By Sharon Terlep
Estée Lauder Co. said Wednesday sluggish sales in the current quarter aren't a sign of a broader slowdown, but Wall Street isn't buying it.
The New York beauty company , which owns high-end lines including Bobbi Brown, Smashbox and Clinique, reported sales growth of 1.1% for the quarter ended Sept. 30, its slowest level in five quarters. Its important MAC brand had lower U.S. sales hit by declining foot traffic to mid-tier department stores and weaker tourist visits in New York and Florida. U.S. sales across its brands fell 3%.
Investors took the dip as a sign of a longer-term slowdown, sending the stock down5.4% by midday to $81.67.
"My concern is you've been growing 6%, 7%, 8% in a market growing 4% to 5% for a while," UBS analyst Stephen Powers said on the company's conference call. "And clearly, that can't go on forever."
Chief Executive Fabrizio Freda said the pessimism is unwarranted and that he is confident the recent period is a blip and not the beginning of a downward trend. U.S. sales of MAC have begun to improve, he said, and noted that internationally the brand is doing well. He said it was weird for one quarter to overshadow its longer-term performance. "It's quarter syndrome," he said.
Mr. Freda, who took over as CEO in 2009, said the company has a number of strategies to help boost growth including adding and expanding smaller, niche brands increasingly popular among consumers; stepping up marketing and new products for MAC; and adding lineups to specialty retail stores which, unlike struggling U.S. department stores, are clocking revenue growth.
Meanwhile, the company is feeling the heat from a shifting retail landscape. Department stores where many Estée Lauder counters are found have reported sliding sales as shoppers increasingly opt to buy online and spend less time in stores.
Overall, Estée Lauder reported a 4.9% decline in profit from a year ago to $294 million.
"It's very fair that people need to be reassured that we can deliver, and I believe we reassured them," Mr. Freda said. "We have been saying consistently, 'Look at the year, not the quarter."
Wall Street analysts, however, weren't fully convinced. Several expressed skepticism over the company's forecast of 6% to 7% sales growth this year after increasing sales just 1.1% in the most recent quarter. Some fretted that Estée Lauder's winning streak isn't sustainable, and a lot of attention was given to MAC's performance.
Caroline Levy, an analyst from CLSA, questioned the company's assurance that MAC is going to stabilize after its weak performance in the U.S. this quarter. "Is it realistic that MAC gets back to growth based on everything you are seeing now?" Ms. Levy said on the conference call. "Are you factoring in the likelihood of some years where two or three of your biggest brands are down in your biggest market?"
Mr. Freda responded by saying MAC's growth prospects are realistic, pledging to improve the U.S. sales trend while noting that less than 30% of the brand's sales are from the U.S. The company didn't break out MAC's performance.
Not all analysts were skeptical. In a note after the call, Barclay's analyst Lauren Lieberman said that the market's reaction is overdone. "We believe the breadth and diversity of Estée Lauder's portfolio of brands is underappreciated."
Estée Lauder set out in May a range of measures it would implement over the next five years to boost profitability. Among the moves, Estée Lauder said it would cut about 2.5% of its global workforce, strengthen its digital business and invest more to grow its makeup brands.
The company has acknowledged shifting consumer preferences in cosmetics and is struggling with a strong U.S. dollar's effect on pricing in international markets and tourist spending, and it said Friday that social and political instability in countries such as France and in some emerging markets has been an additional headwind.
--Anne Steele contributed to this article.
Write to Sharon Terlep at email@example.com
(END) Dow Jones Newswires
November 02, 2016 15:15 ET (19:15 GMT)
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