Strong Fiscal 2022 Third Quarter Results Amid Market Headwinds

Press Release, May 3, 2022

Net Sales Increased 10% and Diluted EPS Increased 24% to $1.53

Organic Net Sales¹ Grew 9% and Adjusted Diluted EPS Rose 18% in Constant Currency

Western Markets and Brick-and-Mortar Outperformed

NEW YORK--(BUSINESS WIRE)-- The Estée Lauder Companies Inc. (NYSE: EL) today reported net sales of $4.25 billion for its third quarter ended March 31, 2022, an increase of 10% from $3.86 billion in the prior-year period. Organic net sales increased 9%. Net sales grew in every product category, largely reflecting continued recovery in brick-and-mortar retail stores, driven by double-digit growth in The Americas and Europe, the Middle East & Africa (“EMEA”) regions, as well as growth in global online². The Company delivered strong sales growth in the context of increased COVID-related restrictions in China beginning mid-March 2022. These temporary restrictions reduced consumer traffic and travel as well as limited the Company’s capacity to ship orders from its distribution facilities.

The Company reported net earnings³ of $0.56 billion, compared with net earnings³ of $0.46 billion in the prior-year period. Diluted net earnings per common share was $1.53, compared with $1.24 reported in the prior-year period. Excluding restructuring and other charges and adjustments as detailed on page 3, adjusted diluted earnings per common share was $1.90, an 18% increase in constant currency.

Fabrizio Freda, President and Chief Executive Officer said, “We delivered strong sales growth and better-than-expected profitability in the third quarter of fiscal 2022 in the face of accelerated headwinds as the quarter evolved, including COVID restrictions in the Asia/Pacific region. Every category grew organically, led by Fragrance’s outstanding performance globally and the makeup renaissance in western markets. Eleven brands contributed double-digit organic sales growth and further demonstrated our diversification, empowered by our multiple engines of growth strategy. Consumer demand remained robust even in this more inflationary environment.

“The Americas and EMEA regions outperformed our overall sales growth. We capitalized on re-opening to deliver double-digit organic sales growth, leveraging our high-touch services, breakthrough innovation, and desirable hero franchises. In the Asia/Pacific region, several markets prospered, led by Japan while our China results were pressured by COVID restrictions.”

Freda concluded, “Given our outstanding performance year-to-date, we expect to deliver a record year in fiscal 2022 despite temporary COVID-driven headwinds that reduced our fourth quarter outlook. We are confident that our business in China will rebound when COVID abates and accelerate our momentum.”

COVID-19 Business Update
The COVID-19 pandemic continued to disrupt the Company’s operating environment globally, primarily impacting retail traffic, travel, supply chain, inventory levels and other logistics during the fiscal 2022 third quarter. The resurgence of COVID-19 cases in many Chinese provinces led to restrictions late in the fiscal 2022 third quarter to prevent further spread of the virus. Consequently, retail traffic, travel, and distribution capabilities were temporarily curtailed. The Company’s distribution facilities in Shanghai operated with limited capacity to fulfill brick-and-mortar and online orders beginning in mid-March 2022.

Fiscal 2022 Third Quarter Results
Organic net sales growth represents net sales growth excluding returns associated with restructuring and other activities; non-comparable impacts of acquisitions, divestitures and brand closures (notably the acquisition of the majority interest in DECIEM and closure of BECCA); as well as the impacts from currency. Category and region commentary reflect organic performance.

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Adjusted diluted earnings per common share excludes restructuring and other charges and adjustments as detailed in the following table.

Net sales in the Company’s product categories and regions outside of the United States were unfavorably impacted by a stronger U.S. dollar in relation to most currencies. Operating income was favorably impacted by the stronger U.S. dollar.

Total reported operating income was $0.74 billion, a 20% increase from $0.62 billion in the prior-year period. Adjusted operating income in constant currency increased 16%, primarily reflecting higher net sales and excluding the following items:

• Fiscal 2022 third quarter: $216 million of other intangible asset impairments related to Dr. Jart+ and GLAMGLOW and $23 million of restructuring and other charges, partially offset by $60 million of income related to the change in fair value of acquisition-related stock options.
• Fiscal 2021 third quarter: $33 million of asset impairments related to some of the Company’s freestanding stores and $145 million of restructuring and other charges.
• The unfavorable impact of currency translation of $2 million.

Skin Care

• Skin care net sales grew in The Americas and EMEA regions, led by strong double-digit sales growth from La Mer. This was partially offset by a decline in the Asia/Pacific region, which was impacted by transitory logistics constraints in China.
• The non-comparable impacts of net sales related to acquisitions, divestitures and brand closures contributed approximately 4 percentage points to net sales growth.
• Growth from La Mer reflected increases in hero products, including Crème de la Mer and the Genaissance de la Mer line of products, the recent launch of The Hydrating Infused Emulsion and initial shipments of the new upgraded The Treatment Lotion as well as targeted expanded consumer reach.
• Estée Lauder skin care net sales declined, reflecting challenges towards the end of the quarter due to logistics headwinds in Greater China, partially offset by the launches of Revitalizing Supreme+ and Micro Essence.
• Skin care operating income decreased, reflecting the current year impact of other intangible asset impairments related to Dr.Jart+ and GLAMGLOW of approximately $216 million.

Makeup

• Makeup net sales increased, reflecting the continued progression towards recovery in western markets, increased usage occasions and easier comparisons to the prior year. The growth was led by M·A·C, Estée Lauder and Clinique.
• The non-comparable impacts of net sales related to acquisitions, divestitures and brand closures reduced net sales growth by 1 percentage point.
• M·A·C’s double-digit net sales growth was driven by hero products, such as Studio Fix, the recent launches of MACStack mascara and LustreGlass Sheer-Shine Lipstick, and compelling social media campaigns to drive the makeup renaissance.
• Double-digit net sales growth from Estée Lauder was fueled by the Double Wear product line, including the recent launch of Double Wear Sheer Long-Wear Makeup.
• Strong double-digit net sales growth from Clinique reflected exceptional performance in the lip, concealer and eye subcategories as well as hero product Even Better Makeup.
• Makeup operating income increased, primarily reflecting higher net sales. Additionally, the prior year was adversely impacted by long-lived asset impairments of $24 million.

Fragrance

• Net sales grew in every region and across virtually all brands that sell fragrances, driven by continued resilience in luxury fragrance, the opening of more brick-and-mortar retail and the beginning of travel recovery in western markets.
• Jo Malone London net sales grew strong double digits primarily driven by strength in colognes, particularly in hero franchises, home and bath & body. The launches of House of Roses and Mediterranean Blossoms also contributed to growth.
• Tom Ford Beauty net sales grew strong double digits, powered by launches, such as Rose De Chine and Rose D’Amalfi, and Costa Azzurra parfum, as well as organic growth in existing hero franchises like Oud Wood and Ombre Leather.
• Net sales from Le Labo rose strong double digits, primarily reflecting the recovery of brick-and-mortar, improved retail traffic, and targeted expanded consumer reach. Growth was driven by hero fragrances, such as Santal 33 as well as the successful launch of Thé Matcha 26.
• Estée Lauder fragrance net sales also grew strong double digits primarily driven by the recently launched Luxury Fragrance Collection and strength from Beautiful Magnolia Intense.
• Fragrance operating income increased, driven primarily by higher net sales partly offset by strategic investments to support brick-and-mortar reopening and holiday.

Hair Care

• Hair care net sales rose in every region, reflecting increases from both Aveda and Bumble and bumble as brick-and-mortar locations recover and online continued to thrive.
• Aveda’s double-digit growth reflected the continued success of its hero franchises, including Invati, Nutriplenish and Botanical Repair, as well as the relaunch of Full Spectrum Semi-Permanent Treatment Hair Color and the launch of Botanical Repair Strengthening Overnight Serum.
• Net sales increased at Bumble and bumble, primarily reflecting the launches of Thickening Plumping Mask and Thickening Go Big Plumping Treatment. Targeted expanded consumer reach also contributed to growth.
• Hair care operating results decreased, reflecting strategic investments to support the brick-and-mortar recovery, partially offset by higher net sales.

The Americas

• Net sales grew strong double digits in the United States, Canada and Latin America as brick-and-mortar retail traffic continued to recover. Net sales increased in every product category and in most major distribution channels.
• The non-comparable impacts of net sales related to acquisitions, divestitures and brand closures contributed approximately 3 percentage points to net sales growth.
• Brick-and-mortar sales increased strong double digits, benefiting from a year-over-year increase in open retail locations as well as improved traffic.
• In North America, net sales grew in every product category led by makeup, which was disproportionately impacted by the challenges stemming from the COVID-19 pandemic in the prior-year period.
• In Latin America, net sales grew in every category and every market.
• Operating income in The Americas increased, reflecting an increase in the intercompany royalty income related to the growth in our travel business and higher sales, partially offset by the other intangible asset impairment of $11 million relating to GLAMGLOW.

Europe, the Middle East & Africa

• Net sales grew in most markets, led by the United Kingdom. The growth reflects recovery in brick-and-mortar compared to the prior year when retail traffic was negatively impacted by COVID-19. Net sales grew double digits in nearly every product category.
• The non-comparable impacts of net sales related to acquisitions, divestitures and brand closures contributed approximately 1 percentage point to net sales growth.
• Net sales from most emerging markets in the region increased, driven by the brick-and-mortar recovery.
• Following the invasion of Ukraine, the Company suspended all commercial activity in Russia and Ukraine. Consequently, net sales in Russia and Ukraine declined.
• Net sales increased in every product category, led by strong growth in skin care and double-digit growth in fragrance and makeup, partly reflecting the return of social activities and in-store services.
• Global travel retail net sales increased double digits, reflecting continued growth from Asia/Pacific. However, additional travel restrictions late in the third quarter of fiscal 2022 led to reduced travel, particularly to Hainan. Travel retail net sales also grew from Europe, the Middle East & Africa and The Americas.
• Brick-and-mortar sales grew double digits reflecting favorable comparisons to the prior year period when more brick-and-mortar was closed.
• Operating income decreased, primarily driven by an increase in the intercompany royalty expense related to the growth in our travel retail business.

Asia/Pacific

• Net sales declined, primarily driven by Greater China due to reduced retail traffic and limited capacity in the Shanghai distribution facilities in compliance with temporary restrictions to prevent the spread of COVID-19. This was somewhat offset by growth in southeast Asia and Japan.
• The non-comparable impacts of net sales related to acquisitions, divestitures and brand closures contributed approximately 1 percentage point to net sales growth.
• Net sales declines in makeup, reflecting the rise in COVID restrictions, and skin care were only partly offset by net sales growth from fragrance and hair care in the region.
• Net sales declined in brick-and-mortar due to soft traffic in areas most impacted by rising cases of the virus. Strong double-digit online growth partly offset the decline in brick-and-mortar as the Company and many retailers continued to capture consumer demand online.
• Operating income decreased, due entirely to the other intangible asset impairment of $205 million relating to Dr. Jart+.

Nine-Month Results

• For the nine months ended March 31, 2022, the Company reported net sales of $14.18 billion, a 15% increase compared with $12.28 billion in the prior-year period. Organic net sales increased 13%.
• Net earnings⁴ were $2.34 billion, and diluted earnings per share was $6.39. In the prior year nine months, the Company reported net earnings⁴ of $1.85 billion and diluted earnings per share of $5.03.
• During the nine-months ended March 31, 2022, the Company recorded restructuring and other charges, other intangible asset impairments, change in fair value of acquisition-related stock options, and other income related to a gain on a previously held equity investment in Deciem Beauty Group Inc. that, combined, resulted in an unfavorable impact of $201 million ($151 million less the portion attributable to redeemable noncontrolling interest and net of tax), equal to $.41 per diluted share, as detailed on page 16. The prior-year period results include restructuring and other charges, changes in contingent consideration and goodwill, other intangible and long-lived asset impairments that, combined, totaled $303 million ($237 million after tax), equal to $.65 per diluted share.
• Excluding restructuring and other charges and adjustments referred to in the previous bullet, adjusted diluted net earnings per common share for the nine months ended March 31, 2022 was $6.80, and rose 19% in constant currency. For the nine months ended March 31, 2022, the benefit of foreign currency translation on diluted net earnings per common share was $.04.

Cash Flows

• For the nine months ended March 31, 2022, net cash flows provided by operating activities were $1.97 billion, compared with $2.78 billion in the prior-year period, reflecting higher working capital needs to support growth and actions taken to mitigate the global supply chain challenges, as well as higher cash paid for taxes, partially offset by higher earnings before taxes, excluding non-cash items.
• Capital Expenditures increased to $658 million compared to $386 million in the prior-year period, primarily driven by increased investments for a new manufacturing facility in Japan, online capabilities and information technology enhancements as well as investments to support the reopening of the Company’s offices located around the world where COVID cases subsided.
• The Company ended the quarter with $3.84 billion in cash and cash equivalents after returning $2.62 billion cash to stockholders through dividends and share repurchases.

Outlook
The Company is revising its full fiscal year outlook, reflecting both outstanding performance year-to-date and additional headwinds that are impacting the fourth quarter of fiscal 2022, including the COVID-related restrictions in China, that are also affecting its travel retail business, and the impact of the invasion of Ukraine.

With multiple engines of growth across regions, brands, product categories and channels, the Company is well-positioned to continue to drive a gradual acceleration as COVID abates and market dynamics support it. The Company expects to invest in areas to support the acceleration, including advertising, online, research and development and supply chain, to drive growth in areas of opportunity and help nurture emerging trends in the rest of the business.

The full year outlook reflects the following assumptions:

• Global volatility and variability is expected to continue, including inflation, supply chain disruption (including temporary reduced capacity at China distribution facilities), impacts related to current COVID-19 restrictions (primarily in Greater China including store closures, reduced traffic and less travel), and disruptions in Europe related to the invasion in Ukraine. The Company is focused on driving growth in areas of recovery while continuing to manage through this uncertain environment.
• Growth in developed markets in the west and brick-and-mortar retail driven by a continued recovery of the makeup and hair care categories as countries reduce COVID-19 restrictions.
• Targeted new distribution throughout the year to retailers that provide broader consumer reach.
• A continued gradual resumption of international travel in Europe and the Americas.
• Benefit from a nearly full year incremental impact of DECIEM in net sales and operating results.
• Higher transportation and logistics costs are negatively impacting both cost of sales and operating expenses in the remainder of fiscal 2022. The Company expects to mitigate some of the impact to its business and costs through strategic price increases and cost savings in other areas.
• Incremental savings from the Post-COVID Business Acceleration Program and reinvestment in advertising and capabilities.
• Full-year effective tax rate of approximately 21.5%.

The Company is mindful of ongoing risks related to the COVID-19 pandemic as well as risks related to social, economic and political matters, including restructurings and bankruptcies in the retail industry, geopolitical tensions, regulatory developments, global security issues, currency volatility, general economic challenges, including increasing inflationary pressures and supply chain disruptions, and changes in consumer preferences that affect consumer spending in certain countries, channels and travel corridors.

Longer-term, the Company expects to return to its growth targets of 6% to 8% sales growth, 50 basis points of operating margin expansion and double-digit adjusted diluted earnings per share growth in constant currency after a period of normalization as the impacts of the COVID-19 pandemic subside.

Full Year Fiscal 2022

Sales Outlook

• Reported net sales are forecasted to increase between 7% and 9% versus the prior-year period.
• Organic net sales, which excludes returns associated with restructuring and other activities; non-comparable impacts from acquisitions, divestitures and brand closures; as well as the impact from currency, are forecasted to increase between 5% and 7%.

Earnings per Share Outlook

• Reported diluted net earnings per common share are projected to be between $6.54 and $6.70. Excluding restructuring and other charges and adjustments, diluted net earnings per common share are projected to be between $7.05 and $7.15.
  • The Company expects to take charges associated with previously approved restructuring and other activities. For the Post-COVID Business Acceleration Program, the charges are estimated to be between approximately $55 million to $85 million, equal to $.12 to $.18 per diluted common share.
• Adjusted diluted earnings per common share are expected to increase between 8% and 10% on a constant currency basis.
  • Currency exchange rates are volatile and difficult to predict. Using March 31, 2022 spot rates for the fourth quarter of fiscal 2022, currency is expected to be about $.05 accretive to diluted earnings per share.
• The increase in ownership of DECIEM is expected to be $.02 dilutive to diluted earnings per common share.

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Conference Call The Estée Lauder Companies will host a conference call at 9:30 a.m. (ET) today, May 3, 2022 to discuss its results. The dial-in number for the call is 888-294-4716 in the U.S. or 706-902-0101 internationally (conference ID number: 9349743). The call will also be webcast live at http://www.elcompanies.com/investors/events-and-presentations.

Cautionary Note Regarding Forward-Looking Statements
Statements in this press release, in particular those in “Outlook,” as well as remarks by the CEO and other members of management, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions.

Factors that could cause actual results to differ materially from our forward-looking statements include the following:

The Company assumes no responsibility to update forward-looking statements made herein or otherwise.

The Estée Lauder Companies Inc. is one of the world’s leading manufacturers, marketers and sellers of quality skin care, makeup, fragrance and hair care products. The Company’s products are sold in approximately 150 countries and territories under brand names including: Estée Lauder, Aramis, Clinique, Lab Series, Origins, Tommy Hilfiger, M·A·C, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo Malone London, Bumble and bumble, Michael Kors, Darphin Paris, TOM FORD BEAUTY, Smashbox, Ermenegildo Zegna, AERIN, Le Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, KILIAN PARIS, Too Faced, Dr.Jart+, and the DECIEM family of brands, including The Ordinary and NIOD.

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This earnings release includes some non-GAAP financial measures relating to charges associated with restructuring and other activities and relating to organic net sales. Included herein are reconciliations between the non-GAAP financial measures and the most directly comparable GAAP measures for certain consolidated statements of earnings accounts before and after these items. The Company uses certain non-GAAP financial measures, among other financial measures, to evaluate its operating performance, which represent the way the Company conducts and views its business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze operating performance from period to period. In the future, the Company expects to incur charges or make adjustments similar in nature to those presented herein; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While the Company considers the non-GAAP measures useful in analyzing its results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with GAAP.

The Company operates on a global basis, with the majority of its net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect the Company’s results of operations. Therefore, the Company presents certain net sales, operating results and diluted earnings per share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of its underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency information by translating current-period results using prior-year period monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.