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William Lauder Defends Dept. Stores as Group Net Soars 26%

Estée Lauder Cos. saw earnings rise 26.2 percent to $98.3 million in the third quarter, while sales rose 15.2 percent to $1.42 billion.

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NEW YORK — For William Lauder, Wednesday was a day filled with drama.

The ceo-in-waiting reminisced about his grandmother, who died last Saturday, as the company reported stellar sales and earnings. In addition, the future chief executive officer had to defend to analysts the future of the group’s key channel: department stores. And he did so vigorously.

For the third quarter ended March 31, the New York-based beauty products giant realized a 26.2 percent rise in earnings to $98.3 Continued from page one

million, or 42 cents a diluted share. Excluding an extraordinary $1.8 million charge related to its discontinued Jane brands business, earnings were 43 cents a share, shattering Wall Street’s consensus estimate of 35 cents a share. Comparatively, the company reported earnings of $77.9 million, or 33 cents a share, in the year-ago period, or 34 cents excluding onetime charges.

It was an emotional day for Lauder, chief operating officer, as the company, family, friends and the industry mourned the death of the namesake and founder of the Estée Lauder Cos. Inc.

The conference call Wednesday revealed Lauder’s executive mettle. It’s clear that the ceo-in-waiting is passionate about the business. And Lauder, who becomes ceo on July 1, is particularly vocal about the department store channel, a topic he tackled during the call’s question-and-answer session, and later in an interview.

Regarding the death of Estée Lauder, it will have little impact on material results. “Obviously it’s an emotional thing for many people in the company,” Lauder said after the call. “Her name is on millions of products. There are thousands of very dedicated Estée Lauder beauty advisers around the world who speak about her or refer to her in one way, shape or form on a daily basis. It’s hard to measure that impact in such a short period of time.”

During the call, Lauder parried questions from Goldman Sachs analyst Amy Low Chasen concerning the company’s dependence on the U.S. department store channel for growth.

Smith Barney analyst Wendy Nicholson ran with the subject in a report immediately following the call, questioning the company’s valuation and its dependence on the high-end market.
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“We are concerned primarily about the company’s dependence on prestige department stores as a distribution channel, given what we view as the volatility and economic sensitivity of the department store channel,” said Nicholson in her report.

It’s an argument that Lauder told WWD he’s heard before, and one without evidence.

“This seems to be one of those consistent fantasies that doesn’t want to seem to go away,” said Lauder. “The fact of the matter is that we feel very strongly that the prestige department store in North America is still a highly relevant and competitive retail environment for upscale aspirational brands in cosmetics, fashion and accessories. [Upscale department stores] continue to demonstrate that, when the consumer has disposable income and wishes to spend money on aspirational brands, this is the retail environment of choice they will go to.” Proof of the trend, said Lauder, has been evident with high-end department stores rebounding stronger and earlier than the general department store population.

“You’ll see over a five-year period of time, growth of the cosmetics business in the prestige channel has significantly outpaced the growth of the cosmetics business in the mass channel,” continued Lauder.

Lauder said he isn’t surprised by the growth. “I wouldn’t say there’s anything surprising about a five-year trend. What’s surprising is that analysts and other people who are intelligent and look at numbers, ignore those numbers. They speak about emotions and use emotion to back into numbers justification. There’s nothing surprising about a five-year trend. The only thing that’s surprising is if you read it and don’t listen to the numbers.”

Lauder’s bullish stance on department stores comes despite his earlier position as founding president of Origins, which marked the groups first foray into freestanding stores. He also overaw gloss.com its Web site.

Regarding quarterly results, increased volume toward the end of the quarter helped drive sales for the period up 15.2 percent to $1.42 billion from $1.23 billion. However, excluding currency exchange benefits resulting from the weak U.S. dollar, sales rose 10 percent.

Makeup led all product categories with a gain of 22 percent to $591 million on a reported basis and 17 percent excluding currency exchange benefits. MAC and Bobbi Brown products in particular were robust, said Lauder during the company conference call, posting double-digit growth. Launches from the Clinique and Estée Lauder brands also helped drive sales.
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Skin care products reported a 10 percent rise, 4 percent excluding currency translation, to $559.1 million..

Hair care products rose 15 percent, or 13 percent in local currency, to $61.3 million. Fragrance sales increased 12 percent on a reported basis to $203.4 million, a 5 percent gain excluding currency translation effects. However, the company continues to experience weakness in the U.S. fragrance market.

For the nine months to date, earnings gained 8.7 percent to $271 million, or $1.17 a share. Excluding charges related to the discontinued Jane brands business, earnings were $1.31 a share. Comparatively, the company reported earnings of $249.2 million, or $1.06, in the corresponding nine-month period.

Sales advanced 13.2 percent to $4.39 billion from $3.88 billion.

The company once again upped its EPS guidance to between $1.59 and $1.62 for the year.