Estee Lauder Cos. Inc (EL) — Q1 2021 Earnings Call Transcript

Hello. 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 our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those 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 disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through Brand.com and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Thank you, Rainey and hello everyone. I hope that each of you are in good health, as the world continues to confront COVID-19. Our hearts are with those impacted and our focus remains first and foremost, with the safety and well-being of our employees, their families, and our consumers. I continue to be incredibly inspired by our employees' enduring compassion, creativity, and resiliency; you are making us a better company, and I extend my deepest gratitude. Our diversified prestige beauty portfolio of categories, channels, geographies, brands, consumer segments, and price points gives us many levers to fuel the business, both in times of prosperity as well as during more challenging periods. In this difficult moment, our multiple engines of growth strategy is invaluable. For the first quarter of fiscal year 2021, sales declined only 9%, a significant sequential improvement, driven by every category. Fragrance and healthcare, in particular, made striking progress. Our hero products and innovations thrived and contributed meaningfully to sales. We successfully adjusted our cost structure to minimize the leveraging effects of lower sales, resulting in an operating margin of 20%, very close to the first quarter of last year, when we had double-digit sales growth. Over the last decade, we have been driven by various engines, leading to prestige beauty share gains each year, and we expect this year to be no different. Since the pandemic began, we estimate that we have grown prestige beauty share globally. On our last earnings call, we explained that the growth engines at the moment are the skincare category and the online channel in the Asia-Pacific regions; each delivered excellent performance to begin our new fiscal year. The Estée Lauder brand performed exceptionally well, returning to growth in the quarter powered by its hero franchises in skincare. Its Advanced Night Repair franchise delivered very strong double-digit sales growth. Encouragingly, the brand's success in skincare was broad-based as each of the Re-Nutriv, Revitalizing Supreme, Perfectionist, Micro Essence, and Nutritious franchises also grew double-digits. This is a remarkable achievement when compared to the brand's very strong skincare performance in the prior year. La Mer had a superb quarter with double-digit sales growth globally, driven by its continued outperformance in the luxury skincare growth segment in Mainland China. The August launch of its new Concentrate delivered especially strong double-digit sales growth in the Asia-Pacific region as consumers appreciated the power of this barrier serum with its new protective antioxidant benefits. Even amidst the pandemic, La Mer is welcoming many new consumers, further demonstrating the irresistible appeal of the brand's superior quality. At our last Investor Day, we discussed growth strategies for each of our large, scaling, and developing brands. Even in these challenging times, we are resolute in our focus on all three tiers. The Darphin brand is a beautiful example in the developing tier of a brand succeeding through these perilous times. Darphin contributed to the skincare category growth in the quarter as the successful launch of Intral Rescue Super Concentrate serum amplified the strengths of the brand's hero products. Our acquisition of Dr. Jart, with its terrific entry prestige derma brand positioning and desirable hero products, enhanced the organic sales growth of skincare. Momentum in the serum, watery lotion, and eye care subcategories carried into the quarter, driving skincare growth. The August launch of Estée Lauder's new Advanced Night Repair serum performed extraordinarily across geographies and channels, aided by compelling activation and an over 40% surge in consumer reviews since launch compared to the entire lifespan of the previous version. Impressively, Clinique's Even Better Clinique Interactive Serum continues to perform strongly in its third quarter since launch. We delivered outstanding double-digit sales growth online, with skincare, makeup, fragrance, and haircare all prospering. Once again, each of our online channels contributed meaningfully. We continued to strategically invest in our brand sites globally, bringing our classic high-touch services to consumers online. The response has been phenomenal. We are seeing tremendous growth in time spent on chat, virtual try-on, and shoppable live streams. Even with most retail spaces reopening around the world, sales rose 60% organically on our brand sites. We now have virtual try-on across more brands and categories in more markets. In the first quarter alone, we hosted over 1 million virtual try-on sessions globally, with consumers spending more than 30 minutes on average in a session. In North America, the Estée Lauder brand launched AI-driven product recommendations based on real-time consumer behaviors and past preferences. These dynamic merchandising techniques hold great promise across our brands and regions. Clinique's global sales growth on Brand.com in the quarter was exceptional, among the strongest across the portfolio. Clinique Skin School, on-demand live streaming, was a great success, leading to new daily programming that combines top consultants with influencers to curate holiday sets and favorite Clinique products. Clinique is our first brand to launch new technology that pairs multiple hosts in one shoppable live stream. Bobbi Brown continues to scale its artistry-like-never-before program, expanding visual artistry to include live chat, pre-booked video consultations, masterclasses, and live streaming by rapidly converting some of its global makeup assets into a network of virtual sellers. Most of the brand's markets now offer these consultations on Brand.com, on local social platforms such as WhatsApp, WeChat, and Instagram. These virtual services have a higher conversion rate, up to 10 times the average, and a higher average order value. With enticing innovation and engaging new services and tools, conversion grew strong double-digits across our brand sites; most compelling is the significant conversion growth in markets that are under-penetrated online, such as Continental Europe. In the quarter, conversion there grew over 75%, while in Latin America, conversion growth far exceeded 100%. These positions are well-suited for profitable growth online. We invested in online fulfillment during the quarter, strengthening our capacity globally, and we are addressing seasonal fulfillment locations in our largest markets in anticipation of robust consumer demand for the holiday season. Leveraging our investment in technology, we deployed more omnichannel capabilities in several markets. In the U.S., we have seen a dramatic uptick in the buy online, pick up in store format. The brands also partnered with Postmates domestically to launch same-day delivery and open a new experiential store in New York. The store features extensive personalization options for consumers and interactive digital experiences. In these initiatives and more, we are meeting the desires of consumers who are craving convenience and choice, offering them new ways to shop in today's environment. The third engine of growth, Asia-Pacific, also excelled. Several markets contributed to the region's high single-digit sales growth, which is notable as some markets in the region dealt with new waves of COVID-19. Mainland China, Korea, and several smaller markets grew organically. In Mainland China, we continue to invest in the vibrant opportunity of our second home market. We expanded into more cities in the course; reaching over 130. We increased our advertising investment across social and digital platforms, showcasing exciting innovation and building brand awareness as we reach new consumers. We continued expanding our talent in anticipation of our new state-of-art innovation center, which will open in Shanghai, as we aim to best meet the needs of Chinese and Asian consumers with local relevancy and trends, through increased capabilities in product design, formulation, consumer insights, and trend analytics. In Mainland China, the brick-and-mortar channel returned to double-digit growth, making both offline and online powerful growth drivers. The travel retail channels further contributed, driven by tremendous growth in duty-free purchases, partly reflecting increased duty-free purchase limits, the opening of some travel corridors in Asia, and online retail growth facilitating higher conversion, magnifying Chinese consumer strengths. Demand from Chinese consumers was very strong across these channels, most especially in skincare, and we estimate we grew our prestige beauty share. The Fragrance category sales growth accelerated in Asia-Pacific in the quarter. We introduced Kilian Paris and Frédéric Malle in Mainland China, in very selective distribution. These unique luxurious brands are proving to be highly desirable, which, coupled with the ongoing strengths of Jo Malone London and Tom Ford, drove significant double-digit sales growth in Fragrances. In Korea, Fragrances also soared; Le Labo's new fragrances drove meaningful upside, demonstrating the strength of our locally relevant innovation. Around the world, we continue to closely monitor the evolution of consumer attitudes and purchasing behavior related to COVID-19. We combine sophisticated social media listening capabilities with machine learning and proper consumer research techniques to develop insights and adapt our marketing and product offerings with speed and agility to capture changing trends. Looking ahead, we are confident in the return of growth in the challenged makeup category as recovery unfolds. In the meantime, we continue to focus on subcategories in makeup favored during the era of masks for COVID-19. In fact, even in lip, which is overall pressured, the liquid lip subcategory is growing, driven by M·A·C's Power Kiss liquid lip as consumers seek matte finish formulas that last. Our innovation represented over 30% of sales in the first quarter. We have an exciting pipeline of new product launches for the remainder of fiscal year 2021 for both engines of momentum and what we expect to be engines of the future. In October, Clinique launched Moisture Surge Intense Replenishing Hydrator, a new formula that hydrates skin for a full 72 hours in a cream gel formula suitable for drier skin types. This month, La Mer will introduce its new concentrated night balm, an anti-stress balm, slow-crafted with crystal miracle broth that promotes the skin's natural rebuilding of collagen to help transform the look of skin during sleep. Continuing our progress on sustainability, Origins intends to be the first prestige beauty brand to bring an advanced recyclable tube package to market with its Clear Improvement Active Charcoal Mask in 2021. This expands upon Clinique's recent launch of all about clean packaging with the most consumer-recycled material and plans for the right plastic for each tube, and to use mostly consumer-recycled material for its cap. For fiscal year 2021, we continue to expect sequential improvement in sales growth each quarter and to gain global share while the prestige beauty category progressively returns to growth. We are mindful of the ongoing impacts of COVID-19, especially the very limited traffic in retail spaces, particularly in areas that are open, and the second waves occurring in certain markets. We are investing in several strategic priorities intended to drive our long-term sustainable growth that, as previously stated in past calls, will accelerate business recovery. For the second quarter, we have magnificent plans for the holiday season and the 11.11 Global Shopping Festival. Holiday merchandising began a few weeks ago, and our brands created rich activations with engaging products. Estée Lauder has holiday kits that include best-selling hero products to drive recruitment. Origins is making holiday gifting easy, offering consumers the ability to text or email a gift, allowing recipients to either accept or exchange their product before it is gift wrapped and sent to them. Bobbi Brown's Holiday Wish List Deluxe Collection includes all aspiration goods and tools to create ultimate holiday looks. M·A·C recently debuted its Frosted Firework collection, partnering with a diverse range of beauty influencers, which generated over 60 million media impressions in the first 10 days following its launch. Today, we will release our fiscal 2020 Citizenship and Sustainability Report entitled, Beauty Inspired, Value Driven. We are incredibly proud of the contribution of our employees around the world in accelerating our citizenship and sustainability efforts and have featured their successes in this year's report. The report highlights the achievement of our 2020 ESG goals as well as meaningful progress toward our 2025 goals. These milestones were reached across citizenship and sustainability priority areas despite the challenges of the pandemic. I'm pleased to announce the company has achieved net zero carbon emissions and 100% renewable electricity globally for our own operations. Building upon this achievement, we also met our goals to set science-based emissions reduction targets addressing scope one and two for our direct operations and scope three for our value chain. Today's announcement signals a new level of ambition and dedication to climate action for the Estée Lauder Companies, setting targets in line with the latest climate science is a testament to our values and our commitment to manage our business for the long-term. We are also proud to have reached zero industrial waste to landfill for our manufacturing, distribution, and innovation sites, and we are on track to provide access to training on basic sustainability and corporate social impact programs for our employees worldwide this month. In addition, over the past two years, our programs that focus on health, education, and the environment have positively impacted the lives of more than 20 million individuals worldwide. Our collective vision is to be the most inclusive and diverse prestige beauty company in the world, and to be the employer of choice for diverse talent and the brand of choice for diverse consumers. Our commitment to racial equality, especially our focus on driving racial equity across our business, is central to achieving our vision. In today's report, we'll be publicly disclosing enhanced employee diversity metrics and information on pay equity. We believe this transparency to all our stakeholders is important to hold ourselves accountable to our vision while importantly, setting the stage to share our progress. In closing, there is no doubt that we are living and working in a moment unlike any other, and yet, we are confident, thanks to our passionate employees, cherished company values, and prudent strategy built around multiple engines of growth. We are well-equipped to face the challenges of today and even better positioned to embrace the opportunities of tomorrow and continue growing our global prestige beauty share. I will now turn the call over to Tracey.

Thank you, Fabrizio and hello everyone. 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. Starting with the first quarter results, net sales declined 9%, driven by the ongoing effects of the COVID-19 pandemic on our brick-and-mortar distribution throughout the world. We achieved strong growth in our global online channel, Mainland China, and the skincare category, and delivered better than expected results in the travel retail channel and in North America. Other areas progressively improved compared to last quarter as retail doors reopened. The December 2019 acquisition of Dr. Jart contributed approximately three points of net sales growth. From a geographic standpoint, our Asia-Pacific region rose 7%, driven primarily by strong double-digit growth in skincare and the addition of Dr. Jart sales in Mainland China, which also rose double-digits as sales in brick-and-mortar retail continued to improve. The pace of online sales growth in China was slower this quarter, following the highly successful 6.18 Mid-Year Shopping Festival programs last quarter. Most brands and channels rose double-digits in China. Korea rose high single-digits, excluding Dr. Jart, and several smaller markets returned to growth as well. Sales in Japan declined due to a tough comparison to the prior year, in which sales grew nearly 20% as consumers bought ahead of an October 2019 VAT increase. The market has also suffered from softer in-store traffic due to a second wave of COVID-19. Sales in Hong Kong continued to be depressed as well due to the pandemic. Net sales in our Europe, the Middle East, and Africa region declined 9%, with virtually every market continuing to feel the effects of the pandemic. While online growth continued to be quite strong, brick-and-mortar traffic remained soft, heavily impacted by COVID-19, which also resulted in significantly lower tourism in key markets. Skincare sales in the region grew double-digits driven by travel retail, but were more than offset by declines in makeup and fragrance. The major Western markets of France, Spain, and the U.K. contributed the most to the decline in sales, as did the Middle East. Our global travel retail business was essentially flat as outstanding results in Greater China, particularly Hainan Island and Hong Kong, and sequential improvement in Korea offset the effects of the significant reduction in international travel. Additionally, the growth of pre-tail and the increase in duty-free purchase limits in Hainan drove higher conversion rates. Net sales in the Americas declined 24% as virtually all markets in the region continue to be impacted by COVID-19. Online sales growth continued to be a bright spot, rising over 40%; however, brick-and-mortar retail remains difficult, especially in department stores and freestanding stores. From a category standpoint, skincare was the most resilient. Net sales grew 10%, driven by continued strong performance from the Estée Lauder and La Mer brands in Asia, including travel retail, as well as incremental sales from the acquisition of Dr. Jart. Net sales in makeup fell 32%, a significant sequential improvement from last quarter. Makeup has seen the biggest impact from COVID-19, as many consumers continue to partially or fully work from home and forego social gatherings. Fragrance net sales declined 13%, a substantial improvement from last quarter. The category grew strongly in Asia, reflecting double-digit increases from both Tom Ford and Jo Malone London, as well as the recent launches of Kilian Paris and Frédéric Malle in Mainland China. Bath, body, and home fragrances continue to perform very well. Our haircare net sales were essentially flat, declining only 1%. While stores and salons were not operating at full capacity during the quarter, the category benefited from exceptional innovation from Aveda, including the recent launch of Botanical Repair, as well as strong online sales. Our gross margin increased 20 basis points compared to the first quarter last year. Favorable category mix and lower costs for in-store testers were partially offset by negative currency impacts. Operating expenses decreased 7%, and the deleveraging effect of the sales decline caused operating expenses as a percent of sales to increase 80 basis points. Agile cost management and lower selling costs, resulting from both channel mix and the impact of the COVID-19-related temporary furloughs and salary reductions on employee costs, resulted in a 20% operating margin, which was just 60 basis points lower than the year-ago quarter despite the lower sales. Diluted EPS of $1.44 decreased 14% compared to the prior year. EPS was higher than expected due to both improved sales performance as well as more proven cost management as doors reopened throughout the quarter. During the quarter, we generated $358 million in net cash flows from operating activities, which was above the prior year, due primarily to the timing of working capital items. We invested $116 million in capital expenditures, repaid the remaining $750 million outstanding on our bank revolver, and paid $174 million in dividends. We also announced this morning a 10% increase in our quarterly dividend to $0.53 per share. Our plans under the post-COVID business acceleration plan are on track, with approvals expected to accelerate in the second quarter and benefits beginning to flow later in our fiscal year. Now let's turn to our outlook. We are pleased with the sequential improvement we saw in nearly every market as the world continues to manage the effects of the pandemic. The path to recovery is not expected to be smooth, as cases of COVID-19 have begun to surge again in many markets, creating renewed restrictions on travel and social activities. We are mindful of the risk of a global recession or a slow economic recovery as government support measures in certain markets taper off. We also recognize macro risks such as ongoing trade tensions and political uncertainty. Nonetheless, prestige beauty remains a highly desirable product category, as evidenced by the sequential improvement in sales trends we experienced this quarter. We believe our multiple engines of growth strategy positions us well to return to strong global results when the impacts from the pandemic subside. With only one quarter of the year completed and the degree of uncertainty I just described, we are not providing explicit sales and EPS guidance for the full year. However, we will provide some underlying assumptions for the year. We continue to expect sequential quarterly sales improvement as the global recovery unfolds, assuming no significant second wave resulting in broad-scale retail door closures again, or other major disruptive events. We expect to return to sales growth by the end of the third quarter. Comparisons to our record performance in the prior year first half will be difficult. Conversely, we expect sales and profit to grow significantly in the second half of the year against a period of considerable COVID-19 impacts, with particularly strong growth in the fourth quarter. The inclusion of six months of incremental sales from the acquisition of Dr. Jart should add about one to two percentage points to sales growth for the fiscal year, but remain slightly dilutive to profit for the year. We expect to close a number of our less productive freestanding retail stores and exit certain wholesale doors primarily in Western markets. While several of our retail customers are also reducing their store footprint, many of the unproductive doors are expected to close later in the fiscal year. Our gross margin has recovered from last quarter’s inefficiencies related to the sudden COVID-19 impact. Additionally, we continue to invest in increased capacity to support our strong skincare growth. We will continue to leverage a portion of the savings generated from our cost programs to support advertising and expanding services and capabilities to enable strong growth in our online channel. As I mentioned before, we increased our quarterly dividend rate by 10% to $0.53 per share. We also expect to reinstate share repurchases as we gain comfort that the recovery is more sustained. While the environment remains quite uncertain, we are providing guidance for the second quarter. For the quarter, we expect sales to decline between 4% and 6% in constant currency. As a reminder, we are comparing against the record prior year quarter where we delivered 16% sales growth and 21% EPS growth last year. We have a robust lineup of holiday offerings at a variety of attractive price points that are carefully targeted to relevant consumer trends we are seeing during this pandemic, and we expect continued strong online sales on our retailers and on our own brand sites. The incremental sales from Dr. Jart are expected to add about two points to growth, and currency is expected to contribute approximately one point. We expect second quarter EPS of $1.45 to $1.60, reflecting the sales outlook, continued cost containment measures, and investment in key growth areas like online innovation and China. Currency is expected to add $0.02 to EPS, and Dr. Jart is forecasted to dilute EPS by $0.03. We will continue to leverage our multiple engines of growth to invest behind a strong recovery in the context of the macro environment. We are taking strategic actions to support long-term sustainable growth by investing appropriately for the long-term while supporting the recovery in the near term. With a solid start to the fiscal year and mindful of continued macro volatility over the next several months, we look forward to leveraging the tremendous strength of our brands and driving a strong recovery as the market adjusts. That concludes our prepared remarks. We'll be happy to take your questions now.

Thank you. Good morning, everyone. I have a question about the shifts in channel mix, both in the long term and within this quarter, as well as for fiscal 2021. First, regarding the long-term impact of the e-commerce growth you've mentioned, do you believe it's reasonable to assume that about half of your margin expansion in the coming years could stem from this channel mix change? Secondly, looking ahead to fiscal 2021, how should we consider the advantages of channel mix on one side, versus the challenges posed by closing less productive stores and any associated stranded costs? Additionally, what effect will the closure of your own stores, as well as wholesale partners choosing to close, have on short-term financial performance? Thank you.

Yes. I will start and then Tracey will join me in the answer. But basically, all our accelerating engines of growth by channels are more profitable, and that's the good news. On the other side, we have to deliver our brick-and-mortar productivity back to normal. This, of course, will be influenced by how fast COVID-19 recedes and how quickly consumers regain confidence to shop in brick-and-mortar locations. We must manage some closures effectively, and we need to transition the entire company into a growth phase. As Trace said, we believe this will be possible as the trends become clearer. The combination of our improving, accelerating engines of growth, which are more profitable, alongside the re-establishment of routines in brick-and-mortar will determine when we can revert to our long-term algorithm for growing margins at about half a point per year. Tracey?

Yes. And Lauren, as you indicated, timing will really impact that. We've already had a number of wholesale and freestanding store closures over the last few years, particularly as many retailers unfortunately went out of business. Certain retailers have also indicated their intent to close doors over the next couple of quarters. With our post-COVID acceleration program, we too will be closing doors over the next couple of quarters, primarily towards the end of the year, along with some freestanding stores. So there will be a timing issue, where we do see pressure from underperforming brick-and-mortar doors, while we see the uplift that Fabrizio spoke about from our online acceleration. That dynamic will certainly be managed throughout fiscal 2021, as door closures stage throughout the remainder of the year and into fiscal 2022.

Hey, good morning, guys.

Good morning.

So for Fabrizio, I was hoping maybe you could give us some perspective on how much of the increased e-commerce demand you've seen since the beginning of the pandemic is sustainable in your mind as you look at longer term? And perhaps within that, can you detail with the e-commerce sales increase you've seen during the pandemic? How much of that you think is driven by new customers? What level of repeat rates are you seeing among those new customers?

Yes. So first of all, the increase of online sales during this quarter totals about 40%. Our brand.com and other retailer.com are growing much stronger; our brand.com is up 60%. So the growth is consistent and is, in my personal view, here to stay. The reason why it's here to stay is because a lot of this growth is tied to new consumers. Many of these new consumers are mature consumers, and before, online was primarily the destination for younger people, millennials, etc. Now the convenience is recognized by everyone. Everyone is online, and even those who were previously not accustomed to shopping online are doing so more often. We believe that while consumers will return to brick-and-mortar stores, omnichannel shopping will be very strong in the future. The frequency of online purchases will remain higher. In particular, we expect higher online engagement among more mature consumers, which is very important for us and for the beauty market. This trend is sustainable due to better online services tailored to consumers, which are facilitated through chat, virtual try-on, and live streaming opportunities. The engagement of consumers online is increasing significantly; we've seen that there is much longer time spent during virtual try-on sessions compared to before.

Good morning, everyone, and nice to see the progress. As you think about the makeup category, how are you planning for innovation going forward? What does the timeline look like? And also, Fabrizio, when you talk about channels, what are your thoughts on the specialty multi-channel going forward? Thank you.

Regarding makeup, we believe it will return to being a very attractive, fast-growing category once COVID-19 recedes. Makeup use is highly reliant on social interactions, including business meetings and gatherings, as well as people expressing themselves. Demand will come back strongly, and makeup will follow suit. As mentioned in our prepared remarks, some segments of makeup are already recovering in Asia. We are prepared for this evolution and are focusing on the categories poised to bounce back first while investing in innovative products for those categories that will recover sooner. Eye makeup, for instance, is performing better right now due to mask mandates, rendering lip makeup less relevant currently. Overall, we are confident in the positive trajectory of makeup coming back as social activities normalize.

Thank you.

Yes, hey, good morning. Thanks. Can we just talk a little bit more about the exit rates and consumption coming out of the first quarter? And what you're seeing in terms of momentum, with a little more granularity, whether by geography or category, channel, however you think is most instructive? And if you're able to share a little bit of data around October results, that would be great because we clearly saw volatility in shipment timing over the course of the September quarter. So I'm just curious as to how you're thinking about that month-to-month lumpiness as we look through and out towards the end of the calendar year as well? Thank you.

Yes, I'll start, and please Tracey add perspective. Regarding strength by category, consumption is particularly strong in the skincare segment, leading notable growth. Within skincare, we see rapid growth in subcategories like moisturizers, serums, masks, and products focused on the eye area. Makeup, as I previously mentioned, is more gradually recovering, with stronger eye makeup performance as there's still pressure on lip makeup. Fragrance sales have surprisingly returned faster than originally thought, presenting a significant opportunity for the upcoming holidays. We plan to push fragrances during this significant shopping period, especially our high-end offerings and artisanal fragrances. Haircare, too, is performing well, with Aveda driving strong online sales and benefiting from innovative product launches.

In terms of the month of October, it has come in as expected, which aligns with our guidance. We recently experienced some shipment rescheduling to restart the business, primarily due to our lower inventory levels in North America. However, we do not expect any parallels in the second quarter. As you know, October typically contributes less revenue than the following months of November and December. The latter two months are considerably larger for us due to events like Singles' Day in China and holiday shopping. Those months are expected to yield stronger revenues for us.

My question is around travel retail; it improved very nicely in the quarter. Could you just share a little bit about how much of this was driven from the higher duty-free allowances in Hainan Island? And how are you thinking about travel retail for the balance of the year? Thank you.

Travel retail has shown exceptional performance, particularly in Asia, since Europe and the Americas remain largely closed to travel. This recovery has been driven by three key factors. First, the rise of domestic travel within China, with Hainan at the center of that growth. We've seen an increase in traffic, reaching approximately 80% of what it was historically. Second, higher duty-free purchase limits have contributed significantly to our success. Third, the reopening of specific corridors, notably Hong Kong and Macau, has started to bolster this growth as well. Additionally, our online retail, enabling reservations, is being embraced by consumers who may feel concerned about shopping in crowded stores. We anticipate that these trends will continue as travel gradually resumes globally, and our existing strategies will allow us to switch channels based on consumer behaviors. While international travel's resumption depends on various factors related to COVID, the domestic travel surge in China offers a promising long-term outlook.

Hey, good morning, folks.

Good morning.

Congratulations on the sequential improvement, particularly in travel retail; it's truly impressive. I want to revisit some questions regarding margins. As we concluded fiscal 2019, I believe you ended with a 17.5% EBIT margin, and according to your 50 basis point algorithm, we would have projected around 19.5% by fiscal 2023. I mention fiscal 2023 as it may be the first year we return to normalcy, given the anticipated turbulence for the remainder of this year and the lingering effects from closures in 2022. If we are on track for the 19.5% in 2023, is there any reason we cannot achieve or even exceed it? You're eliminating numerous costs, and I imagine that not all of them will need to return, especially considering the favorable margin mix tailwind. Are there any factors that might hinder you from reaching or surpassing that 19.5%, assuming 2023 remains relatively stable?

On the last call, we indicated that we expected to potentially reach our fiscal 2019 margins by fiscal 2022. Part of the post-COVID acceleration program is helping us achieve that more quickly; however, that pathway to 2023 looks a little aggressive right now. As we think about the recovery of the business, it depends heavily on how quickly we get back to normal consumption, particularly with brick-and-mortar, and how the balance of channel mix plays out. While we are confident in margin progression, it may take time to fully recover to those levels.

Great. Thank you very much. I'd love to circle back to Mainland China. Can you tell us a little bit about the overall sales growth online and offline, kind of what sort of impact travel retail had on the business? And given your comments about increases in domestic travel retail in China and Hainan, should we think that Mainland China X travel retail may not see the kind of growth that it's had before? And lastly, any impact from the timing on 11.11? Did that have any impact?

No, I think we should look at Chinese consumer consumption as a whole. We estimate that the total Chinese consumer consumption was up about 20%, while we were in the plus 28% to plus 30% range. This reflects how well we've cultivated relationships with Chinese shoppers who are enjoying both online and offline experiences with our brands. For us, it is about being responsive to shifts in consumer preferences. While online purchasing may fluctuate, we still expect double-digit growth as brick-and-mortar reopening is favorable. We're also investing heavily in enhancing our presence in Hainan and other popular shopping districts. So while we anticipate some fluctuations, our overall consumption in China appears strong and sustainable for the long term, especially as we expand and meet evolving consumer needs.

Yes. Good morning, and thank you for taking my question. I was wanting to ask about the innovation pipeline. There were some mentions made in the prepared remarks. In previous quarters, you highlighted that you were being opportunistic regarding product launches, trying to time them when they would be the most effective. I was wondering if you could give us a bit of color on how your first quarter played out: if that benefited from some of the shifts of innovations from previous quarters or if it was fairly normalized? Following up on that, how should we think about Q2 and even 2021? Is there a lot of pent-up innovations to come out and help your growth?

First of all, our innovation has been quite robust. Over the previous quarter, sales attributed to innovation were about 30%, compared to previous numbers of around 20% to 25%. We don’t aim for a specific percentage as innovation is particularly strong and we have a great pipeline. How do we direct our focus on innovation? Typically, we prioritize where we see the strongest consumer demand. Skincare was critical in this quarter, and we made significant investments in this area. Importantly, our innovation pipeline is designed for the long-term, and we are agile enough to adapt to current consumer demand. Overall, the innovation pipeline has never been stronger, and the balance across product categories is robust.

To add to that, we also saw significant innovation fueling growth in categories like fragrance and haircare. Aveda has launched some strong new products this year that have contributed to recovery, and we expect increasing makeup category initiatives to support progress as social activities resume. Overall, we have solid programs lined up for the second half of the year, and are optimistic that this will help accelerate our growth significantly.