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

Yes. Okay. Let me shift gears a little bit maybe and talk about North America. So it seems like a lifetime ago. So I think most people don't remember that the Americas posted 1% growth in the December quarter, right, before COVID-19 hit, and that was the strongest growth for the region in, I think, almost 2 years. So maybe tough to assess, but to what degree has COVID-19 maybe reversed some of those green shoots that you were seeing? And if the vision has changed, like, what do you think stabilization of North America looks like? And when could that business return to growth?

Well, you're right, and thank you for reminding us that we did see growth in December. We had a good holiday, and it does seem like a lifetime ago. I don't think it's reversed any of the green shoots. What it has done is accelerated what we had expected to happen over a longer duration in a much shorter amount of time. So we've talked and more broadly, everyone has spoken about the amount of brick-and-mortar distribution in North America relative to the growth in online. And so we had certainly expected and part of the strategy that we communicated previously was to start to rationalize some of our footprint in North America and certainly shift more of our advertising dollars to online to balance out a diversified mix. We've expanded into specialty multi. Our heritage is department stores, et cetera. Fast forward to today and both retailer.com, so our customers' online sites, as well as our own online sites are growing at a much faster rate. And so that requires us, really, in order to protect profitability and continue to grow or grow in North America to rationalize distribution a bit faster than what we had anticipated. And that's the post-COVID acceleration program that you heard us announce on the fourth quarter earnings call. It really is designed specifically for North America and Europe, so the more mature markets where there is an abundance of brick-and-mortar distribution, to really try to balance that out with the growth that we see happening and expect to continue to happen online. So in terms of when North America will return to growth, difficult to say. Not this year. And so certainly, we will be going through that rationalization process as we mentioned on the call with the program over the course of the next 12 to, I would say, 15 months and hopefully see stabilization and more productive -- smaller footprint and more productive brick-and-mortar distribution in North America, which will free up funds as well to invest in advertising and driving all channels of distribution, online as well as brick-and-mortar. So a much healthier growth going forward once we get past this program.

Okay. I guess I'm going to change my order here of things I wanted to ask you. So one question I had about this -- the post-COVID plan is wondering how much it's similar to Leading Beauty Forward in the sense that like everything Estée does, it's with the long term in mind. It's not just a quick hit restructure where you take out costs and there's no sort of bigger story around it. So I guess I was wondering how much of it is -- if there's also spending that has to happen in order to enable the changes that you see happening. So we're talking about logistics capability for e-commerce or the cost inherent in taking out some -- in rationalizing the brick-and-mortar footprint. So does that sort of contributing margin pressure before we see the benefit, before we start to see the real flow-through of the better model? I guess is that a fair assessment? Because I think for me, that's kind of how Leading Beauty Forward played out in the early years as well.

Yes, well, Leading Beauty -- yes, no, you're right in terms of Leading Beauty Forward. Leading Beauty Forward was much broader, and it was focused primarily on overhead. And so it was really looking at how do we accelerate -- how do we both create a more leveraged structure in our overhead, and that was accomplished through shared services; how do we better contemporize our supply chain; and it was also how do we invest some of the savings back from some of the activities, indirect procurement savings, et cetera, back into digital marketing capabilities. So it was very much focused on what you would classically call G&A. What the post-COVID acceleration program is really focused on is more of the commercial business. So it really is looking at a rationalization, for the most part, of our brick-and-mortar distribution. And when you think about accelerating some door closures, we want to make sure in that process that we retain the consumer. So we don't want to lose those sales. So that will require some more investment in advertising in order to make sure that we retain that consumer. And we always -- when our retailers close doors versus retailers going out of business, but when our retailers close doors, certainly, we work with them to migrate the consumer to other doors or their online site. We would do the same with our freestanding stores as well. So some of the savings will be reinvested back primarily in advertising, a little bit in capability and some will support the bottom line savings. But the program is shorter, and it's narrower in terms of the scope relative to Leading Beauty Forward. So this is a 2-year program. Leading Beauty Forward, as you know, was a 3-year program, very -- and to your point as well, more back-ended in terms of some of the benefits coming out of it.

Okay. Because I guess -- a question that I think has come up a number of times since your -- since the earnings call was also the -- when you mentioned about profitability that margins in '22 will be flat versus '19. And I think with the cost savings, with the channel shift, I think it really left people feeling -- confused, like, were they missing something or were there sort of drags on profitability at least relative to '22 versus what they might be able to do back of the envelope? So is there anything that you can think of? Is it maybe a matter of timing? Is it the higher spending planned so that you can maintain consumers if you're planning more door closures that are maybe not your choice? Is there incremental depreciation as you build out logistics? Sort of those parts that might be missing from people trying to get this question.

Yes. Well, I mean, we will be investing more as we have actually, which is a good thing, in capacity, and we will be doing more of that particularly in skin care given the growth that we've seen over the last few years in skin care. But it's really the recovery of our sales momentum. What we also said on the call was we expect to get back to our overall algorithm of 6% to 8% top line growth and 50 basis points of margin expansion. And I think, Lauren, we really don't have as much guidance, if you will, non-guidance guidance that we tried to provide on the call. We really don't have a crystal ball in terms of what -- how this year will end and what that means for next year particularly, as we were speaking, in terms of travel retail. So we do know that whenever COVID is behind us, we have the right strategy for the growth -- to support the growth algorithm and the margin expansion that we were experiencing pre-COVID. But it's a matter of how long is that tail. So that was really the guidance that we were ultimately trying to get across. Clearly, obviously, not well based on your comment.

Sorry. Okay. Just public service. Okay. And let me -- I think we have time for 2 more questions. So sort of cuts on travel retail. So I think that at least for me, the recovery in travel retail across prestige beauty has just been remarkable, far different than what I expected. And I know a lot of it has to do with the rising popularity of domestic Chinese travel. But you shared on the call just this increased quotas for Hainan Island for Chinese consumers as they travel and shop. How do you see the trajectory of travel retail over the next 12 to 24 months? And it may be too early to know, but to what degree does it feel like some of this increased activity through Chinese domestic travel -- is it cannibalizing or just replace, right, sales that were happening to the e-commerce Mainland and now people can get on a plane and go to Hainan Island and they're shopping in a different channel? Is it incremental versus channel mix?

Yes. No, it's a great question. We certainly believe that some of the sales that we're seeing are people that had traveled outside of China and that are now traveling inside of China. And so that is certainly a piece of it. But if you recall back at our Investor Day, we talked about the fact that only around 8% to 10% of Chinese people had passports. And so as we look over the long term in China, more citizens actually getting passports and being able to travel, we see a steady increase in the number of consumers that will be traveling outside of China and therefore supporting the travel retail business along with Middle Eastern and Indian and Africa and Russia and even Latin America. And so the travel retail channel is certainly one of, when you referenced the Compass previously, one of the big growth engines for the company over the next few years. We still see steady increases. When it will get to a point where it's back to normal is a bit of a question mark. Again, we've already called out that it will be the slowest channel to recover. But we do expect it to recover, and we're still committed to investing in the channel as part of our growth algorithm.

Okay. Last question, which is going to be about corporate structure. So I find it curious that Estée has this really relatively centralized organization structure that's worked really well, where this kind of model for other consumer product companies has been pretty challenged in the rise of local players that have maybe just done a better job understanding their consumer. So what is it that you think makes this sort of a centralized, brand-led model work so well for Estée?

Well, we actually have a matrix model. It is very much brand-led, but we have brand representation at the global level that really puts together our brand strategies, our market strategies, our subcategory strategies, et cetera. And then we have brand representation in our regions and in our affiliates, so in our various markets, that work really on more of the commercial strategies in terms of driving the brand strategies within those markets. I think the difference for us -- and there are many companies that have matrix structures. Obviously, the functions cut across all of the brands and the regions. But what I think the difference for us is, is we have a very strong, and you've heard us talk about this many times, Lauren, corporate strategy. And the corporate strategy is actually cascaded throughout all of our markets. And it's not cascaded as a mandate per se. But when we cascade our corporate strategy, we actually have our regions -- we cascade the principles of our corporate strategy, and we actually ask our regions and our markets to interpret that for their markets. So we very much expect that we will get the local input on how the trends that we see more globally in prestige beauty actually will be carried out in the various markets depending on, obviously, the various consumers, the different GDP in various markets, et cetera. So what we end up with actually is a more localized execution of the corporate strategy as a result of that. And I think with that overall guidance provided by corporate and the expectation that we will get back from our regions and our markets their game plans to localize, we have a tremendous amount of ownership of the corporate strategy. And we end up with local plans that allow us to execute in the markets and gain the share that we've been able to gain over the last few years. So I think when -- and we've thought a lot about this. You've asked this question before. But I believe the difference for us is really the corporate strategy, the Compass, that really provides that framework and that guideline in terms of where we see green shoots in the industry, and that translated into what it means for whether it's China or France or Italy or the U.S. Really, the markets interpreting it with their brand leaders in those various markets that makes the difference for us to be able to execute. And we have a great team. We have a wonderful, very special leadership team that is very passionate about the company, our brands. And I think that, too, is -- makes a very big difference in how we execute.

That's great. I think that's all the time we have. But Tracey, thank you so much for joining us. Hope all your meetings go swimmingly well. And we'll do it again, hopefully, in person next time.

Hopefully, yes. Take care. Good to see you.

Okay. You too.

Bye-bye.