Estee Lauder Cos. Inc (EL) — Q1 2022 Earnings Call Transcript

Hello. On today's call, our Fabrizio Freda, President and Chief Executive Officer, and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and other reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic results exclude the non-comparable impacts 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 consumers through our brand.com sites 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 1 question so that we can respond to all of you within the time scheduled for this call. And now I will turn the call over to Fabrizio.

Thank you, Rainey, and hello, everyone. We are grateful you have joined us today. We delivered excellent performance to begin fiscal year 2022, reinforcing our optimism in the opportunities of tomorrow as we discussed with you in August. Our multiple engines of growth strategy enabled us to excel amid continued volatility and variability from the pandemic. Organic sales rose 18% and adjusted diluted earnings per share grew an even stronger 31%. Encouragingly, relative to the pre-pandemic first quarter of fiscal year 2020, our business is 13% larger on a reported basis and more profitable. We achieved these outstanding results with increasingly diverse growth engines as we expected, by virtue of our dynamic strategy we could act locally amid the complexity of the pandemic to both create and capture demand. The growth engines of makeup, developed markets in the West and brick-and-mortar reunited and complemented momentum in skincare, fragrance, Mainland China, travel retail in Asia-Pacific and global online. 13 brands contributed double-digit organic sales growth, demonstrating the breadth of strengths across our portfolio. If the Lauder and MAC drove Makeup Allergic Renaissance, while La Mer, and Clinique delivered standout results in Skin Care. Impressively, Skin Care solidly outpaced its three-year organic sales growth performance despite having the far toughest comparison among the categories. Fragrance soared double-digits, driven by Tom Ford Beauty and Jo Malone London. Let me share a few highlights by brand Estee Lauder advanced planning for the Makeup Renaissance delivered significant sales growth. As social and professional use education resumed in certain markets, the brand was well-positioned with compelling innovation, superb merchandising, and on-point communication. Its double wear and futurist foundation franchises grew strong double-digits while its new pure color whipped matte lipstick was a hit. MAC strategically engaged consumers to drive performance in makeup. In the Americas and EMEA, excellent results from in-store activations and regional MAC The Moment campaigns, combined with desirable innovation like Lustreglass Sheer-Shine Lipstick and Magic Extension Mascara. The brand's new omni-channel capabilities, which leveraged its free-standing stores, also contributed to the strength. It demonstrates a new capability for MAC to benefit from going forward. La Mer performed magnificently and led the Company, with sales rising strong double-digits. Its new The Hydrating Infused Emulsion expanded our portfolio of East to West innovation, captivating consumers in every region. The product successes are many, as it welcomed new and younger consumers, as well as men into the brand and created a powerful hollow benefit for La Mer Skin Care portfolio. It is a striking example of the innovation gains we can achieve when the power of our data analytics is combined with our creative talent and R&D. La Mer's iconic Creme De La Mer prospered as a new global campaign focused on its most store rising benefit realized terrific initial results. Clinique thrived in skincare from the strength of its heroes. Moreover, its new smart clinical repair wrinkle correcting serum with powerful clinically led claims and compelling before and after visualizations extend the Clinique winning streak with innovation and further demonstrated the brand ability to be highly relevant for consumers of all ages. In makeup, Clinique skincare authority drove growth in complexion led subcategories. While in leap, the brand brilliantly leveraged black, Tony viral sensation on TikTok to expand its consumer base, especially among Gen Z. Visium complemented our organic sales growth in skincare with its coveted vegan brand, The Ordinary. Visium is known for its transparency, which has enamored it with consumers and in the first quarter it launched the insightful, Everything is Chemicals Campaign. And the new regimen builder by The Ordinary on brand.com realized spectacular adaptation, further enhancing the brand's powerful online ecosystem. Fragrance momentum continued with stellar double-digit performance in every region powered by hero products and innovation from Tom Ford Beauty, Jo Malone London, and our seasonal offerings. We are excited for the Estee Lauder brand launch of its luxury collection in the second quarter as it expands our portfolio in the high-growth segment of fragrances. Our fragrance category benefits from diversification among our categories, as well as regions with outstanding performance from both historically strong markets for fragrance and emerging fragrance opportunities. The self-care rituals related to scent, which were embraced during the pandemic, continue even as social and professional use and education resume. Of note, Tom Ford Beauty performed strongly in both fragrance and makeup, such that the brand was among our top performers in the quarter. Its new Ombre Leather Parfum and Heroes wardrobes and Lost Cherry fueled the brand's success. Our growth engines also diversified geographically, led by developed markets in the West. Our business in North America executed with excellence to deliver strong double-digit organic sales growth, powered by readiness for makeup's emerging renaissance, ongoing strength in skincare, fragrance, and recovery in hair care. Strategic go-to-market initiatives supported by on-trend innovation, increased advertising spending, and expert in-store visual services delighted consumers. Our expanded consumer reach enhanced these initiatives as Bobby Brown's launch in Ulta Beauty exceeded expectations. And we are encouraged by the early results of the new Ulta Beauty at Target and Sephora at Kohl's relationships. In Asia-Pacific, many markets faced COVID-induced lockdowns and temporary store closures, which pressured performance. Despite this, the region still grew 10% organically driven by strength in Greater China and Korea. Mainland China achieved double-digit organic sales growth, owing to skincare and fragrance. With online both higher. We launched locally relevant innovation, which proved highly desirable, while we also increased advertising spending, strategically standardizing our consumer reach to match success on JD, and designed successful activation for Chinese Valentine's Day. We continue to invest in the vibrant and compelling long-term growth opportunity in Mainland China, led by our talented local team. We are enthusiastic for our new innovation center in Shanghai to open in the second half of this fiscal year. This new world-class innovation center will be the first of its kind for our Company. We will have a unique ability to grow and build on our market and consumer insights, to develop exceptional products to meet and surpass the needs and desires of Chinese consumers. What is more, we are seeing the benefits of recent investment in online fulfillment, which have led to higher service levels and better inventory management, while setting the stage for expanded omnichannel capabilities in the market. From a channel perspective, globally, brick-and-mortar grew strongly in markets which are gradually emerging from the latest waves of COVID-19. We realized excellent results across the board in brick-and-mortar, most especially in the Americas and EMEA. Our brands created excitement in-store with enticing high-touch services and unique activations. We are encouraged by improving trends in the productivity of brick-and-mortar owing to both increased traffic and our strategic actions, including those under the post-COVID business acceleration program. As brick-and-mortar reignites, our global online business continues to showcase its tremendous promise, with impressive organic results despite significant organic sales growth in the year-ago period. Online grew to be nearly double the size on a reported basis of the pre-pandemic first quarter of fiscal year 2020. Many markets capitalized on the remarkable new consumer acquisition trend of the pandemic to deliver sustained gain in repeat purchases. As we seek to engage with consumers in innovative ways, we advanced our work with Instagram, Snapchat, TikTok, WeChat and others to capitalize on exciting trends in social commerce. We also deploy technology solutions, which enable brands to better customize consumer outreach by leveraging data to merchandise and personalize communication. This is leading to higher conversion rates for new consumers and a deeper level of relationship building after the initial purchase to foster retention. Initiatives such as this position us well to realize even greater success with trial and repeat. We continued to invest in online to strategically extend our consumer reach and realized promising results. For example, in the first quarter, La Mer launched on Lazada in Southeast Asia to tremendous success. We differentiate in merchandising, unique services, and prestige packaging; making it one of the platform's biggest brand launches ever. Our relationship with Lazada expanded in the current quarter with Jo Malone London debut. Before I close, I wanted to share that today, we will release our fiscal year 2021 social impact and sustainability report. We are incredibly inspired by the achievements of our employees globally. The report highlights initiatives across key areas including inclusion, diversity and equity. Climate, packaging, social investments, responsible sourcing, and Green Chemistry. I'm particularly proud of our support to employees globally who face financial hardships due to COVID-19. The ELC Cares Employee Relief Fund awarded nearly 14,000 grants and distributed nearly $8 million through June 30, 2021. Here are a few among the many other highlights of the report. We have continued to contribute to a low carbon future. For the second year in a row, we sourced 100% renewable electricity globally for our direct operations and achieved net-zero Scope 1 and Scope 2 emissions. The Company also made strong progress in its science-based targets for Scope 1 and 2 and made efforts toward meeting its Scope 3 science-based targets. We achieved our existing post-consumer recycled content goal ahead of schedule and announced a more ambitious goal to increase the amount of such material in our packages to 25% or more by the end of calendar year 2025. We're also committed to reduce the amount of building petroleum plastic in our packaging to 50% or less by the end of calendar year 2030. On the last few earnings calls, I discussed actions we're taking to make more progress on our commitments for racial equity, as well as women's advancement and gender equality, which are reflected in the report. We also deepened our work by further aligning the strategy of the Estee Lauder Companies charitable foundation to identify support programs at the intersection of climate, justice, human rights, and well-being with a focus on equity. Building upon our legacy of funding girls' education and leadership programs. In the beginning of fiscal year 2022 and aligned with our social impact commitments, we were pleased to announce a 3-year partnership with Amanda Gorman, an activist, award-winning writer, and the youngest in the world poet in U.S. history. The Estee Lauder Companies will contribute $3 million over three years to support writing change, especially initiatives to advance literacy as a pathway to equitable access and social change. In addition, Mrs. Gorman will bring her voice of change to the Estee Lauder brand. The good thing is our first campaign in the second half of this fiscal year. In closing, we delivered outstanding performance to begin the new fiscal year amid the volatility, and variability of the pandemic. While continuing to invest in sustainable long-term growth drivers, we are focusing on fundamental capabilities for product quality and the consumer-centric elements of acquisition, engagement, and high-touch experiences and services. We are doing this while improving our cost structure, diversifying our portfolio and its distribution, investing behind the best growth opportunities, and living our values. Our confidence in the long-term growth opportunities for global prestige beauty and our Company is reflected in the announcement today to raise the quarterly dividend. I'm forever grateful for the grace, wisdom, and ingenuity of our employees globally, making us a stronger Company each and every day. I will now turn the call over to Tracey.

Thank you, Fabrizio and hello everyone. We're off to an outstanding start with first quarter net sales growing 18% organically driven by the nascent recovery in the Americas and EMEA during the quarter compared to a more difficult environment in the prior year. Global logistic constraints caused some retailers, primarily in North America, to order earlier to ensure popular sets and products would be on counter for holidays. We estimate that this contributed approximately 1.5 points to our first-quarter sales growth that otherwise would have occurred in the second quarter. The inclusion of sales from the May 2021 DECIEM investment added approximately 3 points to reported net sales growth and currency added just over 2 points. From a geographic standpoint, organic net sales in the Americas climbed 27% as COVID restrictions eased throughout the region. Brick-and-mortar retail grew sharply across all formats compared to the prior year period when many stores were temporarily shut down. Distribution in Kohl's with Sephora and in Target with Ulta Beauty began its phased roll-out to initial stores and online in mid-August with minimal impact on net sales growth for the quarter. With the strong resurgence of brick-and-mortar traffic online, organic sales growth in the Americas declined single-digit against the sharp increase last year, while organic online penetration remains solid at 31% of sales. The inclusion of sales from DECIEM added about 9 points to the overall reported growth in the region. In our Europe, the Middle East, and Africa region, organic net sales rose 19% with virtually every market contributing to growth led by the emerging markets in the Middle East, Turkey, and Russia, as well as the U.K. Most markets throughout the regions saw COVID restrictions lifted and some tourism resume during the peak summer months. By channel, the region saw more balance between brick-and-mortar and online growth. All major categories grew this quarter and the region saw the strongest growth in fragrance and makeup as social occasions increased. Our global travel retail business grew double-digit as China and Korea continued to be strong. Internal travel restrictions during the quarter in China slowed Hainan sales temporarily, but restrictions lifted in early September and traffic rebounded. Retailers also responded to the August dip by driving post-travel consumption online. Summer holiday travel in Europe and the Americas ticked up but international travels still reached only 40% of pre-COVID levels. In our Asia-Pacific region, organic net sales rose 10% and were driven by Greater China and Korea. The region overall experienced higher levels of COVID lockdowns this quarter, compared to last year's quarter due to the rise of the Delta variant, although online remains strong. Sales growth in Mainland China was somewhat slower due to COVID restrictions during July and August and the pace of online sales growth slowed following the successful 6-18 programs last quarter, and in anticipation of the 11.11 Shopping Festival. As we've mentioned before, these key shopping moments have created some additional seasonality in our business in this region. More than half of our brands, and virtually all channels rose double-digit in Mainland China. Hong Kong and Macau were bright spots this quarter. They benefited from strong new product launches from La Mer and Jo Malone and successful marketing campaigns from several other brands. From a category perspective, net sales growth in fragrance jumped nearly 50%. Virtually every brand that participates in the category contributed to growth with exceptional double-digit increases from Tom Ford Beauty, Jo Malone London, and La LeBeau. Perfumes and colognes led the category growth and bath, body, and home fragrances continued to perform well. Net sales in makeup rose 18% as markets in the Americas and Europe began to recover from COVID shutdowns. We are encouraged by the sequential improvement in makeup versus pre-COVID levels. However, makeup sales in the quarter were still 19% below two years ago. Nonetheless, Estee Lauder foundations continued to resonate strongly with consumers, and MAC leaned into the makeup recovery with a number of fun and compelling campaigns. Skin care sales remained strong during the quarter. Organic net sales grew 12% and the inclusion of sales from DECIEM added 6 percentage points to reported growth. Nearly all of our skincare brands contributed to growth, although Estee Lauder had a tough comparison with the prior year launch of its improved Advanced Night Repair serum. Our hair care net sales rose 8% as traffic in salons and stores in the U.S. and Europe began to return. Both Aveda and Bumble and bumble saw growth in hair products as well as continued strength from innovation. Our gross margin declined 100 basis points compared to the first quarter last year. The positive impacts from strategic pricing and currency were more than offset by higher obsolescence costs for both basic and holiday product sets and the inclusion of Visium. Operating expenses decreased 240 basis points as a percent of sales. Our strong sales growth was partly due to earlier orders from some North American retailers concerned about logistics constraints and costs related to these sales are expected to be incurred in our second quarter. We do continue to manage costs with agility, realizing savings from our cost initiatives while also investing to support a continued brick-and-mortar recovery, as well as our strategic initiatives. Our operating income rose 32% to $941 million, and our operating margin rose 140 basis points to 21.4% in the quarter. Diluted EPS of $1.89 increased 31% compared to the prior year. During the quarter, we used $81 million in net cash flows from operating activities, which was below the prior year. This reflects a more normalized first quarter where we typically have seasonally higher working capital needs. We invested $205 million in capital expenditures as we ramped up our investment to build the new manufacturing facility in Japan, and we returned $749 million in cash to stockholders through both share repurchases and dividends. We also announced this morning an increase in our quarterly dividend. Now let's turn to our outlook. We are encouraged by the green shoots we are seeing around the world even in the context of an environment of increased volatility. Our strong performance reflects our ability to navigate through the volatility while leveraging our multiple engines of growth. At the same time, we are mindful that recovery is tenuous and likely to be uneven. Nevertheless, we are cautiously optimistic in our assumptions for fiscal 2022 remain consistent. We continue to expect an emerging Renaissance in the makeup category as restrictions are safely lifted and social occasions increase. We welcome the resumption of some travel in the Americas and EMEA in the first quarter. As intercontinental restrictions are lifted, we expect international passenger traffic to build toward the end of the fiscal year. We began taking strategic pricing actions in July, and overall, pricing is expected to add at least 3 points of growth, helping to offset inflationary pressures. On the cost side, we plan to continue to increase advertising to support our brands and drive traffic in all channels. Selling costs are expected to rise to support the reopening of brick-and-mortar retail. We also continue to invest behind key strategic capabilities like data analytics, innovation, technology, and sustainability initiatives. As you are all aware, global supply chains are being strained by COVID and its related effects in some markets, resulting in port congestion, higher fuel costs, and labor shortages at a time when demand for goods is rising. This is causing us to experience inflation in freight and procurement, which we expect to impact our cost of goods and operating expenses beginning next quarter. Based on what we see through October, the expected benefit of pricing combined with good cost discipline elsewhere are enabling us to maintain our expectations for the year. For the full fiscal year, organic net sales are forecasted to grow 9% to 12%. Based on rates of 1.163 for the euro, 1.351 for the pound, and 6.471 for the Chinese yuan, we expect currency translation to be negligible for the full fiscal year. This range excludes approximately 3 points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM. Diluted EPS is expected to range between 723 and 738 before restructuring and other charges. This includes approximately $0.04 of accretion from currency translation and $0.03 accretion from DECIEM. In constant currency, we expect EPS to rise 11% to 14%. At this time we expect organic sales for our second quarter to rise 8% to 10%. The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about 3 points to reported growth, and currency is forecasted to be neutral. Operating expenses are expected to rise in the second quarter as we support holiday activations and the continued recovery of brick-and-mortar retail around the world. Additionally, the prior-year quarter included some benefit from government subsidies which are not anticipated in the current year quarter. We expect second-quarter EPS of $2.51 to $2.61. Both currency and the inclusion of DECIEM are expected to be immaterial to EPS. Notably, our EPS forecast also reflects a 23% tax rate compared to 15.9% in the prior year when we benefited from certain one-time line up. In closing, we are pleased with the terrific start to the year and are proud of the continued efforts of our global team. We remain confident in our corporate strategy with its multiple growth engines to drive sustainable, profitable growth.

Great. Thank you. Good morning. I guess my question is around the supply chain, Tracey for you, if you could talk a little bit more about your ability to get product to the end markets in a timely manner and into holiday. And are you seeing any major shifts in product launches? And then maybe if you can share, if you think about the higher OpEx, how you're balancing air freight versus ocean freight currently? Thank you so much.

We are experiencing some supply chain impacts, including airfreight issues and delays, but overall, we are well-prepared for the holiday season. We anticipated some supply chain challenges earlier this year, which led us to order and produce products ahead of time and secure many of our gift sets early, positioning us favorably for Q2. We are dealing with some inflation in transport costs, but we are managing it effectively. As a luxury company, we have pricing power, which allows us to offset some of the cost inflation through the pricing adjustments we've implemented this year.

Great. Thank you so much. Good morning. I'm really curious to hear a little bit more about MAC. I would certainly have expected it to be key in the beginning of this makeup resurgence. But I was curious what you could tell us in terms of progress on brick-and-mortar footprint in North America and EMEA, how that interacts with the online presence, and how you think about the profit model for that brand or maybe from the makeup category going forward? We're 1 quarter into the beginning of a recovery, but I recognize that looking at operating margins the division isn't really fair game yet. But interested to hear how you think that can evolve over the next, whatever the appropriate time frame, in the 12 plus months or so.

Hi, Lauren. So you began by asking what specifically your question is about.

About MAC.

Oh, MAC, yeah. No, as we announced last year in our post COVID acceleration program, we took the opportunity last year to close some stores, and additional stores will close this year. This includes not just freestanding locations, but also some counters that MAC has removed. We were encouraged at the end of last year and throughout the first quarter by MAC's performance in both the Americas, including North America and Latin America, as well as in EMEA. With the return to brick-and-mortar, we observed higher productivity at the remaining stores we had open. We experienced a bit of softness in North America compared to EMEA, as well as a decline in online traffic as consumers returned to physical stores. We believe this will normalize a bit in Q2 and we will see more balance. As we can all imagine, consumers were eager to return to brick-and-mortar stores in areas where restrictions were eased, and people felt more comfortable going out and socializing.

I would like to mention that MAC has had a strong start in the Ulta Target experience, which is promising as we prepare for the holiday season. The brand is performing well online and is one of the beneficiaries of the online service acceleration in both the U.S. and EMEA. Overall, MAC is making significant progress, as expected, in line with the general acceleration of makeup consumption among consumers.

Yeah. Hi, good morning, everyone. I got a question on consumer behavior. Just on online, what you're seeing there in terms of stickiness retention? Obviously, that's an important channel from a profitability standpoint and consumer engagement. So I just wanted to understand that. And then also, Fabrizio, you think about what happened during the pandemic as consumers are migrating to well-known brands, exploration came down a bit, but I suspect that that's starting to happen now as consumers are getting back out and exploring different brands. I just wanted to get your perspective on that dynamic, if that's what you're seeing, and how does Estee better prepare in the future to deal with all of these upstart brands that are starting up on social media? Thank you.

I believe there are two questions. Firstly, regarding online performance, we have witnessed significant growth over the past two years, effectively doubling our results, which indicates a strong acceleration. Although the growth in online sales slowed temporarily with the reopening of brick-and-mortar stores, we remain encouraged by the ongoing growth we see. Regarding consumer behavior, during COVID, consumers who were already shopping online, particularly younger individuals, increased their online activities. Additionally, many new consumers, including older adults, have started shopping online during the pandemic and have continued to do so, demonstrating the resilience of online shopping even as physical stores have reopened. However, we do expect a rebalancing between the two channels. I remain optimistic about the future of online sales. We are seeing growth across various online channels, including third-party platforms, our own brand site, retail accounts, and pure-play sites, with varying levels of strength across different regions. The overall trend of online growth is quite promising, and we anticipate this to persist even as brick-and-mortar stores recover fully. Currently, online sales constitute 28% of our business, and we expect this figure to rise gradually over time. As for your second question on consumer behaviors in Asia, could you please repeat it?

Yes, it was around exploration, it died down during the pandemic. Are you seeing consumers explore new brands again, and what is doing to try to make sure that doesn't become too much of a risk going forward?

I think the exploration of newness in the world of beauty will continue, will never stop. And personally, I don't have any data points that suggest it was dependent on COVID. The exploration is not only by our new brands, but this exploration is about the newness of the existing brands. In fact, our percentage of newness continues to be very, very high and our innovation program continues to be super exciting. We are continued to be in the 30% of new products per year, which is extraordinary and has been a huge progress in the last years. So we continue to see consumers be interested in innovation, and we continue to make our innovation program one of the best drivers of growth globally.

Hey, guys, good morning.

Good morning.

Good morning.

So just a question of guidance. Clearly, you came in better than expected in terms of fiscal Q1, you mentioned some green shoots, obviously, a makeup recovery, America's recovery, Asia's from Southwest from some of the government lockdowns, inter-quarter, but it sounded like that's getting better. And so I'm just trying to understand the unchanged local currency top-line guidance for the year. Is there something specific that's giving you more caution as you look at the balance for the year? Is it more just some conservatism, given it's early in the year? How do you think about that relative to the Q1 top-line delivery and some green shoots? And maybe specifically also, you can touch on the 11.11 Shopping Festival in China and what you're seeing there in terms of initial signs heading into that festival. Thanks.

We are encouraged by our Q1 performance. However, it's important to note that we are still at the quarter's end. We had some early shipments in the quarter that were actually part of the second quarter, contributing to some of the growth we reported. Looking ahead to the rest of the year, while we see positive signs, there is still considerable market volatility. Some markets were unexpectedly shut down in the first quarter, and we continue to manage through the pandemic. When examining Q2 on a two-year stacked basis compared to pre-pandemic levels, the results appear strong. We also see the continuing impact of seasonality related to the 11-11 Shopping Festival in our Q1 results, which is reflected in the guidance we've provided for Q2. We believe our guidance for the year remains very robust, with the only notable change being our outlook on currency, which is slightly less favorable. In fact, our reported EPS guidance on a constant currency basis has significantly improved. We are recognizing early positive indicators and expressing confidence in the guidance we are providing, particularly from an EPS perspective, despite the challenges we are facing in transportation and related areas. This also informs our decisions on where to invest and the pricing actions we are implementing.

Hey, thanks. First is just a cleanup. Apologies if I missed it, but were the early holiday sales in North America that you've mentioned in the first quarter to any particular brand or product category? That'd be helpful. And what I really want to ask you about was picking up on something there I mentioned, but I'm not sure you addressed Tracey, was just the relative softness in China and Asia that you experienced in the quarter against the curtailed mobility backdrop versus the improvement that you saw in September. and what I hear is enthusiasm entering December at around the 11.11 Holiday. Maybe you could just expand on a little bit on how trends evolve through the September quarter and then what you're expecting in the Asia-Pacific region, as we go through fiscal 2Q? Thank you.

In terms of early shipments, our larger brands accounted for most of the sales volume, but we saw activity across all areas. Both we and our retailers made sure to have our holiday programs and essential products available in stores, given the anticipated transport challenges for this holiday season, and we feel positive about that. In the Asia-Pacific region, including China, we did experience some intermittent shutdowns, which affected traffic to Hainan during July and August, extending slightly into September. However, as we noted in our prepared remarks, Hainan saw a significant uptick once travel restrictions were lifted, which is encouraging. We remain optimistic about China's performance for the remainder of the year, both in Mainland China and among Chinese consumers, regardless of their shopping locations.

Hi, good morning. Thank you for taking my question. This is Grace. I'm wondering if you could talk a little bit about the strength that you're seeing in fragrance and just touch on the sustainability there. Is anything assumed in your guidance for fragrance and then also on a similar vein, if there's anything assumed for the makeup recovery in the second half in guidance. Thank you.

Yeah. No, we see obviously a very strong fragrance momentum and we see great growth in every single region. So it's good. We see particularly strong fragrance traction in the high-end fragrances, in what we call the luxury artisan of our portfolio. This is really a stand, so brands like Jo Malone, Tom Ford, Le Labo, Kilian, Frederic Malle. And we believe this will continue. This is a trend we have identified some years ago and we have focused the growth of our portfolio and our innovation on this kind of highly sophisticated fragrance experiences. And while we have seen that during COVID that this trend is accelerated, the consumers are even more interested. The other interesting thing is during COVID, the element of our fragrance brands that were, for example, home, like candles or personal cleansing, or pampering parts of the lineup beyond the fragrance also was accelerating, and this acceleration continues. So the positives that consumers have learned, also the possibility of the pampering in-house element of products that these brands provide, they continue to buy them also after the COVID period. So the entire fragrance brands are strong. The fragrance category is strong. And we expect to have a good holiday season. In this area, we expect continuous growth over time.

Thank you. Good morning and congrats on your results. Can you comment on the cadence of the quarter in Asia-Pacific and how you exited? It seems that you had a hiccup in China consumption towards the end of the quarter. And Tracey, you mentioned that in your prepared remarks, and I think a question, but is the deceleration in the fiscal second quarter a function of normalizing the pull forward or more how conservative you're seeing things happening? And then obviously, you have this seasonality they have been calling for 11.11. So if you can just elaborate more on that, I would appreciate. Thank you.

I mean, we achieved double-digit growth in China this quarter and some very strong double-digits also on a 2 or 3 years stacked basis. So despite the restrictions they were also in July and August. So the Chinese consumer is really strong and we are serving them. We also with a variety of locations, meaning in every channel we see the growth online, we see the growth in brick-and-mortar. We see the growth in high-end and, and our key idea is to serve the Chinese consumers wherever they are, and to serve them in the best possible way. So we manage this with agility. And depending on what is the commercial model that is emerging in China, we focused more on one channel, also depending on the season and by the moment. Also skin care, which I think is a great sign of strength, skin care grew strong double-digit despite the very tough comparison with the previous year. While in our case, we launched the Advanced Night Repair relaunch. So it was a very big innovation in the base period. So brick-and-mortar in China also saw very strong growth, and our business online grew double digits. Despite the fact that in quarter 1, online is a bit normally sandwiched between the 6.18 big event and the 11.11 big event. But despite that, we grew double-digits. And the long term for demand on the market in closing, namely the large and growing in the class with increasing spending per person, all these remain intact. And so the key idea is to be able to focus on the Chinese consumer, in whatever channel they choose to shop in depending on the moment of the year. And that's where we are doing, and that's why we remain very confident for the remaining of the fiscal year.

And Andrea as it relates to the rest of APAC, we are expecting a pickup in the second quarter, so we are not anticipating as many of the restrictions to be in place in the rest of APAC that we saw in Q1.

Great. Thank you. Actually, I want to talk a little bit about some of the new brands, like the Ordinary. And if you could just give a little bit of commentary around things that you've learned since the majority stake that you've taken and how that could potentially be influencing other brands in your portfolio with respect to where you could potentially invest going forward with retailers might your other brands work in that you may have not thought about earlier. Thank you.

DECIEM is an exceptional company, and The Ordinary has achieved significant success. We are working closely with DECIEM's management team to further develop both The Ordinary and DECIEM as a whole, leveraging their incredible capabilities to create new brands for the future. It’s clear that there's great interest in The Ordinary, and the bond between the brand and consumers is remarkable. We have much to learn from this relationship, and we are also able to help implement global commercial strategies to enhance the brand's reach and strengthen consumer connections in various areas such as supply chain and R&D. This collaboration has proven to be very fruitful. Beyond The Ordinary, DECIEM is fostering additional brands and ideas for the future. Our experiences highlight the importance of creative incubation and the development of new brands, which will positively affect our ability to create and grow our portfolio going forward. We plan to capitalize on the strengths we are discovering in this area.

Thanks, and good morning, everyone. I wanted to ask about Hainan growth. I think you had mentioned this one from previous calls in terms of where the growth was coming from, meaning that you weren't necessarily sourcing it from sales in the Mainland. I guess I'm curious if that's still the case and how you think about what has driven the growth, especially as it seems like some of the duty-free operators are paying the duties to deliver product to Mainland customers. So if that's true, how do you think this all plays out in time in terms of having Mainland and Hainan or local duty-free work together?

In China, our most widespread brand is Estee Lauder, which is available in 140 cities and is supported by strong social media presence and brand values. Currently, we see demand in over 700 cities, meaning there are many consumers who can only purchase our products online or via domestic travel. Historically, there has also been international travel. The market is structured in a way that creates a limited connection between Mainland China and Hainan. A significant number of consumers come from Tier 3 and Tier 4 cities, where brick-and-mortar stores are scarce, so Hainan cannot capture this consumer base at the moment. Hainan is primarily a holiday destination, where shopping becomes a pleasurable experience and an opportunity for discovery. The business in China is serving as an excellent platform for trial and is more about gaining new customers rather than cannibalizing existing sales. Customers who try our products are likely to repurchase them either during future travels or in their daily lives in Mainland China. The competitive landscape is intensifying, with many players entering the market, leading to ongoing intense competition. Each channel we operate serves a distinct purpose, and our strategy is to effectively utilize each channel to maximize our reach and service for consumers interested in beauty products in China. Over time, we aim to differentiate the roles of these channels and how consumers will engage with them. Additionally, Hainan had over 80 million visitors in the past year, serving a significant portion of the middle class due to domestic travel; no passport is needed. Currently, around 12% of Chinese consumers are part of this task force, and even when international travel resumes, we anticipate minimal cannibalization since many consumers may not plan to travel internationally. We remain very optimistic about the long-term outlook and our ability to serve consumers through various channels, which is central to our strategy.

Hi. I have two questions. First, regarding the brands and their growth, you mentioned La Mer specifically. Could you clarify how much of La Mer's growth is attributed to China and Travel Retail? Is the brand also experiencing strong growth in the U.S. and Western Europe outside of Travel Retail? For my second question, I know you mentioned that there were only minimal sales in the first quarter from the pipeline sale into Target and Kohl's. Now that we are in November, could you provide some insights on what you are observing there? I'm particularly interested in the percentage of sales from Target and Kohl's that come from makeup versus skincare. I'm curious about the potential impact on your North American business if those two channels gain significant traction. Thank you.

Thanks, Wendy. In terms of La Mer, La Mer is growing in pretty much every market. It's incredibly strong, the brand does a fantastic job of innovating and so we're seeing growth from both new innovation as well as a continued expansion of new consumers with some of the strategies that the brand is deploying. And we see very high loyalty and repeat with La Mer, it is all around even during this pandemic, it has been one of the constants in terms of performance in our portfolio and the La Mer team is just an absolute fantastic team. So the brand is doing incredibly well. As it relates to Kohl's and Target and also within Target and Sephora within Kohl. We have seeded the initial doors. We certainly expect during the upcoming holiday season that we will see increased growth, obviously, in contribution from the distribution that we have, and we're pleased thus far with the partnership. We're seeing more skin care growth than makeup at the moment. But again, I expect that we will certainly with some of the strong gift programs that our makeup brands have, we expect that we'll see more makeup growth in the second quarter.

I just wanted to add that our North America growth discourse, which has been extraordinary, is the result of manufacturers. It's definitely not yet the impact of Ulta, Target, or Sephora, or Kohl's. That was just at the beginning and only in the last months of the quarter. So it's the result of many other very positive signs. Also, we have been getting shares with categories during the quarter in Clinique, in MAC, in La Mer, in Bobbi, in Tom Ford, in Jo Malone, so it's a very broad growth across. We are really ready with our innovation with the strong marketing programs. We had anticipated the comeback for makeup. We have strengthened our program in what we call the Makeup Renaissance in anticipation on the return to back-to-school or back to work. And we had amazing programs so that we have had the obviously the ordinary, which is the number four brand in a skincare in prestige U.S. to our portfolio. So it's a combination of factors of improvement of the strategy and improvement of the execution in our North America organization. So it's a fulfilled quarter, and we do expect the Ulta Target and Sephora to contribute more in the next quarters, or was not the key contributing factor in quarter one.

I think this quarter really represents the diversification that we have within the business that we've talked about. And certainly the North America performance to Fabrizio's point represents that as well.