there is no discussion. This middle class is super interested in high-quality products, particularly in beauty. And still, there is a lot of space for prestige to grow as percentage of the total market, as I illustrated. The number is still valid. And if we only -- if you only imagine in China to get 1 day at the level of Korea, it's just in many, many years to grow at a very high level. So -- and then finally, the Chinese consumer is really passionate for beauty more than any other consumer. So you have all the elements. It's the market development, the consumer passion, the opportunity of prestige to grow faster, the mass -- the middle class growth overwhelming, which is the key driver in beauty because it's all about middle class growth. So China is and remains a very promising market in the long term. Now what are the specific drivers that will fill this? It's -- first of all, as I explained many times, during COVID, it was even more evident. It's that in China, there are today about 600 cities of millions of inhabitants that -- where there is strong demand for prestige beauty and for our brands. We know this from our sales online. So we are distributed, physically distributed today with our 2 most distributed brands that happen to be Lauder and Clinique in 125, 120 Clinique cities. That's it. So there are, in this moment, at least 400 cities and 0.5 billion people that can only buy our brands when they travel in travel retail, internationally not now but in general -- or domestically now and online, our brand.com, Tmall and through other solutions. So they have no other alternatives because there is no store in their cities, not even one -- and by the way, similar for our competition. So China is a very different model. It's not a model like U.S. where brick-and-mortar was built, a lot of investment. And when brick-and-mortar is everywhere, online arrives and take sales away from brick-and-mortar and keeps brick-and-mortar productivity. China is starting in the large majority of markets with online, and brick-and-mortar is following the online-only where there is a need of omnichannel and -- where brick-and-mortar is actually the biggest appeal in term of quality of exposure, brand, is actually travel retail. That becomes the most elegant, beautiful exposures of the brand. And that's why in Asia, it's the most brand-building channel, frankly, of all. And so this completely different business model has so much more to grow. Imagine how much physical distribution can be built well before arriving to productivity issues, which are today in the West. Imagine how much more online penetration can be created with now platforms and entire cities where the consumer buy these products only online. Imagine how much more as soon as travel starts, why I'm so optimistic that when travel is back, people would be back buying because that's it. That's the only opportunity. They go on holiday finally. They can buy certain brands that are not in their cities in the large majority of cases. So that's why China business model is the beginning of being leveraged. And in my opinion, it's unstoppable and -- because at the end, it's driven by consumption. And nothing will stop consumption. What can change is where this consumer will access the consumption, and we will need to pay attention to be always there serving them. But the consumption is -- the growth of consumption is the key driver of everything. Then in term of the -- China is -- there is a lot of interest in luxury. I mean the -- I know that people imagine China as a country of low prices. There is competition on pricing in this moment. In the COVID environment, obviously, there's been some promotionality from certain retailers. There is competition in China in this moment. But overall, it's interesting to see that the fastest-growing brands are the luxury brands, meaning the brands like La Mer or the competitor of La Mer in our portfolio, Lauder Re-Nutriv, the Bobbi Brown in makeup. So the expensive brands are growing much faster than the entry-price-point brand. How do you explain that? And the fact that it's just -- it's search for maximum possible quality. And the other thing is that -- remember, people -- yes, the economy is not doing well in China but it's not doing awful as well. And we are speaking about wealthy middle class for our target. These people are still in good shape. And these people were very much closed in their homes or in the last months in their offices. They were not enjoying long vacations. Movie theaters are closed. Big, expensive things or jewels -- were not the time to buy them. This people has a lot of money available for indulging in amazing beauty products, and they're doing it. And that's why this is a good moment for China consumption. And as I said, I personally believe this will continue for some time. Now in term of category -- actually for a lot of time in my opinion. But as a category, skin care sprints. Makeup also in China is less buoyant than it was before because also in China, particularly lipstick, has been touched. In China, people does -- use masks in every single situation. We have 7,200 employees in China. We got 2 COVID cases in total. And our offices are open since April, and our people are in the office with masks, with hand sanitizer, with great habits of going elevators no more than one, et cetera, and there was no one case with our systems. And so people are very disciplined in what they do, how they live. But they are living through that active and not closed at homes anymore and -- but because of this, they don't wear a lot of lipsticks because they are under masks all the day and they don't wear that. So we see impact of this kind also on the consumption in China. But as I said, I believe this will change as soon as the situation improve. I don't know if that's answered your question with enough color and facts.

Yes. That's helpful, very comprehensive. And then the recovery you've seen in China post COVID, obviously, the case count has come down quite a bit. Hopefully, we see some of that in other geographies. But what does this sort of tell you about the recovery path around the world when COVID has solved just your experience in China so far given it's one of the few areas where case count has really come down close to 0?

So what are the implication for the rest of the world from China, that's your question?

Assuming that...

And learnings?

[indiscernible] one way or the other, just...

Sorry. Unfortunately, I don't hear you. You froze time to time. So I don't want to answer the question in a wrong way. Could you repeat the question?

So obviously, the pace of recovery in China has been very strong post COVID as the case count has dissipated. What does that sort of tell you about the rest of the world if, in fact, case count does dissipate at some point, which obviously isn't happening as much today?

What I can learn from China is that, first of all, this will require -- this will be gradual. And the consumers will remain very -- paying a lot of attention. And so our stores need to be really well organized. We need to provide safe beauty to consumers, meaning mask, hand sanitizer, et cetera. At least still when the virus is somehow around, even under control but around, the consumer will be worrying about safe shopping. And so we need to provide and we are providing the safest possible shopping experience we can all over the world. What we are learning is that our employees will need to be participating more and more to the normal life of office and travel, whatever. But this will need to be done gradually and only with a super safe environment and in the respect of employees' also emotions, frankly, in respect of their needs. And so there will be need to need a very well-orchestrated and inclusive model of bringing back employee to the right activation of normal business life, and this would be again gradual. Then I'm learning that in term of business, the online business will be a driver for longer than that because unfortunately, COVID, even in China, the brick-and-mortar is not yet back to 100% versus before COVID. But still, the business is plus 50%. It shows how the online acceleration and the work in other business channels like social media that we have basically created in China, these things are very important because brick-and-mortar will be coming back more gradually and -- even in China. And then finally, this confirms that skin care would be -- it's already happening but will be continually driving in every country of the world, which is for us great news. And the China experience confirm that the optimism of the digital social communities that are being created in this moment is fundamental to take not only the economy and the way to work on the technical aspect to get the mood of the consumer, the sentiment of the consumer back. You need to have social interaction. And the ability to bring exciting social interaction via social is going to be an important tool for rebuilding consumer sentiment when will be the right moment. Actually, it's already the right moment in many markets.

Great. That's helpful.

Fabrizio, talking about brand investment. Clearly, you've invested a lot on the advertising line in the last few years with higher-than-expected sales growth. Obviously, you cut back a little bit in the COVID environment. So can you just talk about where you expect your ad spend as a percentage of sales to move in the next few years off the fiscal '20 phase? And also wondering from an industry perspective, might a byproduct post-COVID [indiscernible] that the industry doesn't get all the way back to pre-COVID levels, particularly versus historically high levels of ad spend.

So no, actually, we've been spending more in advertising. And during COVID, we have protected the online advertising as much as we could and as much -- it was effective and efficient. We have reduced advertising particularly in relation to the closures because it was making no sense to advertise to go in a place where a consumer were close -- and totally have no intention to consume. But otherwise, we are not interrupted. In China, we had restarted immediately and spent back to almost normal level as fast as the market will require. So we are definitely cutting many costs. We have no intention to reduce advertising beyond what was useless advertising because things were closed. And so we are -- we will continue to invest in advertising. I don't think the percentage of advertising and sales will change a lot. In the range of 25% A&P is where it is. And this will continue to grow at least in line with the sales. And the most important thing that -- is not how much more we will spend. It's how much more effective what we will spend will be. What we have learned is really how to make the return of our advertising investment much better and much stronger. And the more that -- all what I described before, the move online, the digitalization, the skin care, the role of influencers that's changed the -- they -- actually, I didn't speak to that, but the role of promotions is changing enormously and -- because the sampling are taking such -- so much of a bigger role in our A&P, in our spending than ever in the past. And I can't explain why, but that's another big, very positive evolution. And so all of these will continue to improve. So I believe you can assume that we'll continue to spend in advertising, and we will get more out of the advertising money we spend over time. And the reason why sampling is increasing -- because obviously, in a moment where online is becoming so big, imagine -- and the moment hero products are so successful. So now if you buy an Estée Lauder hero product online on brand.com, when you receive the pack at home, you will find what -- a sample of all the Estée Lauder brand products that we believe you should be interested in from the data we know. And so now we have the power to continue to create in trials basically at 0 extra cost if not a product. As you can -- as you know, with the kind of gross margin we have, that's a manageable spending because the rest of the delivery at home is already happening, completely costed on the hero product we are selling. So the rest is basically super effective spending on the A&P in creating trial of new products and on new consumers, so very exciting new tools that we are experimenting, which frankly are behind this 100% index for brand.com with these kind of numbers only happening because we have some exciting new drivers, which are in the A&P spend.

Got it. We talked -- earlier on, we touched a couple of points on how no one knows what the next 12 months, 18 months or so will look like with the virus and all. But what about your discussions with your retailers? What are you doing to more closely collaborate with your largest customers, U.S. international, travel retail, brick-and-mortar versus online? How are you working together to plan for the next couple of months to drive growth in these categories and realizing that we all have some level of uncertainty going forward?

Yes. No. First of all, we have great relationship with retailers around the world in everything. What we plan together is -- first of all, it's clear that we had to work together how to make the store safe for the consumers and how to bring back the people working in stores around the world and how to make sure that our employee would be safe in the stores, so consumers and employees. So that part has been a big part of collaboration and work for the retailers. And this is not only because of the short-term COVID mitigation reason. This is also for the long term because this concern with hygienic store and hygienic shopping and cleaners. I think it's going to stay for a long term. So this is a good investment of our work, our money with retailers, and it's working pretty well. The second thing we are collaborating is that we have the opening, the closing, all -- and then the activity because you just -- you don't reopen a store and that's it, just open the door. It's all about attracting back the consumer, doing the right activation, using innovation to attract people and build traffic. So we are doing some great work together with our retailers to rebuild traffic in the post COVID environment, and it's speaking for brick-and-mortar. It's also true that there is a lot of work in brick-and-mortar, particularly in the area of productivity. Now COVID has disrupted many brick-and-mortar retailing stores in the world. And some of them, as you know, are not coming back. And so retailers, not us, in this case, retailers have decided to close certain stores, to close certain doors, and we are obviously serving this. And these closures will have, as an impact, the increased productivity of the remaining one. And so we see this as a positive move. Again, this would have happened anywhere, the world in brick-and-mortar, and so something ahead of the growth. Just COVID is accelerating it, and this will increase the productivity of what remains. And then we also choose it, to get out of certain doors, which are not good enough anymore for us in term of productivity or close even some of our free-standing store as we announced in what we call the post-COVID acceleration plan. And this restructuring plan is actually exactly used -- will be used to execute this change, this pivoting from unproductive brick-and-mortar to productive brick-and-mortar and for unproductive brick-and-mortar to better online services, faster and more aggressive. What we talk also with the retailers, our partner retailers in online is all -- there is a lot of work on many fronts, including also in that case, a lot of work on attracting traffic and to increasing loyalty, but there is also a lot of work on fulfillment. Because as you can imagine, the kind of sales increases we have seen online, they put a lot of pressure on the fulfillment models in many countries of the world. First of all, shows the strengths we've built over the years. The fact that we were able to cope with 100% index and no issue of fulfillment of any serious level or significant level, which shows the power we have built both in the technology of our sites, in the ability to manage the traffic and obviously, in the need to deliver our products. But there is still work to be done to make this strong and sustainable, and we are doing this work, in some cases, on our own, in other cases with our retailers. And that's an important part of the work. And then finally, I don't want to underestimate the importance of innovation because in a moment where the consumers are coming out from a difficult period, innovation has a great role. It's always a great role in innovation and beauty. But in this case, there's also an emotionally positive role to bring people back to normal life and discover new things, which we have seen is important. It's important from brand equity building, and it's important for the long term as well. And we do this in collaboration for our -- with our retailers in every country of the world.

Great. Well, with that, we're running up on an hour here. So Fabrizio and Rainey, it was good to see your faces. And that was really informative, Fabrizio. So we really appreciate your time. And with that, on behalf of Olivia and myself, we will end this webcast.

Thank you.

Okay. Thank you very much. Thank you for your questions. Nice work.

Thank you. Have a good summer.

Stay safe.

Bye. Thank you. You too.