Estee Lauder Cos. Inc (EL) — Q3 2020 Earnings Call Transcript

Thank you. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and other reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures on our press release and on the Investors section of our website. And now I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello, everyone. I hope you are in good health during this difficult time as the world confronts COVID-19. My heart goes out to those afflicted, and my deep gratitude goes to everyone around the world who is part of the global relief efforts. Before I discuss results and our strategies to navigate through this challenging environment, I want to first thank our employees at the Estée Lauder Companies. The care and compassion you have shown one another since the outbreak while also balancing new work routines for yourselves and caring for your families has been truly inspiring. Your creativity and sense of collaboration have risen to new heights as we have adapted our business from marketing to sales to manufacturing and more. Our employees have truly exemplified our belief in leadership from average share. The Estée Lauder Companies and some of its charitable foundations have made donations to help limit the spread of the virus and ease the related hardships faced by those it affected. To date, we have made donations and commitments to Doctors Without Borders, the New York City COVID-19 Response and Impact Fund, Red Cross Society of China, Shanghai Charity Foundation, Give2Asia, and Community Chest of Korea. This week, we established the ELC Care Employee Relief Fund, our newest giving initiative, which will be funded through our contributions from the company, the Lauder family, and our employees. It will provide immediate and critical financial relief to employees whose lives have been impacted by the pandemic. Our brands have also found meaningful ways to contribute. The Estée Lauder brand donated 2 million surgical masks for frontline workers in New York, while Clinique donated 50,000 skin care products to doctors and nurses in New York City's hospitals. Aveda launched Aveda Cares, a relief program to benefit independent salons and stylists in the United States. The multifaceted initiative will help salons prepare to recover from COVID-19-related closures. The M.A.C VIVA GLAM Fund is continuing its decades-long giving by allocating $10 million to 250 local organizations all over the world that are providing essential needs and services to people at higher risk during the COVID-19 pandemic. I'm also especially proud of how the company mobilized to manufacture hand sanitizer for frontline workers, high-risk individuals, and our employees, thanks to the tremendous work of our global research development and supply chains teams. Our facilities in the United States, the United Kingdom, and Belgium are making over 1 million hand sanitizers. Now turning to the quarter's performance. As we discussed with you on our last earnings call in early February, we expected third quarter sales to decline. After a strong January globally, we anticipated pressure in February and March in our Asia/Pacific region and our travel retail channel, given the extent of the COVID-19 outbreak at that point in time. However, COVID-19 continued to spread around the world as the quarter progressed, and social distancing measures began to impact retail traffic. As March evolved, travel was significantly curtailed and virtually all stores in the Americas and Europe, the Middle East and Africa temporarily closed, hindering consumers' primary access to supply such that the magnitude of the impact on our business was far greater than initially anticipated. In this very complex challenging environment, reported sales fell 9% in constant currency. Tracy will provide more details about our financial performance in a moment. In this volatile quarter, there were several bright spots in our business, which led to global prestige beauty share expansion. The Estée Lauder brand grew high single digits while DECIEM and Le Labo also delivered sales growth. Skincare sales grew internationally, including Dr. Jart+. In our Asia/Pacific region, sales in Mainland China rose mid-single digits after returning to growth in March. Our online sales increased strong double digits worldwide, with growth accelerating significantly from February to March. The strength of our global travel retail business in January and February enabled it to deliver low single-digit sales growth for the quarter, excluding Dr. Jart+. Each of our three regions are at different stages of impact from the COVID-19 outbreak as I speak with you today. Furthermore, within regions, the extent of containment and recovery varies. As a result and given how fluid the situation is, we are continuously fine-tuning our strategies with our brand and regional teams to both manage the present and plan for the future. Across the regions, a majority of our facilities have continued to manufacture and distribute products, though in a much reduced capacity. Most of our offices globally are operating in a work-from-home scenario, but that, too, is evolving. Our China headquarters in Shanghai has fully reopened as all employees began working in the office daily three weeks ago after having been on a staggered schedule for several weeks. As offices reopened, however, we are going back to work in a different way. We are employing additional safety measures for health and hygiene. We are also applying the experiences of work-from-home with new ways to collaborate and engage more effectively. In our Asia/Pacific region, our business in Mainland China is further improving as retail stores began to reopen with shortened hours in March. By mid-April, virtually every door had reopened. We are encouraged by China's efforts in containing the virus and the initial signs of recovery. We expect to return to double-digit sales growth in Mainland China in the fourth quarter. More recently, sales in Korea have begun to grow and stores have started to reopen. However, Japan, Australia, and markets in Southeast Asia are still in the containment phase, with most retail stores closed as we speak. In Europe, the Middle East and Africa, retail stores in most countries have been closed since early March, with the primary exception being in the Balkan Peninsula and the Nordic region. Some countries have recently announced plans to gradually reopen, most notably Germany and Italy, which are promising signs. Prior to these temporary door closures, several countries in Western Europe had been experiencing lower retail traffic as tourist traffic abated in response to COVID-19. We expect these headwinds to persist for some time to come. In the Americas, most retail stores have been closed since mid-March. Although retailers started seeing much lower traffic earlier in the month as social distancing began. More recently, several states in the U.S. have announced guidelines for the recovery, and we are starting to see very limited reopening with curbside pickup. We are closely monitoring the evolution of consumer behavior through this challenging time and we are developing strategies to address it. We are using sophisticated social media listening tools, machine learning, and other qualitative and quantitative research techniques. Each day, we are assessing how consumers express their needs and desires, from seeking positivity, self-care, and wellness to understanding their at-home needs and routines to hearing their environmental and sustainability concerns. Our successful strategy built on multiple engines of growth is as vital as ever. Our diversified portfolio of categories, channels, geographies, brands, and price points give us many levers to fuel the business and will play a crucial role during recovery when stores reopen and consumers restock at home. Our robust global skincare portfolio, vibrant online business, and broad exposure in Asia/Pacific are the primary engines of growth at this moment. This engine had tremendous momentum before COVID-19 and is playing a crucial role during containment while brick-and-mortar is closed. Let me first speak on skincare. Emerging trends are increasing the appeal of the category, bolstering already strong category dynamics. Taking care of one's skin has become an expression of self-care, which has risen in importance. Consumers are actively exploring subcategories and expanding their regimens, finding peace of mind in the ritual of their routine. Our focus on hero products is the right strategy as consumers seek brands and products they trust. Consumers are newly discovering and continuing to return to our heroes. Beloved heroes like Estée Lauder's Advanced Night Repair, La Mer, Crème de la Mer Treatment Lotion and Concentrate, and Clinique's Moisture Surge have been seeing strong global demand online since the outbreak, demonstrating the dynamics of big brands. In this unprecedented time, we are staying true to our belief in the power of innovation within our hero franchises. We launched Estée Lauder Perfectionist Pro Rapid Brightening Treatment, Clinique Even Better Clinical Radical Dark Spot Corrector + Interrupter, and the new Eye Concentrate from La Mer. Consumer demand has been especially compelling. In fact, for the Perfectionist Serum, its March launch on Alibaba was one of Estée Lauder's best ever on the platform. Clinique Even Better Serum is far exceeding expectations in Mainland China and has been highly sought online in the United States. The La Mer launch contributed to significant share gains in luxury on Tmall. Among our channels, online is thriving around the world. As we discussed with you at our Investor Day last year, we have long believed in the excellent growth prospects of online and have been investing in this dynamic channel for years. Our presence is global with online sales in over 50 countries. We are highly diversified with over 300 brand.com sites, over 60 brand boutiques on platforms such as Tmall, and over 1,700 retail.com doors. Our online brand teams have been actively engaged since the containment measures took hold, optimizing product placement to address consumer current wants and needs and showcasing tools like virtual try-on to ease decision-making. The Estée Lauder brand expanded its online sales strategy to include a broader array of social selling activities from live shows on Instagram focused on self-care with global spokesmodels to live streaming from its brand sites with global and local mega-parties to live chats with consumers on its brand site, to personalized one-on-one outreach through various communication tools. M.A.C pivoted its long-awaited April launch for its newest Selena capsule collection to online and social selling to honor the commitment it had made to consumers. The brand employed an exciting digital activation in place of in-person events for the global launch to tremendous success, as the order sold out online in two days. Selena is the biggest collection launched to date in terms of total sales on maccosmetics.com. Bobbi Brown began daily lessons with the brand's pro makeup artists across digital channels, a topic most requested by consumers. Initial signs are positive, and the brand is welcoming all new consumers, thanks to this always-on artistry initiative. Jo Malone London has seen an influx of activity with its digital communities as consumers have sought to elevate and uplift their space with the power of scent. In China, the brand's home fragrances in bath and body categories have doubled their mix of business. Through our actions like this in recent weeks, we drove conversion rates sharply higher, and our sales have risen across all demographics. I'm especially encouraged by the online growth we have seen from the ageless consumers. Globally, our brands are seeing increases in new consumers of three to four times. Some rates are even higher. For La Mer in the United Kingdom, new consumer acquisition is higher by five times; while in Thailand, across all brands, it is higher by eight times. As consumer behaviors evolve during this time, we are harnessing more data, leveraging our analytics capability to derive even better consumer insights to provide even better service. When retail stores reopen, we will be in a stronger position to further unlock the potential of omnichannel. We are also focusing on the areas of most immediate opportunity in Asia/Pacific, with Mainland China as of March and Korea as of April moving from containment to recovery. We told you on our last earnings call that we stood ready to facilitate recovery as soon as the market supported it, and we are doing just that. In Mainland China, we successfully piloted an emerging business model for online and department stores to adapt to the changing landscape. For La Mer, personalized service across channels with curated and targeted communication drove both online sales and department store sales significantly higher in the month of March. The strength of the La Mer repeat business model has been a key factor for its strong recovery and contributed to the brand's outstanding prestige beauty share gains in Mainland China in the quarter. As countries in Asia/Pacific move into recovery, we are mindful of the consumer in these markets who traditionally purchase our products in travel retail but are not able to do so with air travel largely curtailed. Our regional brand leads are working to meet this consumer demand in markets, be it in department stores, specialty multi-channel, freestanding stores, or online. Our travel retail team is also actively engaged as destinations in the channel reopen, already driving positive trends in Hainan or Macau. We remain focused on meeting the needs of Chinese and Asian consumers with local relevancy and local trends. Since we last spoke in February, we have advanced our work toward our new investment in a state-of-the-art innovation center, which will open in Shanghai. In closing, during this unprecedented time, I'm moved by how deeply we are leading our company values and how our intent of becoming an even better company through this challenging moment. With our extraordinary people and our successful strategy built on a multiple engine of growth, we stand ready to emerge strongly when the global recovery begins. Now I will turn the call over to Tracey.

Thank you, Fabrizio, and hello, everyone. COVID-19 is certainly proving to be the most significant challenge we have faced as a public company, as much of our brick-and-mortar distribution globally has been deemed nonessential during the quarter by several jurisdictions and remains closed today. We continue to do our best to support our communities and our employees while also working to mitigate the business impact during this time. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call, and net sales growth numbers are in constant currency. So looking at our third quarter results. Net sales fell 10%, driven by the rapidly evolving impacts from COVID-19 that occurred throughout the quarter. As the majority of our brick-and-mortar distribution throughout the world was closed as the quarter progressed, we quickly pivoted to drive sales online. Our online growth accelerated sharply at the end of March and continued to rise in April. Sales grew in travel retail from a strong January and February before travel restrictions were enacted, and skincare remained our most resilient category. The Americas region and the makeup category suffered the biggest shortfalls. The December acquisition of Dr. Jart+ added approximately 2 points of net sales growth. Our gross margin decreased 320 basis points compared to the third quarter last year due to a combination of factors. In the first seven months of our fiscal year, we saw outstanding growth in our skincare category, much of it in Asia and in travel retail. To meet what has now been our third year of double-digit demand for our products, we supplemented our internal manufacturing capacity with additional third-party suppliers, and we incurred increased air freight to support sales growth in areas distant from our manufacturing facilities. This resulted in higher supply chain costs in our third quarter. The impact of increased tariffs, higher obsolescence, and promotional activity also contributed, as well as the inventory step-up related to Dr. Jart+. Previous initiatives like Leading Beauty Forward, which is still projected to contribute approximately $425 million to $475 million in net savings by fiscal 2021, have put us on much stronger footing to weather normal economic downturns. However, the impact of COVID-19 has not been a normal downturn. The sudden and dramatic change in sales growth from the beginning of the third quarter to the end created a deleverage effect that could not be offset quickly enough by the significant cost actions we took, which totaled approximately $250 million. Therefore, operating expenses as a percentage of sales rose 250 basis points. As we told you last quarter, we expect to see a greater impact from our third quarter cost actions, including advertising and promotion reductions more aligned to sales performance, a hiring curtailment, and the benefits of work from home, which yielded sharply reduced travel and meeting expenses as well as consulting expenses in our fourth quarter. As it became apparent that store closures and social distancing measures would move beyond China to be adopted around the world, we implemented even more cost actions that will have a more meaningful impact on curtailment of expenses beginning in May. These primarily include furloughs and other leaves of absence as well as temporary reductions in compensation for management and board members. The capabilities we have built and the actions we are taking now enable us to manage through the situation today while funding targeted strategic investments going forward, which will position us well to emerge strongly when the recovery is more apparent. Our interest expense rose by $11 million to $28 million during the quarter, reflecting higher debt levels to finance the acquisition of Dr. Jart+. Our effective tax rate increased to 30.5% from 22.1% in last year's third quarter, primarily attributable to a higher effective rate on the company's foreign operations due to the mix of earnings. Adjusted diluted EPS of $0.85 fell 45% compared to the prior year. Currency diluted EPS by $0.01 and the acquisition of Dr. Jart+ diluted EPS by approximately $0.03. During the quarter, we recorded $346 million of impairment charges related to four brands and certain freestanding retail stores that have been further challenged by the impact of COVID-19 on consumer demand. We believe that our strong balance sheet and ample liquidity provide core competitive advantages for our company, demonstrating the importance of scale. These position us to not only manage through a crisis but to emerge from it stronger. During the quarter, we borrowed $1.3 billion under our $1.5 billion revolving credit facility and had $200 million of commercial paper outstanding, ending the quarter with nearly $5 billion in cash and cash equivalents. In April, we issued $700 million of 2.6% 10-year senior notes in order to further enhance our financial flexibility and liquidity and repaid the commercial paper with the remaining capacity under the revolving credit facility. We were able to do all of this while maintaining our strong single A credit rating. For the nine months, we generated $1.95 billion in net cash flows from operating activities, an increase of 11% from the prior year. We invested $468 million in capital expenditures and $1.04 billion to acquire the remaining interest in Dr. Jart+. We also used $883 million to repurchase shares and $502 million to pay dividends. To further enhance near-term liquidity, we are focusing our capital investment on areas necessary for future growth and paring back in areas such as retail renovations and office improvements. We cut our planned capital expenditures by one third and now expect to spend between $600 million and $650 million for the full year. Additionally, we have suspended share repurchases for the balance of this fiscal year and our quarterly dividend that would have been paid in June of 2020. All of these activities greatly enhance our ability to manage through the shutdown in brick-and-mortar for an extended period of time while we focus on stimulating greater consumption online. History has not provided any truly comparable recent events we can use as guidance concerning the effects of the global pandemic. The disruption to our business caused by COVID-19 has clearly been more widespread and more pronounced than we had expected it would be when we last spoke with you just a few months ago in February. We delivered remarkably strong double-digit growth in sales and adjusted EPS through January, but that was followed by the dramatic spread of the pandemic and the related door closings and curtailment of travel that we spoke about. Due to the fluidity of the situation, it is both complex and difficult to predict the duration or the timing and trajectory of the recovery and the corresponding impact on our business. At this point, in the fourth quarter, the majority of our distribution, with the exception of China and a few other markets, remains closed. And while we are encouraged by the weekly acceleration of our global online business, we do not have enough visibility into the progression of the rest of the business until more retail doors open in the coming months. And we do believe traffic could initially return at a slower pace as some consumers remain tentative until a treatment is developed. Therefore, given the level of uncertainty, we are not providing explicit sales and EPS guidance for the year. That said, there are a few guideposts that we can provide to you. The inclusion of six months of sales from the acquisition of Dr. Jart+ should add about 1 percentage point to sales growth for the year. It is expected to dilute EPS by about $0.14 due to purchase accounting. Currency translation is expected to negatively affect reported sales growth by 1 percentage point, reflecting weighted average rates of $1.11 for the euro, $1.26 for the pound, and $7.03 for the won for the fiscal year. The related EPS dilution should be approximately $0.05. We are very encouraged as we see the beginnings of recovery in China and markets around the world begin to discuss gradually lifting retail and travel restrictions as the virus abates. We expect strong online acceleration to continue as underlying consumer demand is driving both replenishment and new customers online. However, unlike the third quarter where many of our global doors were opened until the last month of the quarter, we expect that most of our retail distribution will remain closed for much of the fourth quarter, and consumer traffic will likely recover slowly in brick-and-mortar. We expect greater sales and margin declines in the fourth quarter as a result. We estimate that global prestige beauty will decline double digits in the second half of our fiscal year. We are also mindful of the risk of a global recession and a slow recovery in employment impacting consumer sentiment and discretionary spending. Our gross margin in the fourth quarter will reflect the adverse conditions we have been experiencing in March and April. The sudden and dramatic change to our volume forecast is expected to trigger an accounting rule requiring us to recognize the impact of reduced manufacturing volumes on our standard costs. Our plants have been running at meaningfully reduced capacity, reflecting some temporary plant closures as well as reduced efficiencies to accommodate social distancing requirements, staggered shift changes, and other changes necessary in this environment. We are also required to recognize expenses related to manufacturing employees who are not working. These expenses are now recognized in the current period instead of when the product is sold. The inclusion of Dr. Jart+, with the impact of the inventory step-up, will also pressure our gross margin. We expect our belt-tightening efforts to have a more pronounced impact in the fourth quarter to partially offset the negative impacts I've discussed. We are implementing some of the additional actions in May and expect to deliver fourth quarter savings of between $500 million and $600 million. Our full year effective tax rate is expected to be approximately 24%. So those are some of the guideposts that we can provide to you for the year. We are committed to continue to take the appropriate actions to rationalize our cost base relative to the new normal and return as quickly as possible to both sales growth and margin expansion as the COVID-19 situation stabilizes during the course of fiscal 2021. We delivered tremendous sales and profit growth through the first half of the year as our business continued to benefit from the strategic actions we took over the past several years to position our company for sustainable, profitable growth. And while the unfortunate temporary shock of COVID-19 has made our outlook for the balance of this year uncertain, we have taken appropriate action to mitigate the effects of the pandemic while continuing to protect our business so we can be well positioned for both the near-term recovery and the long-term opportunities inherent in global prestige beauty. On behalf of Fabrizio and the Estée Lauder Company's leadership team, we extend our immense gratitude to all of our employees around the world for their extraordinary efforts to manage during this unprecedented period. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

Great. I wanted first to talk about travel retail and just what your data and analytics have told you over time about the sales historically through that channel. How much of it is sort of impulse? How much of it is new consumers discovering your brands? How much of it is sales that would have or could happen elsewhere like a replenishment-type sale when someone travels? Because that could inform thinking about your ability to recapture some of that sales or what degree of that sales, even assuming global travel remains suppressed for a good amount of time.

Yes. I think first of all, your assumption is correct. Our data confirms that those are consumers that while traveling are buying, discovering, or replenishing their products. So then there is business travel, where people that travel for business bring back some gifts, and obviously, this creates consumption. But in travel retail, the most successful products all over the world tend to be what we call our hero products, so the products that have high loyalty and a high repurchase rate because both as a gift and as personal consumption, which are the two drivers of travel retail, people really want to buy products that they are pretty sure will either replenish their habits or create exciting gifts. In that sense, there is the possibility to recover at least part of the travel retail sales in the country of origins. And we are working on this in every country, many emerging markets, in China, the U.S., and Europe. And so there is a project to do this as much as possible. However, in this moment, to be very clear, travel retail in Europe and the U.S. is basically closed. And so in the quarter four, there is a very big issue of closures that is in the middle of the travel retail sales, which are possible in the short term. In Asia, we are seeing already amazing results when there are openings. In this moment, the travel retail within China, particularly in the Hainan island or the travel retail in Korea, and the travel retail in Hong Kong, Macau, these are starting already coming back and delivering good growth. We are focusing, in this case, very much more on conversion and it's working. So it again is a word to tail. But the real travel retail recovery will start happening in fiscal year '21 with the gradual reopening of travel and will be probably one of the most gradual reopenings in the recovery from our expectations and from our data.

I hope you're doing well. Could you provide more details about what you observed in March compared to January and February, as well as what you're currently seeing in April across your main categories, regions, and channels? This information would help clarify near-term visibility. Additionally, if possible, it seems you have some insights into cost-cutting measures for the fourth quarter, but I would like to understand that in relation to the near-term manufacturing challenges and other COVID-related issues you've mentioned, Tracey. Any additional insight on your current situation during the shutdown would be appreciated.

I will begin by discussing our observations on the sales front, after which Tracey will address the financial implications. The recovery varies significantly by region, as the impact of COVID-19 differs across markets. Some areas are already seeing a recovery, while others are still facing challenges. We are adapting our strategies based on regional needs. Currently, closures in Europe and the U.S. are at 90% and 12%, respectively. Recent data from the U.S. shows that the market was down by 70% during the last week of March and the first week of April, largely due to the effects of brick-and-mortar closures. March, April, and part of May have been the most challenging months for EMEA and North America due to these significant closures. However, we anticipate a gradual recovery as brick-and-mortar stores in these regions begin to reopen, and we are also witnessing remarkable growth in online sales in both Europe and America. In contrast, countries like China, Korea, and Taiwan exhibited double-digit growth in April, indicating a robust recovery in those areas. This is encouraging as it suggests that once recovery begins, consumers are eager to return to their previous purchasing habits. We are observing increased consumption and restocking at both the consumer and trade levels, although this strong recovery is currently limited to certain regions and the global online market. While most parts of the world are experiencing double-digit online growth, some areas are even reporting triple-digit increases. The recovery has commenced in a small number of travel retail stores, primarily in China and Korea, although other parts of the world remain mostly closed for now. In fiscal year '21, we expect to see a gradual return of all business segments, including brick-and-mortar in Europe and the U.S. As Tracey mentioned in her remarks, the revival of brick-and-mortar operations will be slow. We see signs of recovery in Asia, starting with online sales before brick-and-mortar begins to pick up. The return of brick-and-mortar will take more time, as it relies not just on physical reopening but also on consumer confidence. Therefore, we expect this recovery to be gradual. To summarize, we are seeing a faster recovery in Asia at the moment, widespread closures in Europe and the U.S., rapid global online growth, and a slower recovery in travel retail.

And Steve, to your question on the cost savings and the manufacturing variance. The way I would think about that in the fourth quarter, the $500 million to $600 million of cost savings, about one-third of it is related to employee actions, and the other two-thirds related to other expense areas that we've stepped up in terms of our cost savings, advertising, consulting, travel, et cetera. So that's generally the split in the fourth quarter. As it relates to our gross profit margin, and you saw the impact in the third quarter, we expect that we will continue to see, in the fourth quarter, the impact obviously of the tariffs and of the higher third-party sourcing costs that will impact us in the fourth quarter. In addition to that, I spoke about the under-absorption of some of our overhead and labor costs that we need to expense in the fourth quarter. So the bigger impact will be in the fourth quarter on that. Our gross profit margins will decline further in the fourth quarter due to those one-time issues related to the lower production volumes. As we increase production volumes as we emerge out of COVID-19, that will correct itself.

I wanted to inquire about your sales performance. It's notable that China only experienced a decline in February and that travel retail remained robust throughout the quarter. However, the decline in the U.S. was quite significant. As we consider the reopening of Western markets, could you discuss the differences in underlying demand in these key markets as well as your infrastructure? It's clear that e-commerce penetration is much higher in Asia than in the U.S. Can you elaborate on your infrastructure in this context? Is e-commerce more advanced in China overall? Additionally, as we look further into the year, how are you approaching planning for holidays, Singles Day, and other future events?

So I'll start, and then Tracey will add perspective. The penetration online actually is very strong in the United States, the U.K., and China. Those are the three markets where we have the stronger penetration online, where the market is very well-developed online. So in terms of how we see the situation in the U.S., obviously, our stabilization plan in the U.S. has been postponed by the COVID issue that emerged, so it will take a bit more time than what we originally were hoping when we had an encouraging last quarter in calendar year '19. But it is because of the closures of the brick-and-mortar. In the United States, the online acceleration is outstanding as we speak. It is very reassuring to us that the percentage of our business online will dramatically increase. This was already planned for the long term, but this issue has accelerated it. As I explained in my prepared remarks, what we are seeing in the U.K., the U.S., and China, particularly the ageless consumer, the consumer aged about 50 to 55, as you know, the online was mainly for millennials and the new generations. But frankly, all these other consumers are becoming active online shoppers using e-commerce much more in all its aspects. We believe that this change is here to stay. The increase or the percentage of business online, including retail.com, is not only brand.com; it's retail.com, platforms in China, and in other parts of the world. In all online channels, there is an increase of percentage of sales that goes online. To be clear, for the long term, this is positive for us. It's very positive. Online has always been one of our key drivers, one of our profitable drivers, and most importantly, it makes a stronger platform for the future of omnichannel, which is the way also particularly in luxury distribution models will evolve on all fronts. So good development and we believe this is positive. Tracey, do you want to add perspective?

Then on our infrastructure as well as our plans for holiday, clearly, we are mindful of and watching very closely in terms of as doors open, the productivity of those doors. So certainly, both with our retail partners as well as our own freestanding stores, just making sure as doors open, that they are productive and profitable. We will, as we have over the last few years, take appropriate actions if we find that we do emerge out of this with brick-and-mortar doors that are less profitable than we would like for them to be. As it relates to holiday, at the same time, one of the things that Fabrizio, when he was speaking about online, the inference there is we are very much focused on the fact that demand remains strong. And it's really the access to our products that has become challenging in markets like in Europe as well as in the Americas. So lots of activity or programs shifting to online to make sure that people can access our products. We also are focused on, for holiday, what we think holiday will be like. We hope that by holiday, things stabilize a bit. As I mentioned in my prepared remarks, we are mindful that there could be a recession, certainly impact, but we are hoping that by holiday, people are ready to shop again. Our holiday programs remain intact. The quantities may be adjusted a bit, given how much demand has come back by that time.

And I hope you both are well as well. I guess a follow-up just to the Americas, Tracey, for you. When you think about sales down 23%, it was worse than we thought. Could you just quantify how much was truly the decline from store closures in the last two to three weeks of the quarter versus maybe pulling back on wholesale sell-in? And then bigger picture, as you think about the mix of business in the Americas, I guess, Fabrizio, you already addressed online clearly accelerating. But I'm more curious on how you think about the reliance or the toggles between the department store, the specialty multi-channel, as well as the freestanding stores on the other side of this crisis.

Sure. In January, as Fabrizio mentioned, we saw positive growth in all of our markets, including in the Americas. We actually started to see some softness towards the end of February. To your point, the doors were not closed but certainly, it was apparent by that time that COVID-19 was starting to spread, and consumers were starting to get a bit nervous about shopping in-store, really focusing on stocking up on more essentials. In March, we saw the biggest impact obviously with the doors closed for half of March, but really the early part of March, a tremendous decline in shopping because of the tentativeness of the consumer and really the consumer focused understandably on health and essentials for their homes and their families.

Yes. I want to add that our job is to protect our profitability. When we noticed the situation developing, we began reducing our spending in February. By March, we also cut back to lessen the impact. We anticipated these events as consumer sentiment declined in February. When shutdowns began in the United States, sales plummeted to zero since brick-and-mortar stores were completely closed, leaving consumers shocked and retailers halting their orders. March marked a significant downturn, which contributed to the negative quarterly results. Until January, we had been stabilizing the business and maintaining positive trends. Consequently, we plan to return to our stabilization program once the market recovers. Regarding the non-online segment of our business, if online sales increase, the traditional retail segment will naturally decrease. We believe this will lead to store closures and an overall reduction in brick-and-mortar locations, which could enhance the productivity of the remaining stores and improve the customer experience. We don't view this shift as a short-term negative but rather as part of a long-term strategy. We envision a future where standalone stores and our website coexist in an omnichannel environment. It's intriguing to observe how consumers are adapting to online shopping in various ways. While this transition may have its complexities, we believe it presents opportunities for growth in serving consumers within the luxury market. Though the transition could be challenging, the significant growth of online sales is a positive factor for us, given our strong infrastructure. We excel in our online presence, including our own platforms, and are well-positioned to drive growth globally and in the United States during this post-COVID transition.

I guess, Fabrizio, just to follow that question in the Americas. I guess you said January is positive and February a bit slower, so March deeply negative. I guess, still to average out to negative 23%, it seems like you held some inventories that were probably ordered by the retailers in the U.S. when you saw this coming. Maybe you could comment on, as we look to reopening, what kind of inventory levels out in the channel you see that we're going to be working with as we reopen in the U.S., I guess? And then, I guess, just go back to travel for a minute to get to the positive number. We're just looking at some of the passenger data in China. Looks like it was down maybe 70% or 80% through February. So to get your number to be positive in travel, I think you've commented to us that Chinese consumers make up about half of that business before. It speaks to very big growth rates in Europe and in the U.S. for your entire business to land positive in the quarter. I'm just wondering, I know you said it to be into fiscal '21 until we really see a bona fide recovery in travel. But it seems like you've done some things in that channel that are driving a pretty meaningful share gain in the travel locations that were open heading into this. I wonder if you could comment on any of the strategy there that you think stands out recently.

Yes. I'll start answering your travel question and then Tracey will go on the inventory question. So, but basically, you're right. I think what you were describing is what happened, but let me summarize it, is January was another extraordinary month for travel. Remember, January is Chinese New Year. And yes, Chinese New Year started to be impacted but still some of it happened. We gained market share. We had an amazing program in all the areas that were open, and travel was strong in the October to December period and continued to be very strong in general. Then in February, there was a slowdown obviously, but travel remained open in other parts of the world. March is where travel really was shutting down. So yes, in travel, the month of March was the worst month. Thus, the mix of the three months explains our strong market share performance in the quarter. I believe our market share performance in travel will continue, but the market in quarter four will be probably the worst as travel retail because Europe and the U.S. have really closed. There are three active areas, which are within China, domestic travel with Hainan to reach the center, which has been reactivated at a certain percentage, not fully but with much higher conversion from travelers to purchases. The key point is remember that about 10% of travel buy something. The moment travel is reduced but open and 30% or 40% of travel buy something for several reasons, good marketing, less people, easier, less crowded, good activities, this changes. We are really seeing a few active doors that are very important with very high conversion rates. This is positive. The other thing that is encouraging in our travel retail reading is that most of the world is closed, but as we see openings, consumers are back very fast. Traffic may only return gradually, but conversion rates can be much better. Last thing I want to say, the other thing that will remain positive long term in travel retail is the percentage of business in retail, meaning the ability to prebook online when traveling, is increasing. We have great capabilities in that. We've invested in that. We're ready. You can expect a continuous increase in the online part also in travel retail. Very tough quarter for travel retail, but the long term looks extraordinarily strong and promising.

And as far as the inventory in the trade, with our wholesale customers, clearly with stores closed for six to seven weeks, I would say the early part of the door closures we saw, we started to see a slow pickup in online. As we indicated, it has really progressed. Our retailers that can share inventory between their brick-and-mortar and their online sites have drawn down some of the inventory planned for stores on their retailer.com sites. We've seen those progress quite nicely, and sales have really picked up strongly in the last two to three weeks in particular. As doors open, we expect that from a shipment standpoint, we'll see a slow reorder from a replenishment standpoint, certainly from some of the fast movers that have moved most quickly on retailer.com sites. But as the quarter progresses, we would expect shipments to gradually strengthen throughout the quarter, and by June, really be much stronger.

Glad to hear everyone's healthy and safe. With the expense reductions that you've put in place, how much of it do you think could be permanent versus transitory? And lastly, with the innovation plans underway, any shifts in timing and launches, given the current situation?

As you know, Dana, as we've announced, we have taken some short-term cost actions to improve the liquidity situation, and we announced those in the middle of April. Some of those are employee actions we've taken. Other actions are also short-term as it relates to advertising, really rightsizing our advertising to current sales trends, which will obviously pick up as our sales trends pick up. There are other areas like travel. I think we are all getting used to the ability to work from home and communicate online. We are looking at more permanently having cost reductions in some of those other cost areas. But it's something that we have ongoing cost management programs in addition to the program for Leading Beauty Forward. We take advantage of the opportunities we see to lock in savings whenever we can.

Yes. And I just want to add to this for the long term also, what were the best drivers for our growth before the crisis are the ones which are coming out stronger. Key drivers such as online channels globally are becoming stronger, while the Chinese consumer is recovering first and stronger. Skincare is recovering first and stronger than any other part. In makeup, face makeup, fragrance or seasonal fragrances, and in travel retail, the very efficient travel retail doors of Asia are recovering faster. Our key drivers of growth are recovering first and stronger for the long term. Even if in the short term, we are going to be hit hard by the closures, particularly by the very understandable consumer shock in this moment, in the medium to long term, we will be a stronger organization with our key long-term drivers further validated. One of these drivers will remain innovation. We will continue to innovate. As I said in my prepared remarks, we are reinforcing and investing in a Shanghai center to ensure that our innovation becomes even more relevant to Asia and particularly the Asian consumers. We're focusing our ratio on fewer and bigger innovations, directing our innovation on what works better online in this period of transition. We are focusing our innovation on hero franchises, meaning franchise brands that have high consumer loyalty and awareness. In this moment of transition, consumers are showing they are interested in the brands they trust and the product they know. They go back first to loyalty even before new adventures. We are reflecting this in our innovation plan, and I believe this is one of the strongest we have had.