May 3, 2007
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Estee Lauder profit up but weak sales hit stock

May 3, 2007

By Aarthi Sivaraman

NEW YORK (Reuters) - Cosmetics maker Estee Lauder Cos. Inc. reported higher quarterly profit Thursday on strong business in Europe and Asia, but disappointing U.S. sales sent its shares tumbling as much as 10 percent.

Earnings at the company, known for its Aveda, Clinique and Bobbi Brown brands, rose to $93.9 million, or 45 cents a share, in the fiscal third quarter ended on March 31, from $59.5 million, or 28 cents, a year earlier.

Analysts on average had expected profit of 46 cents a share, according to Reuters Estimates.

Net sales increased 7.1 percent, to $1.69 billion, helped by strong sales of new skin-care products like Continuous Rescue Antioxidant Moisturizer and Repairwear Lift, and new makeup such as Full Potential Lips and Projectionist High Definition Volume Mascara.

But the New York-based company reported weakness in core brands, in fragrances, and in the United States, as it felt a lingering squeeze after Federated Department Stores Inc. FD.N, which owns Macy's and Bloomingdale's, shut several stores to consolidate after its acquisition of May Department Stores.

"(The) Americas region and each of our product categories except hair care were adversely impacted by fewer department store doors resulting from the merger," Estee Lauder Chief Executive William Lauder said during a conference call with investors.

U.S. sales fell 1.5 percent to $856.9 million in the quarter. But net sales rose as more than half of sales and operating income came from a mix of established and emerging markets outside the United States, Lauder said.

The company's shares were down $4.10, or 8 percent, to $46.90 in afternoon trade on the New York Stock Exchange after falling as low as $45.75 earlier in the session.


Analysts had expected U.S. sales to be higher.

"In a quarter where most companies in the sector beat guidance, this result will disappoint, especially after a big run in Estee Lauder shares," Bear Stearns analyst Justin Hott wrote in a research note. He rates the company's stock "peer perform."

"The Americas sales were weaker than we thought, as we had expected flat," Morgan Stanley analyst William Pecoriello wrote in a note to investors. He rates the stock "equal weight."

Estee Lauder said its Clinique and namesake brands are expected to do well going forward, and it forecast fiscal 2007 sales would increase 6 to 7 percent, with earnings from continuing operations at $2.15 to $2.20 per share.

There is great "untapped potential" in the travel retail channel, such as airport stores, where the company already derives high profit margins, Estee Lauder said.

Boosting international performance could be a way to lift sales in the coming quarter, one analyst said.

"We believe that the disappointing third-quarter performance will energize management to accelerate its search for growth opportunities in international markets," Credit Suisse analyst Filippe Goossens wrote in a note. A likely strategy is acquisitions, he added.

Estee Lauder rival Avon Products Inc. , which sells cosmetics directly to consumers, posted better-than-expected quarterly earnings earlier this week. Smaller rival Nu Skin Enterprises reported a quarterly profit on Thursday, reversing a year-earlier loss.

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