Estee Lauder Cos. Inc (EL) — Q2 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 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 and all organic results exclude the impacts of acquisitions. 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 site and through third-party platforms. It also includes estimated sales of our products through our retailer’s 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. Let me first say that I hope each of you are in good health and that your families are well. Our hearts continue to be with those impacted by COVID-19, and our focus remains first and foremost on the health and safety of our employees, their families and our consumers. To our employees, you have uplifted us from caring for the physical and emotional wellbeing of colleagues to making hand sanitizer, seeking opportunities to support charities around the world, generously contributing to the employee relief fund, and so much more. In December, the company made an additional donation to the employees' fund and we continue to make progress on our citizenship and social impact commitments. Our employee's agility and creativity empower the company to deliver the exceptional results we announced today. For the second quarter in fiscal year 2021, sales rose 3% a 12 point positive swing from the decline of 9% in the first quarter. Impressively, our brands grew, led by the double-digit growth from Estée Lauder and La Mer as well as great performance from Jo Malone London. Le Labo and Frédéric Malle also rose double digits. We focus our investment decisions on engines of growth while employing strict cost discipline in other areas, delivering strong double-digit adjusted diluted earnings per share growth. In the quarter, we faced increasing complexity from the pandemic, yet still delivered results that exceeded our record second quarter of fiscal year 2020 when sales grew the strongest in 20 years in our seasonally largest quarter. Our multiple engines of growth strategy continued to prove its value, enabling us to pivot with agility in this challenging moment. We successfully activated efforts behind the growth engines of skincare, fragrance, Asia-Pacific, travel retail in Asia, and global online. Our skincare category performance was extraordinary, reflecting the strong locally relevant innovation, successful strategies, compelling ingredient narrative, and deeper consumer relationships enabled by sophisticated data and analytics. Growth of our high repeat Hero products was broad-based across subcategories from cleansers to watery lotions, serums, eye care, and moisturizers. Our skincare business has continued to grow from strength to strength, bolstered by the realization of skincare as an expression of healthcare. From entry prestige to luxury, our brands excelled in skincare. Many brands contributed, demonstrating the breadth of our performance. Dr. Jart provided incremental sales from our double-digit organic growth due to appealing brand positioning. The Estée Lauder brand once again delivered double-digit growth across several of these Hero franchises in skincare. Its new Advanced Night Repair serum was a powerful force, thanks to its new formula and a luxurious, more sustainable glass bottle. The serum delivered a healthy lift to Advanced Night Repair eye, and these two Hero products benefited from their synergies and desirable sets. The brand's Revitalizing Supreme franchise accelerated significantly, gaining momentum with its Hero moisturizer. La Mer led the luxury skincare group as consumer demand for its iconic products proved strong. The new Genaissance de La Mer concentrated night balm performed exceptionally well, driving the brand's ultra-luxury franchise to new highs. Clinique returned to growth, lifted by skincare as its Hero franchises focused on solving skincare problems like acne and dark spots, while the Even Better Clinical Interrupter is now firmly established as a core performer of the brand and continues to deliver significant growth. It was complemented by an acceleration in the brand's three-step product and acne solution lines. Our luxury and seasonal fragrances captivated consumer desires for Tom Ford Beauty, Jo Malone London, Le Labo, Frédéric Malle, and Kilian Paris. Innovations in iconic products from these brands delivered stellar online sales growth along with improving brick-and-mortar sales in certain markets. Jo Malone London and Le Labo home products continue to flourish as consumers crave scents to enhance their home environments. Our global online channel delivered outstanding double-digit sales growth, significantly accelerated from the previous quarter and driven by every region. Growth was robust across the board as Brand.com, third-party platforms, pure play, and retail.com all contributed meaningfully. Our go-to-market strategies for each of these were tremendously successful, particularly during Black Friday, Cyber Week, and the Global Shopping festival, driving strong consumer acquisition and retention. We continue to enhance our brand sites with high-touch services. These strategic investments are elevating the consumer experience from convenience buying to enriched shopping, including useful tools, targeted recommendations, and expert advice. Across our brands, we are uniquely combining technology and data with our talented advisors on a global scale. Digital is proving to be incredibly powerful, driving over twice the engagement as well as higher conversion and retention rates. In the quarter, we added digital try-ons to more sites around the world. The number of sessions nearly doubled from the previous quarter, reflecting both the expansion to additional sites as well as a significant uptick in activity on brand sites that had launched it previously. Digital chat is also proving to be very impactful. In North America, conversion of live chat sessions is nearly four times higher than average conversion in the market. Digital chat usage accelerated during the holiday season as our skilled beauty advisors offered useful insights and customized education to consumers, driving significantly higher basket sizes than the average. Our brands are increasingly offering engaging digital services and experiences. Two examples are found on Clinique.com. Clinique Reality, the brand's skin-agnostic tool, engages consumers in a highly personalized manner, driving strong conversion rates. Clinique Skin School addresses the growing demand for credible education in an entertaining format with a new focus on real-time interactions. Skin School brilliantly integrates live chat and trend-based programming with a brand expert consultant. We continue to pursue high-touch innovation online as evidenced by the Estée Lauder brand's new AI-driven product recommendations based on real-time consumer behavior and past preferences that we are piloting in North America. We anticipate that these dynamic merchandising efforts hold great promise and are excited to scale in this year for Estée Lauder and for other brands. We are welcoming new consumers on our brand sites, but also successfully driving repeat purchases, enabled in part by our loyalty programs. In the first half of fiscal year 2021, the number of loyalty program members rose strongly, driven by substantial growth in international loyalty program members. In so many ways, we are building deeper relationships with our consumers. Our brands delivered excellent results during the 1111 Global Shopping Festival, leveraging the latest live-streaming technology and capabilities to generate product discovery. For 1111, the Estée Lauder brand achieved the number one rank in beauty. La Mer attained the number one rank in luxury beauty. MAC was the number one prestige makeup brand, and Jo Malone London led in fragrance. We have long believed in the compelling growth prospects of online and have been investing in it for more than two decades. At the onset of COVID-19, we nearly doubled our rate of online investment, including accelerating our consumer-facing initiatives like digital, social selling, omnichannel, and loyalty programs. We are also increasing our investment in our digital infrastructure and fulfillment network to meet much higher traffic and demand. In addition to these capital investments, we continue to optimize our advertising investment in digital channels as well as invest in our exceptional online talent domestically in our headquarters in New York and in our local markets around the world. Among the regions, Asia-Pacific delivered the strongest sequential improvement with sales growth accelerating from 7% to 27%. Mainland China prospered, while Korea and several smaller markets contributed organically. In Mainland China, momentum in brick-and-mortar carried into the quarter with sales again growing double digits. Online accelerated significantly, powered by a remarkable 1111 event. Nearly every brand grew, and across our brands, we reached more consumers, thanks to locally relevant innovation, Hero products, rich storytelling, successful influencer activations, and the dedication and creativity of the local team in China. Travel retail grew single digits organically, driven by strong results in Asia, particularly in Hainan, where we fulfilled the desires of traveling Chinese consumers with innovative merchandising. Traffic to Hainan continued to rebound, and duty-free annual purchasing limits had increased threefold there in July, providing a favorable benefit in the quarter as consumers sought to spend up to the new annual limit before year-end. Conversion was also a strong driver, aided by live streaming. Across channels, demand from Chinese consumers accelerated, especially in skincare and fragrance. The long-term growth opportunity we foresee in the dynamic Asia-Pacific region continues to rebound. Over the past few months, despite the challenges of the pandemic, we made three significant investment commitments as we strive to best meet the desires of Chinese and Asian consumers. In late 2019, we acquired the Korean-based skincare brand Dr. Jart, while in early 2020, we committed to building an end-to-end innovation center in Shanghai. Today, I'm pleased to confirm we're building a state-of-the-art manufacturing facility near Tokyo. We're on track to open our Shanghai innovation center in spring 2022. This will increase our local capabilities in product design and formulation. We're also strengthening our consumer insight and trend analytics in this vibrant market. We broke ground on our new manufacturing facility near Tokyo, which is to be operational in late 2022. It will enable us to better meet demand and increase speed to market in the region. The facility will feature advanced technologies and engineering achievements, with high standards of sustainability and safety, and will be designed to promote a flexible and leading-edge working environment. Across our engines, innovation significantly contributed in the second quarter as we aimed for aggressive goals driven by a focus on fewer bigger and better Hero innovations. We have an exciting pipeline of new product launches for the remainder of our fiscal year. Already, in skincare, the Estée Lauder brand launched Supreme Bright. It addresses the trend of bright in Asia and is highly relevant for consumers of all skin tones around the world with its even better skin tone and dark spot benefits meeting the top needs of multi-ethnic consumers. Clinique introduced Moisture Surge 72-Hour, a revolutionary hydrator that delivers hydration that goes ten layers deep into skin and lasts 100 hours even after washing your face. Clinique launched Even Better Clinical Serum Foundation, a weightless liquid foundation with 24 hours of wear and skin-loving ingredients that visibly improve skin instantly and over time. Our strategic focus and investment in our ESG goals remain of utmost importance for us and our key stakeholders, and we continue to advance our work in the quarter. Let me share a few examples in sustainable ingredients, packaging, and inclusion and diversity that reflect our recent progress. We're pleased to have joined the CDP's 2020 Climate A List, having been awarded the highest score of A. In January, Aveda proudly announced that its products are bigger as a mission-driven brand; this was a natural step for Aveda, a brand that continuously works to reduce its environmental impact while also responding to fast-growing consumer trends. Our brands are employing more innovative and sustainable packaging as they launch new products while also improving the packaging of existing products. The two new Clinique products I just described are two such examples of innovation launching in more sustainable packaging. To continue to invest in and advance our diverse talent, we created a sponsorship program for equitable advancement and professional development of our Black talent. An executive sponsorship program will ensure that our Black employees have the support and focus of senior executives with equitable access to leadership training, mentorship, and career development opportunities. In closing, we delivered excellent performance amid the pandemic, leveraging the strength of our multiple engines of growth strategy, Hero products, and robust innovation. We did this while upholding our values as we increasingly embedded ESG in everything we do, focusing on the safety and wellbeing of our employees, making progress on our environmental goals, and enacting our racial equity commitments. We also invested in technology and data for new capabilities to support accelerating growth drivers. These accomplishments and actions give us confidence that we are well-positioned to continue driving recovery and return to our long-term growth targets after the period of recovery. I'm incredibly grateful to our employees whose grace and fortitude are making us a better company throughout this very difficult moment. While the road ahead will still be challenging, together we can be optimistic that brighter days are coming. I wish each one of you good health. And now, I'll turn the call over to Tracy.

Thank you, Fabrizio, and I certainly echo your comments regarding our wonderful employees. 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. Our net sales rose 3% in the second quarter. The COVID-19 pandemic continued to pressure traffic in our brick-and-mortar distribution, but sales declines in stores were entirely offset by strong growth across our online channels and in travel retail in Asia. The December 2019 acquisition of Dr. Jart added approximately three points to net sales growth. Sales performed above our expectations, in large part reflecting the outstanding execution during the annual team 1111 Shopping Festival as well as the many activations our brands deployed during key shopping events like Black Friday and Cyber Week. In addition to the acceleration in growth we saw in skincare, fragrance sales were strong in the quarter and home fragrance continued to resonate during the pandemic. Our gross margin increased 10 basis points compared to last year's second quarter. Favorable channel mix was driven by the growth in our online sales and also reflects lower costs for testers in our brick-and-mortar distribution. From a category perspective, the acceleration of sales in skincare also benefited gross margin. The positive mix was partially offset by higher obsolescence and a negative currency impact. Operating expenses improved by 160 basis points as a percentage of sales, reflecting both the strength of our sales leverage during key shopping moments and our cost containment measures. Many of our COVID-related cost containment measures remained in place during the quarter and contributed to our improved profitability along with the benefits of our Leading Beauty Forward initiative. Lower selling costs and other in-store promotion costs also reflected the mix shift of our business from brick-and-mortar to online as well as some remaining government subsidies in certain countries. Given the challenged environment, we continue to experience periodic store closures. Partially offsetting the cost favorability was higher investment behind our strategic priorities, including China, online, and digital technology, as well as the inclusion of Dr. Jart expenses this year. As a result, our operating margin rose 170 basis points to 24.3%, a significant accomplishment during this important holiday quarter considering the record results achieved in the year-ago period. Our effective tax rate for the quarter came in at 15.9%. The lower tax rate was primarily due to the recognition of a one-time retroactive benefit related to recently finalized US tax rate regulations. We now expect our effective tax rate for the year to be approximately 20%, reflecting this development. Diluted EPS of $2.61 increased 24% compared to the prior year. EPS was higher than expected due primarily to the combination of strong performance during the key shopping moments in the quarter and the lower tax rate while maintaining strict cost management. This performance is truly a testament to our team's ability to navigate the business through the difficult macroenvironment. Our plans under the post-COVID business acceleration program are progressing. Over the past six months, we've incurred charges of $46 million primarily to close underperforming freestanding retail stores in our EMEA region and for employee-related costs as we align resources to support our online business and our digital capabilities. As the program continues into the second half, we expect to continue to rationalize our retail footprint primarily in Western markets. Additionally, we took an $81 million impairment charge for our glamglow brand reflecting the COVID-related disruption of the brand's growth plans and lower than expected growth from its planned geographic expansion. During the first half of our fiscal year, we generated $1.98 billion in net cash flow from operating activities, which was substantially above the prior year, due primarily to improvements in working capital management. Accounts payable increased reflecting timing-related items that also support our second-half growth plans, and accounts receivable reflected the rapid growth in our direct-to-consumer business and a five-day improvement in DSO. We invested $250 million in capital expenditures to support key investment areas like additional production capacity and technology. Conversely, we spent far less on counters and stores due to lower traffic in brick-and-mortar doors. We ended December with $5.5 billion in cash and cash equivalents just above our total debt. With the strength of our cash position, our free cash flow generation, and our confidence in our business drivers as we recover, we expect to reinstate share repurchases and maintain our dividend during the second half of our fiscal year. So now, let's turn to our outlook; we are obviously encouraged by the sequential improvement we saw in every region as we continue to manage through the effects of the pandemic. While cases of COVID-19 and variants are surging again in some markets, resulting in renewed store closures, restrictions, and lockdowns, we are optimistic that once the vaccines reach enough of the global population, the restrictions on travel and social activities will ease. Nonetheless, we have not assumed a second wave. Therefore, the accelerated global recovery we originally anticipated in our second half has clearly been delayed. While we are pleased with our performance in the first half, the prolonged uncertainty surrounding the pace and timing of the recovery makes it still difficult to provide sales and EPS guidance for the full year. We do continue to expect sequential quarterly sales growth improvement as comparisons to the prior year ease and the global recovery unfolds. The inclusion of six months of incremental sales from the acquisition of Dr. Jart, which benefited our growth in the first half, adds two percentage points to sales growth for the full fiscal year. As you know, several of our retail customers are liquidating or reducing their store footprints. Notably, Lord & Taylor, Stage Stores, and other brands are closing down, and Macy's and Nordstrom have announced store reductions. Additionally, we expect to close certain freestanding stores in North America and EMEA now that the holidays are behind us. In aggregate, these store closures represent between 1% and 2% of our total full-year sales, and we do expect to recapture a portion of those sales in other locations and online. While we will continue to execute our cost savings programs, it is important to recognize that some of the temporary cost measures we took last year will be returning in the coming months. The principal areas of returning costs include some additional advertising, promotion, and point-of-sale employee costs, which were all meaningfully reduced during the time that retail stores were closed last year, as well as the restoration of certain temporary pay reductions we implemented. Travel retail consulting costs are expected to ramp up more slowly. Costs will also increase as offices reopen and we will continue to implement enhanced safety protocols. We will incur incremental spending for our new Asian manufacturing plant and innovation center, and as we continue to see signs of consumers' willingness to resume their normal activities, including returning to stores, we plan to invest incrementally as we normally did pre-pandemic in our fourth quarter to strongly support our launch programs and reaccelerate our makeup business in the upcoming fiscal year. Looking at the near term, for the third quarter we expect sales to rise between 10% and 11% in constant currency. We have a terrific lineup of product offerings and activations for the Lunar New Year, and we expect continued strong online sales. You may recall that we had an exceptional January last year. We completed the acquisition of Dr. Jart at the beginning of our third quarter, and the brand is now part of our organic growth. Currently, it is expected to be accretive by approximately three percentage points. Third quarter EPS is expected to be between $1.10 and $1.20 reflecting the sales outlook and a careful balance between cost containment measures and investment in key growth areas such as online and technology; currency is expected to add $0.03 to EPS. We remain optimistic that the pandemic will be controlled and out-of-home activities will resume under a new normal. With a solid first half behind us, we've proven we can deliver in the context of a difficult macroenvironment while continuing to support our employees, our social and environmental commitments, and investing in the capabilities needed to sustain our growth over the long term. The resiliency of our business during this time and the passion and dedication of our teams reinforce our confidence in our strategy and our ability to deliver long-term sustainable growth.

So I wanted to focus on topline, clearly very strong performance in skincare and e-commerce during COVID. Can you talk about the sustainability of that strength in each of those areas as we move to a post-COVID environment, as well as what some of your key strategies might be to maintain momentum post-COVID? And then on the makeup side, that's obviously been a laggard area for obvious reasons. How quickly do you think category growth recovers in makeup post-COVID, and what's your outlook there? Thanks.

Okay. So first of all, the key drivers for us let’s go one by one. Skincare is very sustainable. Consumers have always been increasingly enthusiastic about skincare. We have an amazing pipeline of innovation for the future years, and the strengths of Asia, particularly of China, are key in driving skincare penetration. The potential of the smaller cities in tier three and tier four will continue to grow. The power of online and offline distribution will remain strong. In travel retail, the results are mainly driven by Asia and particularly by the acceleration of domestic travel within China. So in the future, that domestic travel will continue, and international travel will eventually resume, and this will further accelerate growth in the long-term when COVID is reduced. All our key drivers are really strong for the long-term, and most importantly, our drivers tend to be accretive in profitability. So they will generate clear resources over time. The lagger is brick-and-mortar, particularly in the West. In the short term, this is an issue because there is less traffic, affecting productivity. However, we are working to rebuild this for the long-term. What is currently a drag on one-third of our business in the West will recover post-COVID. We anticipate the traffic to return, but there are retailer closures that Tracy summarized, which are happening that will reduce the amount of stores that won't be sustainable in the long term. Our business acceleration program is focusing on right-sizing channels, rebuilding productivity over time. So we are very positive, in summary, on the continuous trends post-COVID, including new accelerated drivers. As for makeup, its growth is closely related to user locations. User location involves going to the office, dining out, socializing, etc. We believe makeup category growth will be associated with post-recovery. The recovery will be fast and steep once user locations return. We are prepared for that. However, predicting when this will happen is difficult. We expect there will be some recovery throughout all of 2021 associated with the reestablishment of makeup usage when social behavior normalizes.

I was curious if we could talk a little bit about e-commerce development in Western Europe in particular because I think with certain hidden dynamics affecting the numbers you worked through, contributions from travel retail and so on. It seems that while Western Europe is still down, it's down a lot less than in the past through the pandemic. You mentioned the Cyber Week shopping dynamic in Western Europe, but my sense is that this is a channel that had been somewhat less developed historically. So I'd love to hear more about how that has built up and your thoughts on the stickiness of that behavior going forward, particularly in a quarter without major shopping events that are typical for that market. Thanks.

So first of all, our online business has performed very well this quarter, growing over 60% globally. It's interesting because we are growing double or triple digits in every brand, every region, and every channel, including brand.com, retail.com, and third-party platforms. Western Europe is showing similar growth, depending on the market, either double-digit or triple-digit growth in online. The holiday season has been impacted because of lockdowns, particularly in the UK where COVID was quite severe in November and December. This caused brick-and-mortar to close, leading to significant online growth. Our teams have done an amazing job of catering to our consumers online during lockdowns and we've seen that this translates into repeat sales. Online shopping habits established during COVID will remain strong for the long-term. One reason for this in Western Europe is the shift to a more online focus, which has brought new consumers into our fold, including more mature consumers. Online was initially targeted at younger consumers, but now older consumers are coming online and liking what they see. We will see this increase loyalty post-COVID. Additionally, we are now providing high-touch services online that were previously exclusive to brick-and-mortar, scaling that quickly online. For instance, our digital try-on service is now available in 90% of our brand.com sales. So the consumer responded positively to this service, driving strong online growth that we expect to sustain in Western Europe moving forward.

Question is around the landscape where in North America we've seen some unique partnerships recently. Are you expecting to participate in these partnerships? I know historically, mass retail partnerships haven't been that appealing, but maybe with the ultra-target structure, what's coming in your brand expense? And then secondly, regarding consumer behavior post-pandemic, how comfortable are you with the entirety of your brand portfolio today? Thank you.

So regarding the first part, yes, we are actively working with our partners to explore opportunities for engagement as you indicated. This will depend on which brands in our portfolio these opportunities may fit. We are evaluating these collaborations and considering participation by brand. This could serve as a driver for future acceleration in North America as well. Importantly, we are focusing on both brick-and-mortar and digital aspects of these opportunities. As for the brand portfolio, we continuously assess our portfolio for efficiency. We've been open about prior rationalization decisions regarding brands that cannot sustain long-term investments. As this is a continuous process, we are always on the lookout for acquisitions to reinforce our portfolio in areas where we find strategic opportunities.

Fabrizio, I had a question just on your China business. I was curious what you're seeing right now in the makeup category in China.

The makeup category in China is stronger than in other regions because user locations are returning tonormal. Despite this, it is still experiencing a decline overall, which is reflective of the rest of the world. While skincare remains very strong and fragrance is accelerating, makeup also remains a lagger, with mask-wearing affecting usage patterns. So while the makeup performance is improving relative to other regions, it is still not as robust as it will be post-COVID. We expect that a strong recovery in makeup categories will occur once COVID is fully under control.

Fabrizio, I wanted to go back on the online discussions. You guys have done a great job with analytics and understanding consumer behavior. Given how much migration has occurred online, I'm curious what your data and research say about the stickiness of this behavior, particularly among more mature consumers and developed markets, as the margin differential between online and some of the other channels is significant. Thank you.

That's a very good question. Our view is that this shift will be very sticky. People shopping online, even those who may have typically shopped in brick-and-mortar, have enjoyed the online shopping experience. Our loyalty programs have been performing better, and we're seeing a growth in loyalty program member returns indicating that many shoppers are becoming more engaged. Additionally, we've seen a significant increase in conversion rates and traffic as we provide high-touch services online. Digital try-on, consultant interactions, and live streaming opportunities are all contributing to increased engagement time spent onsite. This extended exposure has added media value, as consumers interact with our brand for longer periods. It indicates that companies that can effectively create a robust omnichannel experience will have a competitive advantage. I believe consumers will utilize both channels post-COVID, leading to customers engaging in values that blend in-store and online experiences.

First just a clarification, Tracey, I believe you said that you were adding additional production capacity. So just curious what categories, what regions you were looking at for that. And then my question is really around margin progression especially given this quarter. So I think that's the highest quarterly operating margin you’ve achieved. There are a couple of companies in your category that might be more comparable, and we've seen some of them with operating margins north of 20%. Do you see over the very long term that this business can move into the 20s on margin?

Regarding our production capacity, we’ve clearly needed to invest in production capacity in skincare, particularly in North America and Europe. As you heard me mention in our prepared remarks, we are also investing in a new facility in Asia to support primarily skincare and some makeup, namely foundation. We are committed to having capacity closer to where our strong demand growth is. Regarding margins, as I mentioned, we did an excellent job controlling costs last year after the pandemic hit. Many of those cost controls were temporary, such as salary reductions and rent abatements. Some costs will undoubtedly return in the second half, but we will continue to manage costs in a disciplined way. Your observation on the margin potential is valid, given both our category and channel mix. We are committed to driving improvement, and that would also assist us in moving towards our North Star of a 20% operating margin.

I just wanted to follow up on the operating margin question. I believe EMEA has the strongest margin we've seen. Fragrances have also shown the strongest margin we've seen. From your answer, it sounds like there has been a lot of efforts around cost savings, but certainly channel dynamics as well with EMEA online doubling. How much of the margin improvement do you think might be sustainable over time from a channel mix standpoint?

Absolutely, we have a tailwind as it relates to margin due to both our category mix growth and our channel mix. We have a large footprint in brick-and-mortar which, given where traffic is currently, is a bit of a drag on our margin performance. But we are very comfortable that we have margin progression ahead of us based on the aforementioned tailwinds, especially once the pandemic is behind us.

I want to follow up on the Analyst Day, Tracey. You walked us through a margin that was well into the high teens based on what you knew about the business. Looking around at some of the businesses that are similar to yours, many have achieved operating margins above 20%. Given you're going to end up with a larger travel business, a digital business, and a China business, along with the closure of some stores that were a drag, do you see this business moving towards the 20% margin in the long term?

In the very long term, I do see that as a target that is attainable, based on all that we are doing strategically. The positive trends in online growth, particularly during makeup recovery, are areas to consider with margins improving. Makeup, given its significant reliance on brick-and-mortar channels, currently limits its margin potential as online continues to grow. We agree that operating margins can improve significantly, and we will execute initiatives to support this.

Now, as I mentioned previously, our travel retail business in the short term is strongly driven by Asia, especially in China. When we think about the possible reopening of international travel, we see significant potential. Consumer desires for global travel remains strong, and building our travel retail business here will benefit from those desires.

Maybe just a follow-up on one other question. On online, where does your business settle as a percentage of category sales post-pandemic? Also, how do you think about the retention of those incremental consumers across different e-commerce channels? Additionally, are big events like 618 and 1111 becoming more important in driving your business overall, meaning the June and December quarters might be bigger than historical levels? We've seen somewhat weaker guidance for the September quarter, with expectations earlier of better time performances for upcoming quarters. Thank you.

Regarding key shopping moments, particularly during holiday periods, we anticipate strong performance driven by events like 1111. The fourth quarter has a patterned impact with notable events affecting sales. While we will see some seasonality, we also expect sustained relevance from these key events moving forward. As it pertains to online sales across our channels, historically, we've seen strong incremental growth. We plan to work closely with our retail partners to enhance their retail.com capabilities, which also provides a buffer against any reduced brick-and-mortar sales trends. So expect a comprehensive approach toward maximizing online growth across all domains.