Market Overview

The Estée Lauder Companies Achieves Outstanding Fiscal 2019 Third Quarter Results

Share:

Reported Net Sales Increased 11% and Diluted EPS increased to $1.51

Net Sales Increased 12% and Adjusted Diluted EPS Rose 17% in Constant
Currency Before Impact of New Revenue Accounting Standard

Company Raises Full Year Guidance

The
Estée Lauder Companies Inc.
(NYSE:EL) today reported outstanding
financial results for its third quarter ended March 31, 2019. Net sales
of $3.74 billion increased 11% from $3.37 billion in the prior-year
quarter. The Company posted net sales growth in nearly all product
categories and channels. Excluding the negative impact of currency
translation ($146 million, or 4%) and the benefit from the adoption of
the new revenue recognition accounting standard ("ASC 606") ($106
million, or 3%), net sales increased 12%.

Net earnings rose to $555 million compared with $372 million last year.
Diluted net earnings per common share increased to $1.51 compared with
$.99 reported in the prior year. Excluding the negative impact of
currency translation, the benefit from the adoption of ASC 606 and other
items detailed on page 2, adjusted diluted earnings per common share
increased 17%.

Fabrizio Freda, President and Chief Executive Officer, said, "We
delivered terrific performance in our fiscal third quarter, driven by
strategic investments in our best opportunities combined with creativity
and data-driven insights that fueled exciting innovations. These drivers
strengthened loyalty to our brands and hero franchises and attracted new
consumers globally. Our strongest growth engines were the Asia/Pacific
region, the skin care category, our Estée Lauder, La Mer and Tom Ford
Beauty brands, and travel retail and global online channels.

"Our double-digit constant currency net sales growth was ahead of our
long-term goal and we continued gaining share in global prestige beauty.
With savings from our Leading Beauty Forward initiative, we reallocated
resources into targeted advertising, while still growing profit faster
than net sales gains."

Mr. Freda added, "We had anticipated a gradual moderation of growth in
China and travel retail starting in the quarter, which didn't happen,
and that contributed to our overachievement. We continue to see strength
in several of our key engines of growth and, as a result, we are again
raising our net sales and EPS guidance for the year.

"Long term, we are uniquely positioned in one of the most attractive
consumer sectors and are oriented to the fastest growing areas.
Favorable demographic trends make prestige beauty a desirable, growing
industry, and as the best diversified pure play, we are confident in our
ability to lead and to gain global share."

Adjusted diluted earnings per common share excludes restructuring and
other charges, changes in contingent consideration, the net gain on the
liquidation of an investment in a foreign subsidiary, goodwill and other
intangible asset impairments, and provisional charges for the impact of
the U.S. Tax Cuts and Jobs Act ("TCJA") as detailed in the following
table.

             
Reconciliation between GAAP and Non-GAAP
 
Three Months Ended March 31, 2019  

Three Months Ended
March 31

Net Sales Growth   Diluted EPS Growth  

Diluted Earnings Per
Share

(Unaudited)    

Reported
Basis(1)

 

Constant
Currency

 

Reported
Basis(1)

 

Constant
Currency

  2019     2018  
As Reported Results     11 %   15   %   52 %   62 %   $ 1.51     $ .99  
Restructuring and other charges .07 .20
Contingent consideration (.02 ) (.02 )

Gain on liquidation of an investment in a foreign subsidiary,

net

(.15 ) -
Intangible asset impairments .14 -
Transition Tax resulting from the TCJA - .02
Remeasurement of U.S. net deferred tax assets as of the
TCJA enactment date       -       (.02 )
Non-GAAP           15  

%

        40 %   $ 1.55     $ 1.17  
Impact of adoption of ASC 606          

(3

)

%

                (.27 )      
Non-GAAP, excluding impact of adoption of ASC 606         12   %                 1.28        
Impact of foreign currency on earnings per share                         .09        
Non-GAAP, constant currency earnings per share,

excluding the impact of adoption of ASC 606

        17 %   $ 1.37        
     
(1) Represents GAAP
 

Net sales and operating income in the Company's product categories and
regions were unfavorably impacted by a stronger U.S. dollar in relation
to most currencies and benefitted from the adoption of ASC 606.

                 

Results by Product Category

 

                                               
Three Months Ended March 31  
Net Sales   Percent Change  

Operating Income
(Loss)

 

Percent
Change

(Unaudited; $ in millions) 2019     2018  

Reported
Basis

 

Constant
Currency

 

Constant
Currency, excl
ASC 606

  2019     2018    

Reported
Basis

Skin Care $ 1,744 $ 1,447 21 % 25 % 21 % $ 593 $ 441 34 %
Makeup 1,461 1,388 5 10 7 99 119 (17 )
Fragrance 392 382 3 7 5 17 23 (26 )
Hair Care 136 139 (2 ) 1 1 (2 ) 13

>(100

)

Other       13       14   (7 )     -     (7 )       2       2     -    
Subtotal       3,746       3,370   11       15     12         709       598     19    
Returns/charges associated with
restructuring and other activities       (2 )     -   -       -     -         (35 )     (100 )   65    
Total     $ 3,744     $ 3,370   11   %   15 %   12   %   $ 674     $ 498     35   %
 

Total reported operating income was $674 million, a 35% increase from
$498 million in the prior year. Operating income increased 14% excluding
(1) the adoption of ASC 606 that increased operating income by $126
million, (2) restructuring and other charges and adjustments of $26
million compared to $91 million in the prior-year period, (3) goodwill
and other intangible asset impairments related to Smashbox of $52
million, and (4) the unfavorable impact of currency translation of $44
million. The improvement in operating income largely reflected higher
net sales and disciplined expense management throughout the business.

Skin Care

  • The adoption of ASC 606 increased reported net sales growth by $56
    million, or 4%, and increased operating income by $68 million.
    Adjusting for the impact of ASC 606, total net sales in constant
    currency increased 21%.
  • Skin care net sales grew across most geographies, led by Estée Lauder
    and La Mer. Clinique's skin care net sales also grew globally in
    constant currency.
  • The Estée Lauder brand delivered double-digit net sales growth in most
    regions and channels. The increase reflected continued strength in its
    existing product franchises, including Advanced Night Repair,
    Nutritious, Perfectionist, Micro Essence and Revitalizing Supreme. The
    growth also reflected several successful innovations such as Advanced
    Night Repair Eye Supercharged Complex and the launch of Micro Essence
    Skin Activating Treatment Lotion Fresh with Sakura Ferment in Japan.
  • Double-digit growth from La Mer was also broad-based, with net sales
    increasing across most regions and channels, driven by higher net
    sales of existing products, including The Concentrate and The
    Treatment Lotion, as well as increases in the eye subcategory.
  • Excluding the impact of ASC 606, operating income increased sharply,
    reflecting higher net sales, primarily at Estée Lauder and La Mer.

Makeup

  • The adoption of ASC 606 increased reported net sales growth by $41
    million, or 3%, and increased operating income by $45 million.
    Adjusting for the impact of ASC 606, total net sales in constant
    currency increased 7%.
  • Growth in makeup was primarily driven by higher net sales from Tom
    Ford Beauty, Estée Lauder, La Mer and M•A•C. These increases were
    partially offset by lower net sales from Clinique and Smashbox.
  • Net sales from Tom Ford Beauty increased double-digits, primarily
    driven by its lip color and eye shadow franchises.
  • Estée Lauder generated strong growth, driven by success from its
    Double Wear franchise, Futurist Aqua Brilliance foundation and the
    Pure Color line of products, which benefitted from the launch of Pure
    Color Desire.
  • La Mer's strong double-digit growth was largely driven by the recent
    launch of The Luminous Lifting Cushion Foundation as well as targeted
    expanded consumer reach.
  • M•A•C's increase was led by double-digit growth across Asia/Pacific,
    the Middle East, and India. In China, M•A•C benefitted from the
    successful Strike of Kings collection.
  • Makeup operating income declined, reflecting planned investments at
    BECCA and Too Faced to support new and existing products. Lower makeup
    net sales from Smashbox also contributed to the decline, as did $52
    million of goodwill and other intangible asset impairments related to
    Smashbox. This decline was partially offset by increases at M•A•C, Tom
    Ford Beauty, and La Mer, primarily due to higher net sales, as well as
    an increase at Clinique reflecting sales channel mix and a shift of
    advertising and promotion to support skin care launches.

Fragrance

  • The adoption of ASC 606 increased reported net sales growth by $9
    million, or 2%, and increased operating income by $13 million.
    Adjusting for the impact of ASC 606, total net sales in constant
    currency increased 5%.
  • The net sales increase reflected growth from Estée Lauder as well as
    from our luxury fragrances, including Jo Malone London, Tom Ford
    Beauty, Le Labo, and By Kilian. These increases were mostly offset by
    lower net sales from certain of our designer fragrances.
  • Jo Malone London's net sales increase reflected growth in fragrances
    and expanded targeted consumer reach.
  • Increased net sales from Tom Ford Beauty reflected strong growth from
    Private Blend fragrances Oud Wood and Soleil Blanc, as well as
    expanded targeted consumer reach.
  • Le Labo and By Kilian net sales increased primarily due to expanded
    targeted consumer reach and new product launches.
  • Fragrance operating income declined, driven by lower net sales from
    certain of our designer fragrances. This was partially offset by
    higher operating income from Tom Ford Beauty and Estée Lauder due to
    higher net sales.

Hair Care

  • Hair care net sales decreased, primarily reflecting lower net sales
    from Bumble and bumble, primarily in the North America salon channel.
  • Hair care operating income declined, reflecting planned strategic
    advertising investments on hero franchises and digital outreach at
    Aveda and lower net sales at Bumble and bumble.
                 

Results by Geographic Region

 

                                               
Three Months Ended March 31
Net Sales   Percent Change  

Operating Income
(Loss)

Percent
Change

(Unaudited; $ in millions) 2019     2018  

Reported
Basis

 

Constant
Currency

 

Constant
Currency, excl
ASC 606

  2019     2018   Reported Basis
The Americas $ 1,155 $ 1,181 (2 ) % (2 ) % (6 ) % $ (29 ) $ 33

>(100

)

%
Europe, the Middle East & Africa 1,625 1,416 15 22 20 494 386 28
Asia/Pacific       966       773   25       31       27         244       179     36    
Subtotal       3,746       3,370   11       15       12         709       598     19    
Returns/charges associated with
restructuring and other activities       (2 )     -   -       -       -         (35 )     (100 )   65    
Total     $ 3,744     $ 3,370   11   %   15   %   12   %   $ 674     $ 498     35   %
 

The Americas

  • The adoption of ASC 606 increased reported net sales growth by $54
    million, or 4%, and increased operating income by $78 million.
    Adjusting for the impact of ASC 606, total net sales in constant
    currency declined 6%.
  • Total prestige beauty industry retail sales further decelerated in the
    United States during the quarter, particularly in the makeup category.
  • Despite challenges in brick-and-mortar stores, net sales online
    continued to grow across brand.com and retailer.com and we continued
    to change our mix to faster growing channels.
  • Net sales in key countries in Latin America grew in constant currency
    including Brazil and Mexico. This growth was offset by declines in
    Chile and Venezuela.
  • Excluding the benefit from ASC 606, operating income in The Americas
    declined, primarily reflecting lower net sales, the goodwill and other
    intangible asset impairments related to Smashbox and strategic
    investments in technology and capabilities in select corporate
    functions partially offset by disciplined expense management.

Europe, the Middle East & Africa

  • The adoption of ASC 606 increased reported net sales growth by $21
    million, or 2%, and increased operating income by $19 million. The
    unfavorable impact of foreign currency translation reduced reported
    net sales growth by 7%. Adjusting for the impact of ASC 606, total net
    sales in constant currency increased 20%.
  • The Company generated strong net sales growth in the region, both on a
    reported basis and in constant currency, primarily due to strong
    double-digit net sales growth from the travel retail business. Net
    sales in India, Russia and Italy also grew in constant currency. This
    growth was partially offset by lower net sales in certain Western
    European markets and slightly lower net sales in the United Kingdom.
  • The emerging markets in the region were negatively impacted by foreign
    currency translation. Excluding this impact, the net sales in a
    majority of those markets reflected strong growth. The growth in India
    was primarily driven by M•A•C while growth in Russia was due to
    increases at Estée Lauder and La Mer.
  • In travel retail, strong double-digit net sales growth was broad-based
    across brands, with more than half of our top-10 brands in the channel
    growing double-digit, led by Tom Ford Beauty, Estée Lauder, Origins,
    M•A•C, and La Mer. Growth was also realized across many geographies
    and reflected increases in international passenger traffic, improved
    conversion, successful innovation and expanded targeted consumer reach.
  • Net sales performance in the United Kingdom reflected reduced consumer
    confidence ahead of Brexit and lower traffic across brick-and-mortar
    stores, including from department store closures, that was partially
    offset by higher online net sales.
  • Operating income increased, primarily due to strong double-digit
    growth from the travel retail business and, to a lesser extent, many
    countries throughout the region. This was partially offset by lower
    results in the United Kingdom where prestige beauty decelerated due to
    a soft retail environment in anticipation of Brexit.

Asia/Pacific

  • The adoption of ASC 606 increased reported net sales growth by $31
    million, or 4%, and increased operating income by $29 million. The
    unfavorable impact of foreign currency translation reduced reported
    net sales by 6%. Adjusting for the impact of ASC 606, total net sales
    in constant currency increased 27%.
  • The Company delivered another quarter of strong double-digit net sales
    increases in Asia/Pacific, both on a reported basis and in constant
    currency. The growth was broad-based, with two-thirds of the markets
    in the region growing double digits.
  • Hong Kong, Japan and the emerging markets in Southeast Asia continued
    to deliver strong growth, and net sales in China and Korea accelerated.
  • The Company generated double-digit net sales growth in virtually every
    major product category and channel.
  • Operating income increased, primarily due to higher net sales.

Nine-Month Results

  • For the nine months ended March 31, 2019, the Company reported net
    sales of $11.27 billion, a 9% increase compared with $10.39 billion in
    the prior-year period.
  • Net earnings were $1.63 billion, and diluted earnings per share was
    $4.39. In the prior-year nine months, the Company reported net
    earnings of $922 million and diluted earnings per share of $2.45.
  • Adjusting for restructuring and other charges and adjustments, and
    excluding the impact of currency translation and the adoption of ASC
    606 as detailed in the table on page 16, net sales increased 12% and
    diluted earnings per share rose 22%.

Cash Flows from Operating Activities

  • For the nine months ended March 31, 2019, net cash flows provided by
    operating activities were $1.76 billion, compared with $1.92 billion
    in the prior year.
  • The decline primarily reflected higher international inventory levels
    to support our growth and timing of payables and receivables that was
    mostly offset by an increase in earnings before taxes.

Outlook for Fiscal 2019 Full Year

The Company continues to see strong consumer demand for its high-quality
products and for the fiscal year expects to grow significantly ahead of
the industry and to continue building global share. Global prestige
beauty is expected to grow approximately 7% during the fiscal year.
However, the Company is mindful of risks related to social and political
issues, including geopolitical tensions, regulatory matters, global
security issues, currency volatility and economic challenges that could
affect consumer spending in certain countries and travel corridors.

Given this environment, the Company has reflected the following risks in
its outlook:

  • Continued softness of brick & mortar retail in the United States and
    United Kingdom is impacting overall prestige beauty growth, especially
    in the makeup category. The Company plans to invest further in the
    U.S. in the fourth quarter of fiscal 2019 to improve growth.
  • Some costs associated with the anticipated Brexit in the United
    Kingdom.
  • Continuation of tariffs in China and the gradual moderation of net
    sales growth in China and Travel Retail from recent levels. The
    Company has not experienced this moderation to date and continues to
    be optimistic about the strength of long-term growth in those areas.

Full Year Fiscal 2019

Sales Outlook

  • Reported net sales are forecasted to increase between 7% and 8% versus
    the prior-year period, which includes a 3% impact from currency
    translation and no impact from the adoption of ASC 606. Excluding
    these items, net sales are forecasted to grow between 10% and 11%,
    above the Company's long-term growth goal of 6% to 8%.

Earnings per Share Outlook

  • Reported diluted net earnings per common share are projected to be
    between $4.72 and $4.79. Excluding restructuring and other charges and
    adjustments, diluted net earnings per common share are projected to be
    between $5.15 and $5.19.
  • The adoption of ASC 606 is expected to increase diluted net earnings
    per common share by approximately $.06.
  • Currency exchange rates are volatile and uncertain. Using the March
    31, 2019 spot rate for the fourth quarter of fiscal 2019, the negative
    currency impact equates to about $.22 of diluted earnings per common
    share.
  • On a constant currency basis, before restructuring and other charges
    and adjustments, as well as the impact of ASC 606, diluted earnings
    per common share are expected to increase between 18% and 19%. This
    growth reflects higher investments during the second half of the year
    behind strong product innovation programs for some of our largest
    brands and to build capabilities for long-term growth.
  • The Company expects to take charges associated with previously
    approved restructuring and other activities relating to Leading Beauty
    Forward in fiscal 2019 of approximately $160 million to $175 million,
    equal to $.35 to $.38 per common share.
  • For the full fiscal year, the Company expects the global effective tax
    rate to be approximately 22%, before charges associated with the
    restructuring and other charges and adjustments.
             
Reconciliation between GAAP and non-GAAP
                               
Year Ending June 30, 2019 (F)   Twelve Months June 30
Net Sales Growth   Diluted EPS Growth   Diluted Earnings Per Share
(Unaudited)

Reported
Basis

 

Constant
Currency

 

Reported Basis

 

Constant
Currency

  2019 (F)   2018

Forecast / actual results including restructuring

and other charges and adjustments

7%-8% (1) 10%-11% 60%-62%

(1)

68%-70% $4.72-$4.79 (1) $ 2.95 (1)

Non-GAAP

Restructuring and other charges .35 - .38 .51
Contingent Consideration

(.04

)

(.09

)

Gain on liquidation of an investment in a foreign subsidiary,

net

(.15

)

-
Intangible Asset Impairments .23 -
TCJA Impacts                         .01       1.14  
Non-GAAP               14%-15%         $5.15-$5.19     $ 4.51  
Impact of adoption of ASC 606     -     -            

(.06

)

       

Non-GAAP, excluding impact of adoption of

ASC 606

    7%-8%         13%-14%         $5.09-$5.13     $ 4.51  
Impact of foreign currency on earnings per share                        

.22

         

Forecasted constant currency net sales growth

and earnings per share

        10%-11%         18%-19%  

$5.31-$5.35

    $ 4.51  
     
(1) Represents GAAP
(F) Represents forecast
 

Conference Call The Estée Lauder
Companies will host a conference call at 9:30 a.m. (ET) today, May 1,
2019 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: 6869966). 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 for
Fiscal 2019 Full Year," 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, 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:

(1) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses;

(2) the Company's ability to develop, produce and market new products on
which future operating results may depend and to successfully address
challenges in the Company's business;

(3) consolidations, restructurings, bankruptcies and reorganizations in
the retail industry causing a decrease in the number of stores that sell
the Company's products, an increase in the ownership concentration
within the retail industry, ownership of retailers by the Company's
competitors or ownership of competitors by the Company's customers that
are retailers and our inability to collect receivables;

(4) destocking and tighter working capital management by retailers;

(5) the success, or changes in timing or scope, of new product launches
and the success, or changes in the timing or the scope, of advertising,
sampling and merchandising programs;

(6) shifts in the preferences of consumers as to where and how they shop;

(7) social, political and economic risks to the Company's foreign or
domestic manufacturing, distribution and retail operations, including
changes in foreign investment and trade policies and regulations of the
host countries and of the United States;

(8) changes in the laws, regulations and policies (including the
interpretations and enforcement thereof) that affect, or will affect,
the Company's business, including those relating to its products or
distribution networks, changes in accounting standards, tax laws and
regulations, environmental or climate change laws, regulations or
accords, trade rules and customs regulations, and the outcome and
expense of legal or regulatory proceedings, and any action the Company
may take as a result;

(9) foreign currency fluctuations affecting the Company's results of
operations and the value of its foreign assets, the relative prices at
which the Company and its foreign competitors sell products in the same
markets and the Company's operating and manufacturing costs outside of
the United States;

(10) changes in global or local conditions, including those due to the
volatility in the global credit and equity markets, natural or man-made
disasters, real or perceived epidemics, or energy costs, that could
affect consumer purchasing, the willingness or ability of consumers to
travel and/or purchase the Company's products while traveling, the
financial strength of the Company's customers, suppliers or other
contract counterparties, the Company's operations, the cost and
availability of capital which the Company may need for new equipment,
facilities or acquisitions, the returns that the Company is able to
generate on its pension assets and the resulting impact on funding
obligations, the cost and availability of raw materials and the
assumptions underlying the Company's critical accounting estimates;

(11) shipment delays, commodity pricing, depletion of inventory and
increased production costs resulting from disruptions of operations at
any of the facilities that manufacture the Company's products or at the
Company's distribution or inventory centers, including disruptions that
may be caused by the implementation of information technology
initiatives, or by restructurings;

(12) real estate rates and availability, which may affect the Company's
ability to increase or maintain the number of retail locations at which
the Company sells its products and the costs associated with the
Company's other facilities;

(13) changes in product mix to products which are less profitable;

(14) the Company's ability to acquire, develop or implement new
information and distribution technologies and initiatives on a timely
basis and within the Company's cost estimates and the Company's ability
to maintain continuous operations of such systems and the security of
data and other information that may be stored in such systems or other
systems or media;

(15) the Company's ability to capitalize on opportunities for improved
efficiency, such as publicly-announced strategies and restructuring and
cost-savings initiatives, and to integrate acquired businesses and
realize value therefrom;

(16) consequences attributable to local or international conflicts
around the world, as well as from any terrorist action, retaliation and
the threat of further action or retaliation;

(17) the timing and impact of acquisitions, investments and
divestitures; and

(18) additional factors as described in the Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form
10-K for the fiscal year ended June 30, 2018.

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 and marketers of quality skin care, makeup, fragrance and
hair care products. The Company's products are sold in over 150
countries and territories under brand names including: Estée Lauder,
Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy Hilfiger,
M•A•C, Kiton, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo
Malone London, Bumble and bumble, Michael Kors, Darphin, Tom Ford,
Smashbox, Ermenegildo Zegna, AERIN, Tory Burch, RODIN olio lusso, Le
Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, By Kilian, BECCA and
Too Faced.

ELC-F

ELC-E

             
CONSOLIDATED STATEMENTS OF EARNINGS
                                       

(Unaudited; $ in millions, except per share data
and
percentages)

Three Months Ended
March 31

 

Percent
Change

Nine Months Ended
March 31

 

Percent
Change

2019     2018         2019     2018        
                                             
Net Sales (A)     $ 3,744       $ 3,370       11   % $ 11,273       $ 10,388       9   %
Cost of sales (A)       819         683       20   %   2,552         2,147       19   %
Gross Profit       2,925         2,687       9   %   8,721         8,241       6   %
Gross Margin 78.1 %   79.7 % 77.4 % 79.3 %
Operating expenses:
Selling, general and administrative (B) 2,170 2,092 4 % 6,435 6,266 3 %
Restructuring and other charges (A) 29 97 (70 ) % 99 198 (50 ) %
Goodwill impairment (C) 48 - 100 % 68 - 100 %
Impairment of other intangible assets (C)       4         -       100   %   22         -       100   %
        2,251         2,189       3   %   6,624         6,464       2   %
Operating Expense Margin       60.1   %     65.0   %         58.8   %     62.2   %      
Operating Income       674         498       35   %   2,097         1,777       18   %
Operating Income Margin 18.0 % 14.8 % 18.6 % 17.1 %
Interest expense 32 33 (3 ) % 101 96 5 %
Interest income and investment income, net 15 16 (6 ) % 42 40 5 %
Other components of net periodic benefit cost 1 1 - % 1 2 (50 ) %
Other income, net (D)       71         -       100   %   71         -       100   %
Earnings before Income Taxes       727         480       51   %   2,108         1,719       23   %
Provision for income taxes (E)       170         106       60   %   472         790       (40 ) %
Net Earnings       557         374       49   %   1,636         929       76   %

Net earnings attributable to noncontrolling

interests       (2 )       (2 )     -   %   (8 )       (7 )     14   %

Net Earnings Attributable to The Estée Lauder

Companies Inc.     $ 555       $ 372       49   % $ 1,628       $ 922       77   %
 

Net earnings attributable to The Estée Lauder

Companies Inc. per common share:
Basic $ 1.53 $ 1.01 52 % $ 4.47 $ 2.50 79 %
Diluted 1.51 .99 52 % 4.39 2.45 79 %
 
Weighted average common shares outstanding:
Basic 361.9 367.9 364.0 368.3
Diluted   368.3         375.7             370.9         375.7          
 

(A) In May 2016, the Company announced a multi-year initiative (Leading
Beauty Forward) to build on its strengths and better leverage its cost
structure to free resources for investment to continue its growth
momentum. Leading Beauty Forward is designed to enhance the Company's
go-to-market capabilities, reinforce its leadership in global prestige
beauty and continue creating sustainable value. During fiscal 2019, the
Company continued to approve specific initiatives under Leading Beauty
Forward. The Company plans to approve additional initiatives through
fiscal 2019 and expects to complete those initiatives through fiscal
2021. Inclusive of approvals from inception through March 31, 2019, we
estimate that Leading Beauty Forward may result in related restructuring
and other charges totaling between $900 million and $950 million, before
taxes. Once fully implemented, Leading Beauty Forward is expected to
yield annual net benefits of between $350 million and $450 million,
before taxes. These savings can be used to improve margin, mitigate risk
and invest in future growth initiatives.

(B) The Company recorded $9 million and $18 million of income within
selling, general and administrative expenses for the three and nine
months ended March 31, 2019, respectively to reflect changes in the fair
value of its contingent consideration related to certain of its fiscal
2015 and 2016 acquisitions. During the three and nine months ended March
31, 2018, the Company recorded income of $9 million and $6 million,
respectively.

(C) The Company recorded $52 million and $90 million of goodwill and
other intangible asset impairments with an impact of $.14 and $.23 per
common share for the three and nine months ended March 31, 2019,
respectively, related to its Smashbox reporting unit. During March 2019,
Smashbox made additional revisions to its internal forecasts reflecting
the continued slowdown of its makeup business driven by ongoing
competitive activity and lower than expected growth in key retail
channels for the brand.

(D) The Tax Cuts and Jobs Act (the "TCJA"), which was enacted on
December 22, 2017, presented us with opportunities to manage cash and
investments more efficiently on a global basis. Accordingly, during the
three months ended March 31, 2019, as part of the assessment of those
opportunities, we sold our available-for-sale securities, which
liquidated our investment in the foreign subsidiary that owned those
securities. As a result, we recorded a realized net gain on liquidation
of our investment in a foreign subsidiary of $71 million ($57 million
after tax), for a net impact of $.15 per common share.

(E) During the nine months ended March 31, 2019, the Company recorded a
net charge of $5 million equal to $.01 per common share to reflect the
finalization of the provisional amounts for the impact of the TCJA. For
the nine months ended March 31, 2018, the Company recorded provisional
charges for the impact of the TCJA totaling $392 million, equal to $1.04
per common share.

     
Returns and Charges Associated With Restructuring and Other
Activities and Other Adjustments
                 

(Unaudited; $ in millions, except per
share data)

        Operating Expenses                  
     

Sales
Returns

 

Cost of
Sales

 

Restructuring
Charges

 

Other
Charges/
Adjustments

  Total   After Tax  

Diluted
Earnings
Per Share

Three Months Ended March 31, 2019
Leading Beauty Forward $ 2 $ 4 $ 12   $ 17 $ 35 $ 27 $ .07
Contingent consideration (9 ) (9 ) (7 ) (.02 )

Gain on liquidation of an investment in a

foreign subsidiary, net (71 ) (71 ) (57 ) (.15 )
Intangible asset impairments                         52       52       52       .14  
Total     $ 2   $ 4   $ 12   $ (11 )   $ 7     $ 15     $ .04  
                                             
Nine Months Ended March 31, 2019
Leading Beauty Forward $ 2 $ 16 $ 31 $ 68 $ 117 $ 95 $ .26
Contingent consideration (18 ) (18 ) (15 ) (.04 )

Gain on liquidation of an investment in a

foreign subsidiary, net (71 ) (71 ) (57 ) (.15 )
Intangible asset impairments 90 90 86 .23
Transition Tax resulting from the TCJA (12 ) (.03 )

Remeasurement of U.S. net deferred tax

assets as of the TCJA enactment date 8 .02

Net deferred tax liability related to foreign

withholding taxes on certain foreign
earnings resulting from the TCJA       9       .02  
Total     $ 2   $ 16   $ 31   $ 69     $ 118     $ 114     $ .31  
                                             

(Unaudited; $ in millions, except per
share data)

        Operating Expenses                  
     

Sales
Returns

 

Cost of
Sales

 

Restructuring
Charges

 

Other
Charges/
Adjustments

  Total   After Tax  

Diluted
Earnings
Per Share

Three Months Ended March 31, 2018
Leading Beauty Forward $ - $ 3 $ 72 $ 25 $ 100 $ 75 $ .20
Contingent consideration (9 ) (9 ) (6 ) (.02 )
Transition Tax resulting from the TCJA 7 .02

Remeasurement of U.S. net deferred tax

assets as of the TCJA enactment date             (9 )     (.02 )
Total     $ -   $ 3   $ 72   $ 16     $ 91     $ 67     $ .18  
                                             
Nine Months Ended March 31, 2018
Leading Beauty Forward $ - $ 9 $ 125 $ 73 $ 207 $ 156 $ .42
Contingent consideration (6 ) (6 ) (4 ) (.01 )
Transition Tax resulting from the TCJA 332 .88

Remeasurement of U.S. net deferred tax

assets as of the TCJA enactment date 42 .11

Net deferred tax liability related to foreign

withholding taxes on certain foreign
earnings resulting from the TCJA       18       .05  
Total     $ -   $ 9   $ 125   $ 67     $ 201     $ 544     $ 1.45  
 
                 

Results by Product Category

                                             
Nine Months Ended March 31
Net Sales   Percent Change  

Operating Income
(Loss)

 

Percent
Change

(Unaudited; $ in millions) 2019     2018  

Reported
Basis

 

Constant
Currency

 

Constant
Currency, excl
ASC 606

  2019     2018    

Reported
Basis

Skin Care $ 4,962 $ 4,216 18 % 20 % 21 % $ 1,624 $ 1,221 33 %
Makeup 4,427 4,275 4 6 6 398 514 (23 )
Fragrance 1,401 1,423 (2 ) 1 2 156 195 (20 )
Hair Care 433 419 3 5 5 27 45 (40 )
Other       52       55   (5 )     (4 )     (9 )       9       9     -    
Subtotal       11,275       10,388   9       11       12         2,214       1,984     12    
Returns/charges associated with
restructuring and other activities       (2 )     -   -       -       -         (117 )     (207 )   43    
Total     $ 11,273     $ 10,388   9   %   11   %   12   %   $ 2,097     $ 1,777     18   %
 
   

 

               

Results by Geographic Region

                                                 
Nine Months Ended March 31
Net Sales   Percent Change  

Operating Income
(Loss)

 

Percent
Change

(Unaudited; $ in millions) 2019     2018  

Reported
Basis

 

Constant
Currency

 

Constant
Currency, excl
ASC 606

  2019     2018    

Reported Basis

The Americas $ 3,609 $ 3,818 (5 ) % (5 ) % (4 ) % $ (57 ) $ 231

>(100

)

%
Europe, the Middle East & Africa 4,825 4,236 14 18 17 1,580 1,196 32
Asia/Pacific       2,841       2,334   22       26       26         691       557       24    
Subtotal       11,275       10,388   9       11       12         2,214       1,984       12    
Returns/charges associated with
restructuring and other activities       (2 )     -   -       -       -         (117 )     (207 )     43    
Total     $ 11,273     $ 10,388   9   %   11   %   12   %   $ 2,097     $ 1,777       18   %
 

Net Sales and operating income in the Company's product categories and
regions for the nine months ended March 31, 2019 were unfavorably
impacted by a stronger U.S. dollar in relation to most currencies. Net
sales were negatively impacted by the adoption of ASC 606 while
operating income benefitted from it. Total reported operating income was
$2.10 billion, an 18% increase from $1.78 billion in the prior year.
Operating income increased 18% excluding (1) the adoption of ASC 606
that increased operating income by $41 million, (2) restructuring and
other charges and adjustments of $99 million compared to $201 million in
the prior-year period, (3) goodwill and other intangible asset
impairments related to Smashbox of $90 million, and (4) the unfavorable
impact of currency translation of $81 million.

This earnings release includes some non-GAAP financial measures relating
to charges associated with restructuring and other activities, goodwill
and other intangible asset impairments, the net gain on liquidation of
our investment in a foreign subsidiary, the changes in the fair value of
contingent consideration and charges associated with the TCJA. The
following is a reconciliation 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
manner in which 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 adjustments
similar in nature to those presented below; 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 weighted average foreign
currency exchange rates. Beginning in fiscal 2019, the Company adopted a
new accounting standard related to hedging that resulted in gains/losses
on its foreign currency cash flow hedging activities to now be reflected
in Net Sales, where in prior periods they were reflected in Cost of
Sales and Selling, general and administrative expenses. To better assess
its performance in a constant currency environment, beginning in fiscal
2019 the Company is excluding the impact of these hedging activities in
its constant currency calculations.

     
Reconciliation of Certain Consolidated Statements of Earnings
Accounts Before and After Returns, Charges and Other Adjustments
                                                                       
Three Months Ended March 31, 2019   Three Months Ended

March 31, 2018

       

(Unaudited; $ in millions,
except per share data
and

percentages)

    As Reported  

Returns/

Charges/

Adjust-

ments

  Non-GAAP  

Impact of
adoption
of ASC 606

 

Non-GAAP,
excluding
impact of
adoption of ASC
606

 

Impact of
foreign
currency
translation

 

Non-GAAP,
Constant
Currency-
Adjusted

  As Reported  

Returns/

Charges/

Adjust-

ments

  Non-GAAP  

% Change
Non-GAAP

 

% Change
Non-GAAP,
Constant
Currency-
Adjusted

Net Sales $ 3,744   $ 2   $ 3,746   $

(106

)

  $ 3,640   $ 146   $ 3,786   $ 3,370   $ -   $ 3,370 11 % 12 %
Cost of sales       819       (4 )     815       (67 )     748       36     784       683       (3 )     680            
Gross Profit       2,925       6       2,931       (39 )     2,892       110     3,002       2,687       3       2,690     9 %   12 %

Gross

Margin

78.1 % 78.2 % 79.5 % 79.3 % 79.7 % 79.8 %
 

Operating

expenses

  2,251       (72 )     2,179       87       2,266       66     2,332       2,189       (88 )     2,101     4 %   11 %

Operating

Expense

Margin

      60.1 %           58.2 %           62.3 %           61.6 %     65.0 %           62.3 %          

Operating

Income

      674       78       752      

(126

)

    626       44     670       498       91       589     28 %   14 %

Operating

Income

Margin

18.0 % 20.1 % 17.2 % 17.7 % 14.8 % 17.5 %
 

Other income,

net

71 (71 ) - - - - - - - - - -

Provision for

income taxes

      170       (8 )     162       (28 )     134       12     146       106       24       130     25 %   12 %
Net Earnings
Attributable
to The Estée Lauder
Companies Inc.     $ 555     $ 15     $ 570     $ (98 )   $ 472     $ 33   $ 505     $ 372     $ 67     $ 439     30 %   15 %

Diluted net

earnings

attributable to
The Estée Lauder
Companies Inc. per
common share     $ 1.51     $ .04     $ 1.55     $ (.27 )   $ 1.28     $ .09   $ 1.37     $ .99     $ .18     $ 1.17     33 %   17 %
 
Amounts may not sum due to rounding.
 
 
Reconciliation of Certain Consolidated Statements of Earnings
Accounts Before and After Returns, Charges and Other Adjustments
                                                                           
Nine Months Ended March 31, 2019   Nine Months Ended

March 31, 2018

         

(Unaudited; $ in millions,
except per share data
and

percentages)

    As Reported  

Returns/

Charges/

Adjust-

ments

  Non-GAAP  

Impact of
adoption of
ASC 606

 

Non-GAAP,
excluding impact
of adoption of ASC
606

 

Impact of
foreign currency
translation

 

Non-GAAP,
Constant Currency-
Adjusted

  As Reported  

Returns/

Charges/

Adjust-

ments

  Non-GAAP  

% Change
Non-GAAP

 

% Change
Non-GAAP,
Constant
Currency-
Adjusted

Net Sales $ 11,273   $ 2   $ 11,275   $ 28   $ 11,303   $ 288   $ 11,591   $ 10,388   $ -   $ 10,388 9 % 12 %
Cost of sales       2,552       (16 )     2,536       (219 )     2,317       67     2,384       2,147       (9 )     2,138            
Gross Profit       8,721       18       8,739       247       8,986       221     9,207       8,241       9       8,250     6 %   12 %

Gross

Margin

77.4 % 77.5 % 79.5 % 79.4 % 79.3 % 79.4 %
 

Operating

expenses

  6,624       (171 )     6,453       288       6,741       140     6,881       6,464       (192 )     6,272     3 %   10 %

Operating

Expense

Margin

      58.8 %           57.2 %           59.6 %           59.4 %     62.2 %           60.4 %          

Operating

Income

      2,097       189       2,286       (41 )     2,245       81     2,326       1,777       201       1,978     16 %   18 %

Operating

Income

Margin

18.6 % 20.3 % 19.9 % 20.1 % 17.1 % 19.0 %
 

Other income,

net

71 (71 ) - - - - - - - - - -

Provision for

income taxes

  472       4       476       (9 )     467       21     488       790       (343 )     447     6 %   9 %
Net Earnings
Attributable

to The

Estée

Lauder

Companies

Inc.

    $ 1,628     $ 114     $ 1,742     $ (32 )   $ 1,710     $ 61   $ 1,771     $ 922     $ 544     $ 1,466     19 %   21 %
Diluted net
earnings
attributable
to
The Estée
Lauder
Companies
Inc. per

common

share

    $ 4.39     $ .31     $ 4.70     $ (.09 )   $ 4.61     $ .16   $ 4.77     $ 2.45     $ 1.45     $ 3.90     20 %   22 %
 
Amounts may not sum due to rounding.
 
   
CONDENSED CONSOLIDATED BALANCE SHEETS
                   
(Unaudited; $ in millions) March 31

2019

  June 30

2018

  March 31

2018

ASSETS
Current Assets
Cash and cash equivalents $ 2,902 $ 2,181 $ 2,140
Short-term investments - 534 384
Accounts receivable, net 2,036 1,487 1,761
Inventory and promotional merchandise, net 1,814 1,618 1,533
Prepaid expenses and other current assets       408     348     351
Total Current Assets       7,160     6,168     6,169
Property, Plant and Equipment, net 1,891 1,823 1,726
Other Assets       3,880     4,576     4,877
Total Assets     $ 12,931   $ 12,567   $ 12,772
 
LIABILITIES AND EQUITY
Current Liabilities
Current debt $ 516 $ 183 $ 296
Accounts payable 1,068 1,182 884
Other accrued liabilities       2,647     1,945     2,208
Total Current Liabilities       4,231     3,310     3,388
Noncurrent Liabilities
Long-term debt 2,883 3,361 3,363
Other noncurrent liabilities       1,200     1,186     1,284
Total Noncurrent Liabilities       4,083     4,547     4,647
Total Equity       4,617     4,710     4,737
Total Liabilities and Equity     $ 12,931   $ 12,567   $ 12,772
 

The following table details the impacts of ASC 606 on the Company's
Consolidated Balance Sheet as of March 31, 2019.

   
CONSOLIDATED BALANCE SHEET IMPACT FROM ASC 606
                   
(Unaudited; $ in millions) As Reported   Adjustments  

Prior to the
Adoption of
ASC 606

Accounts receivable, net $ 2,036 $ (211 ) $ 1,825
Inventory and promotional merchandise, net 1,814 (26 ) 1,788
Other Assets       627     (60 )     567
Total Assets     $ 12,931   $ (297 )   $ 12,634
 
Other accrued liabilities 2,647 (438 ) 2,209
Other noncurrent liabilities       1,200     (55 )     1,145
Total Liabilities     $ 8,314   $ (493 )   $ 7,821
                     
Total Equity     $ 4,617   $ 196     $ 4,813
 
     
SELECT CASH FLOW DATA
         
Nine Months Ended
March 31
(Unaudited; $ in millions) 2019   2018
Cash Flows from Operating Activities
Net earnings $ 1,636 $ 929
Depreciation and amortization 404 389
Deferred income taxes (46 ) 84
Other items 221 179
Changes in operating assets and liabilities:
Increase in accounts receivable, net (377 ) (325 )
Increase in inventory and promotional merchandise, net (184 ) -
Increase in other assets, net (73 ) (10 )
Increase in accounts payable and other liabilities       175       674  
Net cash flows provided by (used for) operating activities     $ 1,756     $ 1,920  
 
Other Investing and Financing Sources/(Uses):
Capital expenditures $ 441 $ 368
Proceeds of investments, net 1,215 224
Payments to acquire treasury stock 1,344 676
Dividends paid 453 407
Proceeds (repayments) of current debt, net (167 ) 106

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