A better performance in the still volatile North Asian travel retail sector, helped by a low comparison base, and encouraging momentum in Europe and the Americas. They were among the key messages on The Estée Lauder Companies’ Q1 earnings call yesterday (30 October).
As reported, the company returned to top-line growth as its travel retail business improved and its fragrance portfolio delivered strong momentum. Net sales rose +4% to US$3.48 billion, with organic net sales up +3%, marking the first quarter of positive growth under the company’s Beauty Reimagined strategy.
Gross margin expanded 100 basis points to 73.4%, while adjusted operating income climbed +77% to US$255 million with an adjusted operating margin of 7.3%.
Beginning this fiscal year, ELC reorganised its geographic reporting. Under the new structure, the company’s travel retail business is now reported within the Asia Pacific region, excluding Mainland China.
Asked about the state of the North Asian travel retail channel and its related inventory levels, President and Chief Executive Officer Stephane de la Faverie commented: “Travel retail is still very volatile. That’s where we start basically with the market. You have asked specifically a question for TR Asia in general, but TR West is actually in a good place, and we’re seeing a lot of positives.
“But let me focus on TR East. It’s a tale of different cities because I think we are starting to just lapse some of the worst decline.”
De la Faverie in turn divided Asia travel retail into “several buckets”, highlighting a lot of momentum in some markets, notably Japan, which returned double-digit Q1 growth.
“If you look at the rest of travel retail APAC, if you exclude China and Korea, we also believe that we are gaining share with some positive momentum, especially in the emerging market, Oceania.”
In terms of China’s travel retail ecosystem, de la Faverie reaffirmed that the company is back to the “right level” of inventory and is managing stock based on demand.
“This is the way we are doing it for now and for the future,” he said emphatically. “And we are back in line to industry penetration of travel retail that we intend to maintain as long as the demand continues to be what it is.”
De la Faverie noted a September improvement in footfall within Chinese travel retail. “I was myself in Hainan a few weeks ago and experienced high foot traffic. Conversion is slightly down. I don’t want to just say conversion is picking up. But we, as The Estée Lauder Companies, are putting a lot in place to drive retail activation.
“[In China] we are investing in retail podiums with Estée Lauder, with Jo Malone, with Le Labo, with Tom Ford. We are really deploying the entire arsenal of our brand, which led us to believe that the strong performance that we’ve seen during Golden Week – which tends to just drive a lot more traffic – showed us actually gaining market share.
“Obviously, Golden Week is October 1 to October 8. So I’m not concluding anything for the quarter. But I’m showing some beginning of rebound through strong retail activation on our part. And also traffic resuming and some level of conversion getting better when you provide the right experience to the consumer.”
Looking forward, Executive VP & CFO Akhil Shrivastava said the group anticipates stronger performance in the first half, buoyed by favourable comparisons in Asia Pacific, driven by global travel retail business and Mainland China.
“In our global travel retail business, we have good momentum in the West, fuelled by consumer-facing investments and distribution expansion,” Shrivastava said.
“That said, persistent challenges in the east continue to pressure retail sales. We expect these challenges to have a greater impact in the second half, particularly as we face tougher comparisons to last year when Mainland China returned to growth and our global travel retail business started shipping in line with retail.
“Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth.”
{The story continues after The Moodie Davitt Report communication below}
Shrivastava picked up on the inventory theme, remarking: “As we have consistently communicated… our travel retail inventory is now more right-sized relative to the retail we are seeing.
“Of course, we adjust it [inventory] up and down based on the retailers’ working capital needs, etc, but there is nothing that should concern anybody that our travel retail inventory is elevated. It’s in the right place, and it is significantly lower than where it was one year ago, both in absolute terms and ratios of forward-looking retail.
“So we feel good about that, which has really allowed us to focus on building the business and really managing it at retail.”
Buoyant Europe and Duty Free Americas deal deliver growth
De la Faverie singled out the company’s European Travel Retail business for praise. “We made great progress in expanding our consumer coverage in fragrance through new retail activations, new doors and upgrading the existing fleet across our luxury portfolio,” he said.
“This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter.
“We also drove similarly strong retail sales growth in the Americas Travel Retail for fragrance, in part from our all-new distribution with Duty Free Americas.”
As reported, The Estée Lauder Companies had not done business with Duty Free Americas for many years but in a breakthrough win/win the two announced a wide-ranging strategic agreement in September.
Looking at travel retail more broadly, Shrivastava said the group is “starting to really double down” in the west and the Americas. “So [it is] not only our position of strength in the east, but now we want to position ourselves in a much stronger way in global travel retail.” ✈
