Estee Lauder Cos. Inc (EL) — Q4 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 as before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, our net sales growth numbers are in constant currency and all our organic results excluding the impact of acquisitions, divestitures, brand closures, and the impact of currency translation. You can find reconciliations between GAAP and non-GAAP measures 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 consumer to our brand.com sites and through third-party platforms. It also includes estimated sales of our products through 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 you and your families are in good health. In our hearts, we continue to be with those impacted by COVID-19. We delivered outstanding performance amid the pandemic in fiscal year 2021, capped with an exceptional fourth quarter empowered by our dynamic multiple engines of growth strategy, as well as the timeless desirability of prestige beauty. In a year of pain and sorrow, our employees cared for each other, their families, and our company with compassion, creativity, and results. While the challenges of COVID-19 persist, we confidently begin Fiscal year 2022 as a stronger company full of aspiration for the opportunities of tomorrow. For Fiscal Year 2021, sales rose 11%, as we pivoted our energy resources to the growth engines of skincare, fragrance, Asia-Pacific, travel retail in Asia-Pacific, and global online. Impressively, 8 brands grew double-digits, led by Estee Lauder, La Mer, and Jo Malone London. Multiple waves and variants of COVID-19 that extended the center reach were unexpected a year ago drove volatility and variability throughout the year. We saw reopening reversed to closing and reopening in one market met with renewed lockdowns in other markets. Despite this, we delivered on the goal we set last August for sales growth to improve sequentially each quarter. Our sales exceeded $16 billion for the first time ever, up 9% from Fiscal year 2019 on a reported basis, fueled by skincare and fragrance. Adjusted operating margin expanded to 18.9%, which is 140 basis points above Fiscal year 2019. As we invested in today's strongest growth engines, managed cost with discipline, and funded long-term growth opportunities. Adjusted diluted earnings per share rose 21% relative to two years ago. We delivered these excellent results while pushing our social impact and sustainability goals and commitment. First and foremost, we remain focused on employee and consumer safety and well-being. We achieved important milestones for our 2025 sustainability goals, expanded our inclusion, diversity, and equity programs, defined a strategy for women's advancement and gender equality, and advanced work towards our racial equity commitments. Here are a few among the many areas of our progress. We achieved net-zero carbon emissions and 100% renewable electricity globally for our own operations. We also set science-based emissions reduction targets, addressing scope 1 and 2 for our direct operations and certain elements of scope 3 for our value chain, signaling our new level of ambition for climate options. We launched ingredient transparency for seven additional brands, such that 11 brands now offer these insightful content. We transformed our traditional inclusion, diversity, and equity week into a blockbuster virtual experience with 35 events involving thousands of participants from 25 countries. We also introduced new educational offerings, including four anti-racist and inclusive leadership programs. We expanded our grassroots to add employee resource groups, which served as a source of support and comfort throughout the turmoil of last year. The women leadership network is our largest group and is now global with its expansion into Latin America and Asia-Pacific. We created two new leadership programs for women and Black employees. The open door women's leadership program is a unique, intensive course to develop our next generation of women leaders. Building on its success, we designed the open doors collection, a self-guided program to bring these leadership skills to all our employees around the world. The leadership and development program has successfully ensured that Black employees have equitable access to leadership training, mentorship, career development, and advancement opportunities, as well as to build a stronger, more inclusive network of talent across the organization by promoting visibility and facilitating leadership connections with participants. Our new partnership with Howard University focused on its alumni, hosted 12 engaging events and launched an accelerator program to help increase the pipeline for Black talent with career coaching, professional training, and self-empowering networking. Let me now turn to product innovation, which serves as an impossible catalyst for growth in Fiscal year 2021. Innovation represented over 30% of sales, exceeding our expectations. We combined data analytics with our creative talent and R&D to successfully anticipate, scale and set trends across categories. The Estee Lauder brand achieved its fourth consecutive year of double-digit sales growth in fiscal year 2021, fueled by strength across its many hero franchises in skincare. Trusted products along with innovation were sold from Shanghai to New York, Paris, and now Sao Paolo, given the brand's well-received launch in Brazil. Advanced Night Repair's newly reformulated serum sparked excellent sales growth. Revitalizing Supremes’ New Supreme Bright moisturizer further bolstered the accelerating franchise, while the Nutriv new eye serum served and created a halo effect on demand. In makeup, the brand's double wear, futurist and pure color franchises produced significant double-digit sales growth in the fourth quarter. Exciting early signs of the makeup renaissance were apparent. La Mer delivered outstanding double-digit sales growth in the fiscal year. As innovation and engaging campaigns with iconic ingredient-based narratives drove demand for its hero products. The new Genesis de La Mer concentrated on a bulb proved highly sought after and expanded the brand's ultra-luxury franchise. It has both attracted new consumers and captivated loyal consumers globally. Clinique saw skin care accelerate in fiscal year 2021. Sales rose double digits and powered the brand to high single-digit sales growth. The brand successfully met consumer needs through the launch of Moisture Surge 100H with its unique hydration benefits and target solutions for skincare problems like Even Better Clinical Interrupter. Clinique showcased its promise for a makeup renaissance, with stellar double-digit category growth in the Fourth Quarter, with the new Even Better Clinical Serum Foundation and Even Better Concealer capitalizing on its skincare authority. All told, our robust skincare portfolio from entry prestige to luxury across subcategories is fulfilling this journey's needs worldwide. The brand positioning and hero products delivered strong double-digit organic sales growth in the second half of Fiscal year 2021. In May, we amplified the strength of our skincare portfolio as we became majority owner of DECIEM with its coveted ingredient-based brand, The Ordinary, and an emerging science-driven brand as part of its portfolio. Complementing skincare strengths, fragrance delivered striking sequential sales growth acceleration throughout the year. Each of our luxury and artisanal fragrance brands contributed meaningfully from Jo Malone, London to Tom Ford Beauty, Le Labo, Kilian Paris, and Frederic Malle. In both established fragrance markets in the west and emerging fragrance markets in the East, Tom Ford Beauty's Private Blend franchise is both recruiting new consumers and driving stronger engagement, with the brand's dragon sales more than doubling in Mainland China during the year. The Asia-Pacific region was another dynamic growth engine in Fiscal Year 2021. Its annual sales growth accelerated from 18% to 22%, led by Mainland China, where sales rose strong double digits. Korea grew organically. Several smaller markets also contributed to Asia-Pacific strength. The region, however, experienced increasing pressure from the pandemic as the year evolved, with Japan and many markets in Southeast Asia particularly impacted by renewed lockdowns in the second half. Mainland China prospered as we invested in its vibrancy today and opportunity of tomorrow. We entered more cities, reaching 145, expanded our presence specialty multi, opened freestanding stores, and increased our advertising spending. Skincare and fragrance sales grew strong double digits for the fiscal year. We are encouraged that makeup accelerated to double-digit sales growth in the second half. Our brands delivered excellent results for the key events of Tmall's 11.11 Global Shopping Festival and 618 mid-year shopping festival as engaging live streaming generated product discovery for many new consumers. For the recent 618, among Tmall Beauty Flagship Stores, the Estee Lauder brand ranked number 1 in Total Beauty, while La Mer ranked 1st in Luxury Beauty, and Jo Malone London led the fragrance category. To further capture the market's recent online growth opportunity, we are continuing to invest in Tmall and brand.com to expand our capabilities. Most recently, some brands increased coverage of different demographics by launching in July. With international travel largely curtailed, we expanded our investment in the dynamic travel retail development of Hainan to serve Chinese consumers in the best possible way, given the island's tremendous traffic growth and higher duty-free purchase limits. Our brands further elevated the standalone and prepaid shopping experiences, delivered ideal merchandising, and leveraged live streaming to drive strong sales growth. Looking at channels, online thrived globally in fiscal year 2021 characterized by strong double-digit sales gains and a significant step change in its power as a growth engine. We accelerated our consumer-facing digital infrastructure and fulfillment investments. The challenge is now more than twice as big as it was two years ago and greatly benefits from its diversification as each of brand.com, third-party platforms, retail.com, and various retailers delivered outstanding performance. During the year, brand.com came to epitomize the allure of a luxury flagship store for each brand, localized by market and reimagined with our classic high-touch services. We expanded virtual training, live streaming, omnichannel capabilities, and consultations with our expert beauty advisors. Consumers of all ages explored, replenished, and engaged in an immersive environment of entertainment and community. Our brands increasingly leverage the exciting trends in social commerce by integrating with platforms like Instagram, WeChat, and Snapchat. Estee Lauder launched on TikTok with the #NightDoneRight, driving nearly 12 billion views and the creation of almost 2 million videos. This challenge used diverse creators to educate a younger audience on how important it is to take care of their skin at night while showcasing Advanced Night Repair. Clinique's campaigns on TikTok became a viral sensation, highlighting the brand's acne solution and exploring the creation of nearly 700,000 videos on the app. Together, these and other strategic actions delivered exceptional results for brand.com as new consumers, conversion rates, basket size, repeat purchases, and loyalty members grew considerably. Beyond the favorable growth rates, the data relationship fostered with consumers enabled us to better optimize engagement in-store and online, offering exciting future growth opportunities. We are investing across all channels of online, collaborating with traditional and pure-play retailers on initiatives to actualize Prestige Beauty online's potential. We spoke on the last call about heading expanding our presence with top-tier retailers, which continued into the Fourth Quarter, most especially in EMEA. And as I discussed a few minutes ago, we are expanding our consumer coverage in Mainland China. For Fiscal Year 2022, we expect these growth engines of skincare, fragrance, Asia-Pacific, travel retail Asia-Pacific, and global online to continue to thrive, owing to our strong repeat purchase rates, sophisticated data analytics-derived consumer acquisitions, retention, high-touch online services, and robust innovation pipeline. Three compelling skincare innovations were recently launched. Estee Lauder's new Advanced Night Repair Eye Matrix focuses on lines in every eyed zone, while La Mer De Hydrating Infused Emulsion is designed to replenish, strengthen, and stabilize skin with healing moisture and has already proven to attract new consumers. Clinique's Smart Clinical Repair Wrinkle-Correcting Serum is designed to visibly reduce stubborn lines. Our Shanghai Innovation Center is expected to open in the second half of this fiscal year, enhancing our capability in product design, formulation, consumer insight, and trend analytics for Chinese and Asian consumers. With the new center, our East to West innovation will benefit, enabling us to create more successes like Estee Lauder Futurist Hydra or Supreme Bright, and La Mer, the Treatment Lotion. As the world emerges from the pandemic, we will be the best diversified pure-play in prestige beauty as more engines of growth contribute across categories, geographies, and channels. Makeup and hair care are poised to gradually reignite as growth engines. Our developed markets in the West in brick-and-mortar retail. Growth in emerging markets is expected to resume over time as vaccination rates increase. We anticipate the momentum in makeup will build around the world driven by local reopening and increasing social and professional user education, just as we saw in the fourth quarter. Indeed, makeup had started to improve at the end of Fiscal year 2021, driven by our hero subcategories of foundation and mascara. Newness in the category was highly sought after, evidenced by the success of MAC Magic Extension Mascara, Too Faced Lip Plumper, Smashbox Hydrated Tinted Moisturizers, and Bobbi Brown Sheer Pressed Powder contributing to the makeup emerging renaissance. MAC launched the MAC The Moment campaign linking its makeup products and artistry to key experiences such as date night, parties, weddings, and back-to-school shopping. Too Faced expanded into brows in July with a collection that includes an innovative brow gel that adds color and texture. Similar to makeup, hair care is set to benefit from the rise of social and professional use education, as well as salon reopening. Aveda, which is now 100% vegan, and Bumble and bumble entered fiscal year 2022 with momentum owing to desirable innovation and robust consumer engagement leading to strong online performance globally over the past year. As makeup and hair care gain momentum, we expect our engines of growth will gradually diversify by geography and channel, initially driven by developed markets in the west and over time by emerging markets in Asia. In the Fourth Quarter, we aligned innovation, advertising spending, and store activations as consumers returned to stores, eager to explore beauty and seek high-touch services. Across brick-and-mortar from regional and national department stores to specialty retailers and freestanding stores, our business in the U.S. prospered, especially in makeup and fragrance, and exceeded our expectations. As we start our new fiscal year, Bobbi Brown recently debuted in Ulta Beauty. Several of our brands launched online and in-store with Sephora at Kohl's, Ulta, and Target. In closing, we leveraged the power of our multiple engines of growth strategy to elevate the company to new heights in Fiscal year 2021. We did this while prioritizing the health and well-being of our employees as primary focus and making progress on our social impact commitments and sustainability goals. Our success in agility in operating amid the challenges of the past year gives us confidence for Fiscal year 2022 as we expect volatility and variability from the pandemic to persist for some time to come. This year, we are celebrating our 75th anniversary as a company and beginning our next 75 years, incredibly inspired by the opportunities of tomorrow as the leading global house of prestige beauty with the most talented employees, to whom I extend my deepest gratitude. I will now turn the call over to Tracey.

Thank you for the introduction and hello, everyone. I concur with Fabrizio in thanking our incredible team who have demonstrated great resilience during the pandemic. Navigating through the highly uneven recovery this past year has certainly required greater agility and flexibility, and our teams across the globe rose to the occasion, delivering superb results for the fiscal year while also establishing a stronger foundation for future growth and profitability. We delivered exceptional net sales growth of 56% in our fourth quarter as we anniversary pandemic-related store closures in the prior year. The inclusion of six weeks of sales from DECIEM added approximately three points to growth in the quarter. Our performance also exceeded the pre-pandemic levels of the Fiscal 2019 Fourth Quarter by 9%, driven by significant sales increases in Mainland China, the skincare and fragrance categories, global online, and travel retail in Asia. All three regions grew, and all product categories within each region grew during the quarter. Net sales in the Americas region rose 86% against the prior-year period with almost no brick-and-mortar retail open. Throughout the quarter, consumer confidence in the U.S. grew as COVID restrictions abated and people resumed shopping in stores again. Our brands responded with strong programs supporting recovery, new product launches, and animating key brand shopping events like Mother's Day. Sales in the region remained below Fiscal '19 levels for the quarter, reflecting in part the loss of over 900 retail locations that represented nearly 170 million in annual sales. Additionally, makeup has historically been the largest category in the region, and the category has yet to fully recoup sales lost during the pandemic. Nevertheless, we are encouraged by the sequential acceleration in North American sales, which has been better than we expected. Net sales in our Europe, the Middle East, and Africa region increased 65%, with all markets contributing to growth as COVID restrictions eased throughout the Quarter. Global Travel Retail, primarily reported in this region, continued to suffer from a significant drop in international travel traffic, but grew strong double-digits in the Quarter as comparisons eased, and local tourism in China, especially to Hainan, remained robust. Across developed markets in the region, store traffic has begun to pick up, and retailers have become more comfortable with restocking. Emerging markets in the region saw strong retail in the Quarter, driven by locally relevant holiday activation, retailer events, and online performance. Sales in the region were slightly above Fiscal '19 levels for the Quarter, primarily due to the resilience of travel retail. Net sales in the Asia-Pacific region rose 30%. Virtually every country contributed to growth, although the pace of improvement varied widely among the markets, and a resurgence of COVID has slowed a full recovery. Sales of our products online continued to rise strong double-digits in the region, driven by the successful 618 Shopping Festival campaign in China and the continued strength of social e-commerce. Mainland China continued to experience robust double-digit growth with broad-based improvement across product categories, brands, and channels. Other markets in the region, including Korea, Hong Kong, and Japan, grew exceptionally against the prior-year brick-and-mortar lockdown. Sales in the region were 50% above 2019 levels, largely reflecting China's rapid emergence from the pandemic last year. Net sales in all product categories grew sharply this quarter. Skincare, fragrance, and hair care drove higher sales than Fiscal 2019. Fragrance-led growth with net sales rising 150% versus the prior year. Luxury fragrances resonated with consumers looking for self-care and indulgence, and among Chinese consumers increasingly attracted to the category. Home, bath, and body products have also gained traction during the pandemic and helped to attract new consumers. Jo Malone London saw recovery to pre-pandemic levels in brick-and-mortar, and the brand's Blossom and Brit collections were popular in Asia. Standouts from Tom Ford Beauty include the recent launch of Tubereuse Nue and the continued strength of Bitter Peach and Rose Prick. Net sales in makeup jumped 70% against the prior year, reflecting the greatest beauty category impact of COVID-19, particularly in western markets where makeup is the largest category. The makeup category in prestige beauty has proven to be especially sensitive to brick-and-mortar recovery due to the use of testers and in-store services by consumers. Estee Lauder saw strong growth from Futurist and Double Wear foundations in Asia, and MAC liquid lip color and eye products, especially mascara, outperformed. Hair care net sales grew 52% as salons and stores reopened. The launch of Aveda's Blonde Revival Shampoo and Conditioner also contributed to category growth, adding to other strong innovation programs over the past several months from Aveda. Net sales in skincare continued to thrive, rising 42% in the quarter driven by strong increases from La Mer, Estee Lauder, Clinique, and others. Skincare sales growth also benefited from the addition of DECIEM in the quarter by approximately 4 percentage points. Our gross margin improved 650 basis points compared to the fourth quarter last year. This favorability reflected significant improvements in obsolescence and manufacturing efficiencies compared to the prior year impact of COVID-19 on our sales and on our manufacturing locations. Operating expenses rose 36%, driven by the planned increase in advertising and selling costs to support the reopening of retail and the recovery. Additionally, we sharply curtailed spending last year in response to the onset of the pandemic, and some of these costs were reinstated, primarily compensation. We delivered operating income of 385 million for the quarter compared to a $228 million operating loss in the prior-year quarter. Diluted earnings per share of $0.78 included $0.02 of favorable currency translation and $0.02 dilution from the acquisition of DECIEM. Our full-year results reflect the benefits of our strategic focus as we leaned into current growth drivers and invested behind future areas of growth while effectively managing both costs and cash. The sequential acceleration of our business throughout the year culminated in net sales growth of 11%. The strength of Chinese consumer demand, both at home and in travel retail, the resilience of the skincare and fragrance categories, and the momentum we drove in our online channels all supported our growth. Our distribution mix continued to evolve even as brick-and-mortar reopened. Sales of our products through all online channels continued to thrive as they rose 34% for the year and represented 28% of total sales. Despite the continued curtailment of international travel, our business in the travel retail channel grew, ending Fiscal 2021 at 29% of sales. Among brick-and-mortar retail, specialty multi and perfumeries grew, while department stores and freestanding stores experienced the greatest impact from the ongoing pandemic and declined for the year. Our gross margin rose 120 basis points to 76.4%, driven by favorable pricing, lower obsolescence, increased manufacturing efficiencies, and lower costs for testers and stores, partially offset by currency due to the weakening of the U.S. dollar. Operating expenses declined 300 basis points to 57.5% of sales. Selling and store operating costs decreased as high-service stores were either closed for part of the year, or they reopened with reduced traffic and staffing levels. Additionally, in-store merchandising costs decreased, while advertising investments, primarily digital media, rose faster than sales to support our brands in the recovery. We achieved significant savings from our cost initiatives, including leading Beauty Forward and the preliminary benefits from the post-COVID Business Acceleration Program. This gave us the flexibility to reinvest in necessary capabilities, absorb some of the inflation and media and logistics costs, and support the reinstatement of certain compensation elements that were reduced or frozen due to the onset of the pandemic. Our full-year operating margin was 18.9%, representing a 420 basis-point improvement over last year and 140 basis points above Fiscal 2019. This year also includes 50 basis points of dilution from the inclusion of Dr. Jart and DECIEM. Our effective tax rate for the year was 18.7%, a decrease of 450 basis points over the prior year, primarily driven by the geographic mix of earnings, which included a favorable one-time adjustment for Fiscal Years 2019 and 2020 related to recently issued GILTI Tax Regulations. Net earnings rose 57% to $2.4 billion, and diluted EPS increased 57% to $6.45. Earnings per share includes $0.11 accretion from currency translation and $0.08 dilution from the acquisitions of Dr. Jart and DECIEM. In Fiscal 2021, we recorded 148 million after-tax or $0.40 per share of impairment charges related to our Smashbox and GLAMGLOW brands, as well as certain freestanding retail stores. Restructuring and other charges related primarily to the Post-COVID Business Acceleration Program were 176 million after-tax or $0.48 per share. These charges were more than offset by the one-time gain on our minority interest in DECIEM of 847 million after-tax or $2.30 per share. The Post-COVID Business Acceleration Program is progressing quickly with projects underway across all regions. We have closed nearly 500 doors or counters, including about 50 freestanding stores under the program in Fiscal 2021. We also closed approximately 100 additional freestanding stores outside of the program upon lease expiration, primarily in North America and in Europe. We've realigned our go-to-market organizations to better reflect our evolving channel mix. We're also winding down certain brands such as BECCA and Rodan. These actions are expected to continue into Fiscal 2022. For the total program, we continue to expect to take charges of between 400 million and 500 million through Fiscal 2022 and generate savings of 300 to 400 million before tax by Fiscal 2023, a portion of which will be reinvested. We continue to focus on maintaining strong liquidity while also investing for future growth during the year. Cash generated from operations rose 59% to $3.6 billion, primarily reflecting the higher net earnings. We utilized 637 million for capital improvements, supporting increased capacity and other supply chain improvements, further e-commerce development, and information technology. We repaid 750 million of debt outstanding from our revolving credit facility, issued 600 million of new long-term debt, and retired 450 million of debt. We used 1.1 billion net of cash acquired to increase our ownership interest in DECIEM. We returned 1.5 billion in cash to stakeholders during the year via increased dividends and the reinstatement of share repurchase activities in the second half of the Fiscal year. So looking ahead to Fiscal 2022, we are encouraged by the increasing vaccination rates and reopening of markets around the world. We look forward to the resumption of international travel, increasing foot traffic, and brick-and-mortar retail, and the development of our recent acquisitions. We are still mindful, however, that the recovery has evolved unevenly and some markets are seeing their third or fourth waves of COVID, including increasing effects of new more contagious strains of the virus, hindering a return to normal life. This has been particularly evident in the U.S. over the past several weeks. Additionally, increasing climate and geopolitical events make it difficult to predict the corresponding impact on our business. Nevertheless, given the strength of our programs, we are cautiously optimistic and therefore providing a range of sales and EPS expectations for the Fiscal year caveated with the following underlying assumptions. Progressive recovery in the makeup category as full vaccination rates increase and mask-wearing abates in western markets during the first half of the Fiscal year. Beginning of the resumption of international travel in the second half of the Fiscal year. The addition of new retail accounts for some of our brands should provide broader access to new consumers, notably through Sephora at Kohl's and Ulta at Target in North America and the addition of JD.com in China online. The inclusion of incremental sales from DECIEM, benefiting sales growth for the fiscal year, primarily in the Americas and AMEA region and in the skincare category. Pricing is expected to add approximately 3 points of growth, helping to offset inflation risk and freight, media, labor, and commodities. Increased advertising support as markets reopen and further investment behind select capabilities, including data analytics, innovation, technology, and sustainability initiatives while maintaining good cost discipline elsewhere. We forecast increasing benefits from our post-COVID business acceleration program as it ramps up this year. Approximately, 200 million of the cost we cut during the pandemic are expected to be reinstated. These primarily include hiring, travel and meeting expenses, furloughs, leaves of absence, and compensation. In addition to these assumptions, there are a few non-operating items you should be aware of as you adjust your models. Our full-year effective tax rate is expected to return to a more normalized level of approximately 23% from 18.7% in Fiscal 2021. Net interest and investment expense is expected to be around $150 million. The increase is primarily due to the comparison to last year when we recorded the benefits of our minority interest in DECIEM through May 18th, 2021. At that time, we acquired a majority ownership in DECIEM and we began to fully consolidate the entire business and deduct a portion of the income we don't own as a charge to net earnings attributable to non-controlling interest. This charge is expected to be less than $5 million in Fiscal 2022. Net cash flows from operating activities are forecast to be between $3.2 billion. Capital expenditures are planned at approximately 5% of projected sales as we develop additional manufacturing and distribution capacity, notably for the building of our new facility in Japan. We also expect to fund more robust research and development capabilities in China and North America. Increased investment in technology and support new distribution and e-commerce for our brands. Our Capex plan for the year also includes some spending deferred from last year. Also, beginning in Fiscal 2022, we plan to introduce the concept of organic sales growth in our earnings materials and investor presentations. Organic growth adjusts reported sales growth for both currency and changes in structure, such as acquisitions, divestitures, and brand closures. This should help provide a more meaningful understanding of the performance of our comparable business. Additionally, reflecting the level of volatility still in the environment, we are at this point widening our guidance ranges for the year. For the full fiscal year, organic net sales are forecasted to grow 9% to 12% based on August 13 spot rates of 1.17 for the Euro, 1.381 for the Pound, 1164 for the Korean Won, and 6.479 for the Chinese Yuan. We expect currency translation to add one point to reported sales growth for the full fiscal year. As I mentioned earlier, this range excludes approximately three points from acquisitions, divestitures, and brand closures, primarily, the inclusion of DECIEM. Diluted EPS is expected to range between $7.23 and $7.38 before restructuring and other charges. This includes approximately $0.19 of accretion from currency translation. In constant currency, we expect EPS to rise by 9% to 12%. This also includes approximately $0.03 accretion from DECIEM. At this time, we expect organic sales for our first quarter to rise 11% to 13%. The incremental sales from acquisitions, divestitures, and brand closures are expected to add about 3 points to reported growth and currency is expected to be accretive by approximately 3 points. Operating expenses are expected to rise in the first quarter as we invest in the reopening and recovery of brick-and-mortar retail around the world and some of the temporary cost measures start to ease. We expect first-quarter EPS of $1.55 to $1.65. Currency is expected to be accretive to EPS by $0.05 and DECIEM is forecast to have no impact. In closing, while we're cautious about the uneven recovery to date, we remain confident about the strategic actions we continue to take to support sustainable, profitable growth post-pandemic, and the agility we have demonstrated this past year. On behalf of the entire Estee Lauder Company's leadership team, we give thanks to our incredible teams around the world for their extraordinary efforts to manage during this unprecedented period. That concludes our prepared remarks. We'll be happy to take your questions at this time.

Hey, good morning, guys.

Hi, Dara.

Good morning.

Can you give us an update on how much of the incremental e-commerce business and new customers you obtained during COVID are proving sticky now that we fully cycle COVID and perhaps also just give us a sense for expectations for e-commerce sales growth in Fiscal '22 and how you think about that versus a COVID boost? And then longer term, can you also spend some time just discussing how you're better using or upgrading technology to drive e-commerce sales longer-term? Thanks.

So, let me start by saying that the large majority of our online progress during COVID is very sticky. Keep in mind that we attracted many new consumers. The new consumers were also among the older consumers, and they really liked our products. We see they're coming back and they're staying, even when stores reopen, obviously with a different balance, but this is definitely happening. Overall, our online presence is continuing to grow, and we expect this growth to continue for many years to come; the trend will not stop after COVID. Our online mix in China, for example, has experienced strong performance. To illustrate, our last 618 event was quite successful, and retailers around the world have seen significant growth. Brand.com in the moment will stabilize or slightly decrease temporarily as people return to stores, but it will start to grow again. That's our expectation. Overall, our online business will continue to progress as a percentage of total business over the next years.

And keep in mind, Dara, we've also explained in our prepared remarks that we do have some new customers. Retailer.com should see growth as well with the U.S. expansion of Ulta into Target and Sephora into Kohl's, and the same with JD in China. We've got, as Fabrizio said, very strong plans for online again this year, and I expect that it will continue to increase as a percent of our penetration of sales. Regarding technology, we are investing significantly in our e-commerce platform to enable capabilities that we've spoken about, whether it's virtual try-on, our data analytics to support personalized experiences, and many other capabilities. Beyond online, we continue to invest in the consumer experience in our stores and in other areas as well. We have a robust technology investment plan that I would expect to continue over the next couple of years. We're also investing in new technology in our new facility that is opening in a couple of years in Japan, which will be a state-of-the-art manufacturing facility, leveraging quite a bit of technology as well.

Great, thanks.

Great. Thank you. Good morning. I was wondering if you'd talk a little bit more about Asia-Pacific and the improvements there? If you could talk about the drivers there, you mentioned the strength of 618. Should we expect more quarterly variability in Asia, whether because of 618 or 11.11, and how that could influence how the year develops? If you could just also talk about the current trends given another uptake in volatility due to the pandemic? Thank you.

There is very big strength in Asia-Pacific that we expect to continue in the long term. As we noted in the prepared remarks, there have been some pandemic issues in places like Japan and parts of Southeast Asia which could become obstacles in specific markets temporarily, but overall, Asia-Pacific will continue to be very strong and will be led by China, whose progress will continue to develop in our opinion and that's been happening so far. What we call variability of sales around ups and downs in Asia-Pacific, particularly in China, is more about seasonality. There is clear seasonality with reasons such as festivals, holidays, and public events throughout the year. We manage seasonality with anticipation, and that's why our quarter-by-quarter plans are well articulated. I would not call it variability but rather seasonality.

Great. Thanks. Good morning. I will start with the discussion of the 3% contribution from pricing in '22. I know there's always some pricing in the business, and it's somewhat subtle based on the consumer standpoint, but 3% just sounded higher than usual to me. So, curious if it's centered in categories and brands, are there areas where you feel the momentum is so strong that it's not an untapped opportunity, or is this more in response to the broadly inflationary environment?

Well, as you mentioned, Lauren, we take pricing every year, usually in the 2% to 2.5% range. We are taking approximately 3% of pricing this year, and it is certainly considering the inflationary environment that we're operating in. We do take differential pricing, so it is an average across all of our markets and brands. But there is no specific category that we're taking any more pricing than others.

And I just want to add, we do have the ability to price where there is the opportunity. Because of our loyalty program and other areas of strength, we are planning due to the current environment to take about 0.5 points more in pricing than in previous years. This is completely justified. Combined with our cost-saving programs, it allows us to manage inflation without any negative impact on our advertising or on our profitability. Another point to mention is that with the kind of success we've had with innovation, the attractiveness of our offerings can command luxury pricing as we deploy high-quality products. Around 20% to 30% of our annual revenue comes from innovation, which gives us flexibility in terms of pricing.

Great, thank you very much. Just two questions. If I can just do a quick follow-up on China. We're reading a little bit about government actions in terms of cracking down on wealth-flaunting luxury, particularly in social media. I just wanted to be sure that that's not something that you see affecting your business. Then my deeper question is if you could give us an update on the e-commerce in the U.S. as a percent of sales and how that breaks out between your direct brand.com business and the retailer.com business along with any changes in trends there that you're seeing? Thank you.

And sorry, could you repeat the one on the U.S.?

The.com.

Just an update on the.com business in the U.S., the percent of sales. I think it was running around 40% and then how that's breaking out between the direct business and the retail.com.

Regarding China, we do not see any issues from government actions affecting our industry or our recent improvement; in fact, we see a lot of support for the trend and a significant interest in our products as the middle class evolves. For example, government support for Hainan and duty-free shopping has driven internal consumption, benefiting our industry as those consumers opt for luxury purchases domestically rather than abroad. On the online side in the U.S., we ended the year with a little over 40% online. As you know, we started the year with some retail doors closed. So, we had very strong online penetration. As brick-and-mortar reopened, the online penetration lessened a bit, but we still ended the year at about 40%. In terms of retailer.com vs. brand.com, we saw strength in retailer.com toward the second half of the year and brand.com earlier in the year. This year, we have strong plans for both brand.com and retailer.com in the U.S. to continue to grow.

Thank you.

Yes. Thanks and good morning. I was hoping you would just elaborate a bit further on what you're doing to best position your portfolio to take advantage of the anticipated recovery in makeup and to what degree you see your businesses likely to accrue net share gains alongside that recovery? Thank you.

We are preparing for the makeup brand resurgence, and we are actively working on all our makeup brands across all regions to leverage this recovery as user education comes back. The positive trends we witnessed in the U.S. in this last quarter are very encouraging. In the last quarter, our makeup was extraordinarily strong; for example, we saw great results from MAC and other brands. We noticed the recovery beginning with foundations and lipsticks, which is very promising. We are also developing marketing programs, innovation initiatives, and new launches for every market, ensuring that we time these to the anticipated recovery trends, which we expect will take place gradually but will depend on vaccination levels and controlling COVID spikes. We have strong analytics that guide us on when to time our marketing and launch efforts in different parts of the world, and this strategic approach is effectively leading to the desired returns on our investments.

Hi, good morning. This is Grace Ong for Steph. I wanted to dig in a little on the Travel retail recovery that you're expecting and how you think about growth in market locations like Hainan. Would you expect that Hainan continues to grow as international travel resumes, or is there a rebalancing somehow as that demand is realized? Thank you.

We expect Hainan to continue to grow, and we foresee the success there will be relatively independent from the complete comeback of international travel. The number of Chinese consumers with passports is above 10% and evolving towards 15%. Domestic travel in Hainan appeals to 100% of the Chinese middle class, ensuring its long-term growth potential, regardless of international travel patterns. We are assuming that some international travel will gradually restart in the second semester of our '22 fiscal year, but this will depend on the pandemic situation and government regulations. Thus far, we've seen some early signs of increased travel throughout Europe this summer, though it remains significantly below pre-COVID levels. We anticipate a more significant acceleration in international travel in Fiscal Year 2023.

Thanks and morning everyone. I wanted to ask a bit of a follow-up on China and just maybe talk a bit about what's embedded in your expectations for the business in that country for Fiscal '22? Maybe in the context of things that we've seen around slowing sales on Tmall, and discuss the commentary about expanding on JD.com, just how does that fit in when you talk about different demographics? So, if you could elaborate a bit on that, that would be helpful?

We expect the market in China to continue growing double digits. We are optimistic about the strengths of this market as well as our position with the consumers here. We anticipate continued acceleration in online sales, which currently comprises approximately 50% of our Mainland China business and will continue to grow. We see the potential for sustained growth on existing platforms like Tmall, which has been very successful for our beauty brands and partners. We are also working towards enhancing our brand.com and our marketing strategies online, continually learning and adapting our approaches to align with the rapid technological advancements available in China. Certain brands have decided to expand on JD.com due to their appeal to specific demographics, and we are optimistic about the results from this broader consumer coverage. China represents a very dynamic and competitive market that keeps evolving, and we remain committed to staying ahead of these changes.

Great, thanks. Good morning. My question is for Tracey. If you could talk a little bit more about what you expect for the sales and profitability rebound in the North American segment in Fiscal 2022, particularly layering on some of the new distribution partnerships, both Kohl's and Sephora at Ulta Target? And then I do have a follow-up for Fabrizio on DECIEM. I know that the Ordinary has been driving significant success to date, but they do have a number of other brands in their portfolio, so curious about your plans to scale some of these. Thank you.

Okay. Let me start with North America. We're very optimistic given the trends that we saw in the Fourth Quarter, and that are continuing into the First Quarter regarding the North America segment. People are returning to stores, and there's strong online shopping, and certainly, the new retail partnerships with retailers we partner with will also contribute to growth this year. Across the board, our team has been working on solid innovations. We're increasing advertising in North America in Fiscal 2022, so we expect both top-line growth and margin expansion in North America related to our strategies for this year.

Indeed, you're right. DECIEM has an extraordinary portfolio of brands, with The Ordinary being the largest and continuing to grow successfully. However, we also intend to continue developing other brands in their portfolio, like NIOD, which is more science-based. DECIEM also boasts the capability for excellent brand incubation, which we intend to leverage for developing new ideas. Our priority this year will be on The Ordinary due to the incredible growth opportunities we see there, but we're committed to nurturing other brands in the long term.

Hi, thank you very much. I wanted to follow up on the disclosure about travel retail making up 29% of Fiscal '21 Sales. Can you confirm that? Does that suggest there was a significant acceleration in Q4 for the Travel retail business? Also, does that indicate that the continental Europe business saw a decline in that quarter? Any clarification on that would be appreciated. Additionally, regarding your decision to partner with Ulta and Target, it seems like an expansion of distribution through channels where you’ve been less comfortable in the past. Given that these brands are being curated in a different setting, what are your thoughts on expanding into other channels, like Amazon or other online platforms in the future? Thank you for addressing these points.

So I can confirm travel retail in terms of the percent of mix at 29%. We did see strong growth in travel retail in the fourth quarter, and as for the AMEA region, we did also see growth, particularly excluding travel retail. The UK faced some challenges but all our regions grew in the fourth quarter.

In terms of travel retail, we expect that domestic travel, particularly from the Chinese consumers, will continue to drive growth. Our strategy is to ensure we meet the growing demand of Chinese consumers wherever they choose to shop. We will maintain a strong presence in both high-quality department stores in China and in Hainan. We've elevated our luxury experience, which now represents over 60% of our business globally. Our investment strategy has focused primarily on elevating the consumer experience during fiscal year 2021. But we've also recognized opportunities to sell in mass markets through retailers like Ulta and Target to reach consumers who are looking to upgrade their beauty products.