Estee Lauder Companies Inc

NYSE:EL

Earnings Call Transcript 2021-Q1

[Operator]

[00:00:00] Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2021 21 first quarter conference call. Today's call is being recorded and webcast for opening remarks and introductions. I would like to turn the call over to senior vice president of Investor Relations, Miss Rainey Mancini.

[Rainey Mancini, Senior Vice President of Investor Relations]

[00:00:21] Slow on today's call are Fabrizio Freda, president and Chief Executive Officer, and Tracey Travis, Executive Vice President and Chief Financial Officer, since many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed with the FCC where you'll find factors that could cause actual results to differ materially from the 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 disclosed in our press release, all net sales growth numbers are in constant currency. You can find reconciliation between gap and gap measures in our press release and on the investor section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand dot 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 asked that you please limit yourself to one question so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

[Fabrizio Freda, President and Chief Executive Officer]

[00:01:25] Thank you, Reynolds. And hello, everyone. I hope that each of you are in good health as the world continues to confront covid-19, our hearts are with those impacted and our focus remains first and foremost with the safety and well-being of our employees, their families and our consumers. I continue to be incredibly inspired by our employees enduring compassion, creativity and resilience, where you are making us a better company and I extend my deepest gratitude. Our diversified prestige beauty portfolio of categories, channels, geographies, brands, consumer segments and price points give us many levers to fuel the business, both in times of prosperity as well as during more challenging times. In this most difficult moment, our multiple engines of growth strategy is invaluable. For the first quarter of fiscal year, 2021, sales declined only nine percent, a significant sequential improvement driven by every category, fragrance and hair care in particular, had striking progress. Our hero products and innovations thrived and contributed meaningfully to sales. We successfully adjusted our cost structure to minimize the leveraging effects of lower sales, resulting in an operating margin of 20 percent very close to the first quarter of last year when we had double digit sales growth. In different periods over the last decade, we were driven by different engines leading to prestige, beauty share gains each year, and we expect this year to be no different. Since the pandemic began, we estimate that we have grown prestige due to share globally. On our last earnings calls, we explained the growth engines of the moment are the skincare category, the online channel at the Asia-Pac Asia-Pacific region each delivered terrific performance to begin our new fiscal year.

[00:03:44] The Estee Lauder brand performed exceptionally well, returning to growth in the quarter powered by its hero franchises in Skincare. Advance No Repair franchise delivered very strong double digit sales growth. Encouragingly, the brand's success in skincare was broad based as each of the new three revitalizing supreme perfection. In essence, nutritious franchises also grew double digits. This is a remarkable achievement when compared to the brands very strong skincare performance in the prior year. Lemaire had a superb quarter with double digit sales growth globally driven by its continued outperformance of luxury skincare growth in mainland China, the August launch of its new concentrate deliver the especially strong double digit sales growth in Asia, in Asia Pacific and consumer. So the soothing power of these various room with its new prototype antioxidant benefits. Even amid the pandemic, Langmead is welcoming many new consumers, further demonstrating the irresistible appeal of the brand's superior quality. It's our last Investor Day, we discussed growth strategies for each of our large scale and developing brands, and even in these challenging times, we are resolute in our focus on all three tiers. The Datsun brand is a beautiful example in the developing tier of the brand succeeding through these Antonella's times, DEFEN contributed to the skincare category growth in the quarter as the successful launch of Internal Rescue Super Concentrate serum amplified the strength of the brands. Here are products. Our acquisition of Twitter, just with its terrific entry, prestige, they're my brand positioning and desirable hero products, enhanced your organic sales growth of skincare.

[00:05:57] Momentum in the serum water solution in IKEA subcategories carried into the quarter driving skincare growth, the August launch of Estee Lauder, the new advanced Navitaire serum performed extraordinary across geographies and channel, aided by compelling activation and another 40 percent surge in consumer reviews since the launch when compared to the entire lifespan of the previous version. Impressively, Clinique, even better clinical interactor serum continues to perform strongly in its third quarter since launching. We deliver outstanding double digit sales growth online with skincare, midcap fragrance and haircare, all prosecuting once again, each of our online channels contributed meaningfully. We continued to strategically invest in our brand sites globally, bringing our classic high touch services to consumers online. The response has been phenomenal. We have seen tremendous growth in time spent on four track, the actual tritone and shop life streams. Even with most retail stores reopened around the world, sales rose 60 percent organically on our brand sites. We now have virtual tie on across more brands and categories in more markets, in the first quarter alone, we hosted over one million virtual tritone sessions globally with consumer spending more than 30 minutes on average in a session. In North America, Desilu, the brand launched a driven product recommendation based on real time consumers behaviors and past preferences. This dynamic merchandizing holds great promise across our brands and regions clinic. Global sales growth on brand come in the quarter was exceptional among the strongest across the portfolio.

[00:08:14] Clinique seeking school OnDemand live streaming was a great success, leading to new daily programing that combines top consultants with influencers to future holiday sets and favorite clinic products. Clinic is our first brand to launch new technology that pairs multiple hosts in one shot livestream. Bobby Brown continue to scale its artistry like never before program, expanding their artistry to include live chat, three booked video consultations, master classes and live streaming by, rapidly converting some of its global makeup artists into a network of virtual cellars. Most of the Bryans markets now offer these consultations on Brendle come on local social platforms such as WhatsApp, WeChat and Instagram. These virtual services have a higher conversion rate five to 10 times the average and a higher average order value. With enticing innovation and engaging new services and tools, conversion conversion grew strong double digits across our blindsides. Most compelling is the significant conversion growth in markets that are under penetrated online, such as continental Europe in the quarter conversion that grew over 75 percent. While in Latin America, conversion growth far exceeded 100 percent dispositions as well for suitable, profitable growth online. We invested in online fulfillment during the quarter, strengthening our capacity globally, and we are addressing seasonal fulfillment locations in our largest markets in anticipation of robust consumer demand for holiday. Leveraging our investment in technology, we deployed more omnichannel capabilities in several markets in the U.S., we have seen dramatic uptick in buy online pickup in store for Mac.

[00:10:31] The brands also partnered with Housemaid's Domestically to launch same day delivery and open a new experiential store in New York. The store features extensive personalization options for consumers and interactive digital experiences in these initiatives and more, we are meeting the desires of consumers who are craving convenience and choice, offering them new ways to shop in today's environment. The third engines of growth, Asia Pacific, also accept several markets contributed to the region, high single digit sales growth, which is most notable in some markets in the region, dealt with new waves of covid-19. Mainland China, Korea and several smaller markets grew organically in mainland China. We continue to invest in the vibrant opportunity of our second home market. We expanded into more cities in the course, reaching over 130. We increased our advertising investment across social and digital platforms, showcasing exciting innovation in building brand awareness as we reach new consumers. We continued expanding our talent in anticipation of our new State of Art Innovation Center, which will open in Shanghai as we aim to best meet the needs of Chinese and Asian consumers. We look at relevancy in local trends through increased capabilities in product design formulation, consumer insights and trend analytics. In mainland China, the bricks and mortar China return it to double digit growth such that both offline and online, where powerful growth drivers that travel retail channels farther contributed, driven by tremendous growth in China, partly reflecting increased Duty-Free purchase limits, the opening of some travel corridors in Asia and online retail growth, facilitating higher conversion, magnifying Chinese consumer strengths.

[00:12:51] Indeed, demand from the Chinese consumers was very strong across these channels, most especially in skincare. And we estimate we grew our prestige beauty share. The fragrance category sales growth accelerated in Asia Pacific in the quarter we introduced in Paris and Frederich, now in mainland China in their Sillett distribution in June. These unique, luxurious brands are proving highly desirable, which, coupled with the ongoing strength of Joomla Malone, London and Tom Ford, drove significant double digit sales growth of fragrances. In Korea, Francis also sought Linebaugh New Cetron, 28, self-reliance drove meaningful upside, demonstrating the strength of our locally relevant innovation. Around the world, we continue to closely monitor the evolution of consumer attitudes and purchase behavior related to covid-19. We combine sophisticated social media listening capabilities with machine learning and proprietary consumer research techniques to develop insights and adapt our marketing and product offerings with speed and agility to capture change in trends. Looking ahead, we are confident in the return of growth in the challenge mid-cap category as the recovery will unfolds. In the meantime, we continue to focus on subcategories in makeup that are favorite in the era of masks for covid-19. In fact, even in which is overall pressured, the liquid lip subcategory is growing nicely, driven by max launch of power kiss liquid lip as consumers seek must finish formulas that last. Our innovation represented over 30 percent of sales in the first quarter. We have an exciting pipeline of new product launches for the remainder of fiscal year 2021 for both engines a moment and what we expect to be engines of the future.

[00:15:07] In October, Clinique launched its Mosso surge, intense, replenishing it, a new formula that hydrates keen for a full 72 hours in a cream gel formula that dries for dry skin types. This man's land there will introduce its new genus Delamare, concentrate the night bone and ampules strands down to look crafted we Cristen miracle drug that promotes clean, natural rebuilding of collagen to help transform the look of skin during sleep. Continuing our progress on sustainability origins intend to be the first pristine beauty brand to bring in advanced cycle, to package to market with is clear improvement active charcoal mask in 2021. This expands upon Clinique, a recent launch of all about clean in packaging with most consumer recycled material and plant derived plastic for its two and most consumate recycled material for its cap. For fiscal year 2021, we continue to expect sequential improvement in sales growth each quarter and to build global share while prestige beauty progressively returned to growth. We are mindful of the ongoing impacts of covid-19, most especially the very limited traffic in retail stores as to reopen and the second waves occurring in certain markets. We are investing in several strategic priorities intended to drive our long term sustainable growth that progressive in the world of call the business acceleration program. For the second quarter with if he can plan for holiday and 11 11 global shopping festival.

[00:17:06] Holiday merchandizing began a few weeks ago, and our brands created rich activations with engaging fisty products, Estee Lauder, Delamare have kits that include best selling products to drive recruitment. Origin is making holiday gift easy, offering consumers the ability to text or email a gift, allowing the recipients to either accept or exchange their product before it is gift wrapped and sent to them. Bobby Brown Holiday Wish List Deluxe Collection includes all the inspiration, goods and tools to create ultimate holiday looks, and Mac recently boosted its frosted firework collection, partnering with a diverse range of beauty influencers who generated over 60 million media impressions in the first 10 days after launching. Today, we will release our fiscal 2020 seat issues and sustainability report entitled Beauty Inspired, Value Driven. We are incredibly proud of the contribution of our employees around the world in accelerating our citizenship and sustainability efforts and have featured their successes in this year's report. The report highlights the achievement of our 2020 as goals as well as meaningful progress toward our 2025 goals. These milestones were reached across citizenship and sustainability priority focus areas, despite the challenges of the pandemic. I'm pleased to announce the company has achieved net zero carbon emissions and 100 percent renewable electricity globally for our own operations building upon this achievement. We also met our goal to set science based emissions reduction targets, addressing in scope one and two for our target variation in scope, three for our value chain. Today's announcement signals a new level of ambition and dedication to climate action for this and other companies setting targets in line with the latest climate science testament to our values and our commitment to managing our business for the long term.

[00:19:29] They are also proud to have reached zero industrial waste to landfill for our manufacturing, distribution and innovation sites. We are on track to provide access to training on basic sustainability and corporate social programs for our employees worldwide. This month, in addition, over the past two years, our programs and grants focus on health, education and the environment have positively impacted the lives of more than 20 million individuals worldwide. Our collective vision is to be the most inclusive and diverse prestige beauty company in the world and to be the employer of choice for diverse talent, the brand of choice for diverse consumers, our commitments to racial equality, especially our focus on driving racial equity across our business, is essential to achieving our vision. In today's report will be publicly disclosing enhanced employee diversity metrics and information on pay equity. We believe this transparency to all our stakeholders is important to hold ourselves accountable to our vision while importantly setting the stage to share our progress. In closing, there is no doubt that we are living and working in a moment unlike any other, and yet we are confident, thanks to our passionate employees, cherished company values and proven strategy built on multiple engines of growth. We are well-equipped to face the challenges of today and even better positioned to embrace the opportunities of tomorrow and continue growing global prestige. Beauty share. I will now turn the call over to Tracy.

[Tracey Travis]

[00:21:26] Thank you, Fabrizio, and hello, everyone. As a reminder, my commentary today is adjusted for the items that Ranie mentioned at the beginning of the call, and net sales growth numbers are in constant currency. So starting with the first quarter results, net sales decline nine percent, driven by the ongoing effects of the covid-19 pandemic on our brick and mortar distribution throughout the world, we achieved strong growth in our global online channel, mainland China and the skincare category, and delivered better than expected results in the travel retail channel and in North America. Other areas progressively improved compared to last quarter as retail doors reopened. The December 2019 acquisition of Dr. Jarret contributed approximately three points of net sales growth. From a geographic standpoint, our Asia Pacific region rose seven percent, driven primarily by strong double digit growth in skincare and the addition of Dr. Jarret. Sales in mainland China rose double digits as sales in brick and mortar retail continue to improve. The pace of online sales growth in China was slower this quarter following the highly successful six 18 mid-year shopping festival programs last quarter. Most brands and channels rose double digits in China, Korea rose high single digits, excluding Dr. Jarret, and several smaller markets return to growth as well. Sales in Japan declined due to a tough comparison to the prior year in which sales grew nearly 20 percent as consumers bought ahead of an October 2019 VAT increase.

[00:23:15] The market has also suffered from softer in-store traffic due to a second wave of covid-19. Sales in Hong Kong continue to be depressed as well due to the pandemic. Net sales in our Europe, the Middle East and Africa region declined nine percent, with virtually every market continuing to feel the effects of the pandemic. While online growth continued to be quite strong, brick and mortar traffic remained soft, heavily impacted by covid-19, which also resulted in significantly lower tourism in key markets. Skincare sales in the region grew double digits, driven by travel retail, but were more than offset by declines in makeup and fragrance. The major western markets of France, Spain and the U.K. contributed the most to the decline in sales, as did the Middle East. Our global travel retail business was essentially flat is outstanding results in greater China, particularly Hainan Island and Hong Kong, and sequential improvement in Korea offset the effects of the significant reduction in international travel. Additionally, the growth of retail and the increase in duty free purchase limits in Hinan drove higher conversion rates. Net sales in the Americas declined 24 percent as virtually all markets in the region continue to be impacted by covid-19. Online sales growth continue to be a bright spot, rising over 40 percent.

[00:24:54] However, brick and mortar retail remain difficult, especially in department stores and in freestanding stores. From a category standpoint, skin care was the most resilient, net sales grew 10 percent, driven by continued strong performance from the FDA lawter and Lamya brands in Asia, including travel, retail, as well as incremental sales from the acquisition of Dr. Jarret. Net sales in makeup fell 32 percent, a significant sequential improvement from last quarter. Make up the scene, the biggest impact from covid-19 as many consumers continue to partially or fully work from home and forgo social gatherings. Fragrance net sales declined 13 percent, a substantial improvement from last quarter. The category grew strongly in Asia, reflecting double digit increases from both Tom Ford and Joe Malone, London, as well as the recent launches of Chilian in Paris and Frederick Mall in mainland China. Bath, Body and home fragrances continue to perform very well. Our hair care net sales were essentially flat, declining only one percent, while stores and salons were not operating at full capacity during the quarter. The category benefited from exceptional innovation from Aveda, including the recent launch of botanical repair, as well as strong online sales. Our gross margin increased 20 basis points compared to the first quarter last year, favorable category mix and lower costs for in-store testers were partially offset by negative currency impact.

[00:26:39] Operating expenses decreased seven percent and the deleveraging effect of the sales decline caused operating expenses as a percent of sales to increase 80 basis points, agile cost management and lower selling costs resulting from both channel mix and the impact of the covid-19 related temporary furloughs and salary reductions on employee costs, resulting in a 20 percent operating margin, which was just 60 basis points lower than the year ago quarter. Despite the lower sales diluted EPS of a dollar, 44 cents decreased 14 percent compared to the prior year. EPS was higher than expected due to both improved sales performance as well as more prudent cost management as doors reopened throughout the quarter. During the quarter, we generated 358 million in net cash flows from operating activities, which was above the prior year due primarily to timing of working capital items. We invested one hundred and sixty million dollars in capital expenditures, repaid the remaining 750 million outstanding on our bank revolver, and paid one hundred and seventy four million in dividends. We also announced this morning a 10 percent increase in our quarterly dividend to 53 cents per share. Our plans under the Cope, the Post covid business acceleration plan are on track, with approvals expected to accelerate in the second quarter and benefits beginning to flow later in our fiscal year. So now let's turn to our outlook.

[00:28:20] We are pleased with the sequential improvement we saw in nearly every market as the world continues to manage the effects of the pandemic. The path to recovery is not expected to be smooth as cases of covid-19 have begun to surge again in many markets, creating renewed restrictions on travel and social activities. We are mindful of the risk of a global recession or a slow economic recovery as government support measures in certain markets taper off. We also recognize macro risks such as ongoing trade tensions and political uncertainty. Nonetheless, prestige beauty remains a highly desirable product category, as evidenced by the sequential improvement in sales trends we experienced this quarter, and we believe our multiple engines of growth strategy positions us well to return to strong global results when the impacts from the pandemic subside. With only one quarter of the year completed and the degree of uncertainty I just described, we are not providing explicit sales and EPS guidance for the full year. However, we will provide some underlying assumptions for the year. We continue to expect sequential quarterly sales improvement as the global recovery unfolds, assuming no significant second wave resulting in broad scale retail door closures again or other major disruptive events. And we do expect to return to sales growth as of the end as of the third quarter.

[00:29:57] Comparisons to our record performance in the prior year first half will be difficult. Conversely, we expect sales and profit to grow significantly in the second half of the year against a period of considerable covid-19 impacts with particularly strong growth in the fourth quarter. The inclusion of six months of incremental sales from the acquisition of Dr. Jahed should add about one to two percentage points to sales growth for the fiscal year, but remains slightly dilutive to profit for the year. We expect to close a number of our less productive freestanding retail stores and exit certain wholesale doors, primarily in Western markets, while several of our retail customers are also reducing their store footprint. Many of the unproductive doors are expected to close later in the fiscal year. Our gross margin has recovered from last quarter's inefficiencies related to the sudden covid-19 impact. Additionally, we continue to invest in increased capacity to support our strong skincare growth. We will continue to leverage a portion of the savings generated from our cost programs to support advertising and expanding services and capabilities to enable strong growth in our online channel. As I mentioned before, we increased our quarterly dividend rate by 10 percent to fifty three cents per share.

[00:31:27] We also expect to reinstate share repurchases as we gain comfort that the recovery is more sustained. So while the environment remains quite uncertain, we are providing guidance for the second quarter, for the quarter. We expect sales to decline between four and six percent in constant currency. As a reminder, we are comparing against a record prior year quarter where we delivered 16 percent sales growth and 21 percent EPS growth last year. We have a robust lineup of holiday offerings at a variety of attractive price points that are carefully targeted to relevant consumer trends we are seeing during this pandemic and we expect continued strong online sales at our retailers and on our own brand sites. The incremental sales from Dr. Jha are expected to add about two points to growth and currency is expected to be accretive by approximately one point. We expect second quarter EPS of a dollar 45 to a dollar sixty, reflecting the sales outlook, continued cost containment measures and investment in key growth areas like online innovation and China.

[00:32:42] Currency is expected to add two cents to EPS, and Dr. Jha is forecast to dilute EPS by three cents.

[00:32:51] We will continue to leverage our multiple engines of growth to invest behind a strong recovery in the context of the macro environment, we are taking strategic actions to support long term sustainable growth by investing appropriately for the long term while supporting the recovery in the near term. With a more solid start to the fiscal year and mindful of continued macro volatility over the next several months, we look forward to leveraging the tremendous strength of our brands and driving a strong recovery as the market accommodates. And that concludes our prepared remarks will be happy to take your questions now.

[Operator]

[00:33:34] The floor is now open for questions, if you have a question, simply press on the star key, followed by the digit one on your touchtone telephone to ensure that everyone can ask their questions. We will limit each person to one question, time permitting. We will return you for additional questions. Just queue up again by pressing the star key and the digit one. And our first question is going to come from the line of Lauren Lieberman with Barclays.

[Lauren Lieberman, Barclays Capital]

[00:34:02] Great. Thank you. Good morning, everyone. And my question was about about channel makeshifts, both longer term and and in the quarter itself and for fiscal 21. So first piece of it is just over the longer term with the things you've already talked about, the acceleration of e-commerce growth. Curious if you think it's fair to say that half of your margin expansion over the next several years could come from that that channel mix dynamic. The second was that as we look into fiscal 2001, how we should be thinking about the benefits of channel mix on one hand, but then the drag that you will experience as less productive doors get close to the degree that there is stranded costs that come with that or what you know what the impact of door closures, your own doors and also wholesale doors or customers choosing to close doors. What impact that has on the PNL in the short term? Thanks.

[Fabrizio Freda, President and Chief Executive Officer]

[00:34:58] Yeah, I'll start with increase will join me in the answer. But basically all our accelerating engine of growth by channels are more profitable. And that's the good news. On the other side, we have to deliver our brick and mortar activities back to normal. And this obviously would be influenced by how fast covid retire and how fast the consumer confidence is going to go in brick and mortar. And as you said, by managing some closures and then we need to turn the total company into growth. That said, we believe this will be possible as of course. And so the combination of the improved accelerating engines of growth, which are more profitable and the reestablishment of a brick and mortar will determine when we can go back to our long term algorithm, growing about half a margin point for a year.

[Tracey Travis]

[00:36:07] Yeah, and Lauren, as you indicated, I mean, timing is will really impact that. So in terms of when we expect door closures to occur, you know, we've already had a number of wholesale door closures and freestanding door closures over the last few years. When you think about the number of retailers that have gone out of business, unfortunately, in the last couple of years, and and certain retailers have also indicated their intent to close doors over over the next couple of quarters with our post covid acceleration program, we, too, will be closing doors over the next couple of quarters, more towards the end of the year, as well as some freestanding stores. So there will be a timing issue where we do see pressure from under productive brick and mortar doors while we see the uplift that Fabrizio spoke about from our online acceleration. And that's all embedded within the guidance that we've given, certainly for, you know, for the second quarter. And and we'll see how the second half of the year plays out. But that's certainly a dynamic that we will be managing in fiscal 21 as as the the foreclosures are staged throughout the balance of the year and into fiscal 20 to.

[Operator]

[00:37:37] Thank you. Our next question will come from the line of Dara Mozartian Morgan Stanley.

[Dara Mohsenian, Morgan Stanley]

[00:37:44] Hey, good morning, guys. So, Fabrizio, I was hoping maybe you could give us some perspective on how much of the increased e-commerce demand you've seen since the beginning of the pandemic is sustainable in your mind as you look out longer term and perhaps within that, can you detail with the e-commerce sales increase you've seen during the pandemic, how much of that you think is driven by new customers, what level of repeat rates you're seeing among those new customers?

[Fabrizio Freda, President and Chief Executive Officer]

[00:38:14] Yeah, so first of all, the increase of online is extraordinarily during this quarter in total, we were growing at about 40 percent. But our brand, AKAM and other and other some retailers are growing much stronger. Our brand is 60 percent. So, Candy, the growth is consistent in and I believe personally is here to stay. And the reason why it's yet to stay, because the a lot of this growth is about the new consumers that we see we see online in many of these new consumer and mature consumers. And before online was mainly the destination of younger people, millennials, etc.. Now is the community for everyone. Everyone is online and also the people that before we're not accustomed to go there, are going that more often. So what we see is that people buy online maybe in the future when the store will be open. We believe that omnichannel will be very strong and so people will use both brick and mortar and online, obviously that the amount of posture's online will stay higher and particularly will stay high in in our in our community, in the mature group of consumers, which are very important for us and very important for beauty. So this is a sustainable trend and it's sustainable acceleration.

[00:39:34] The second thing which is happening, which is very important, is that historically how a high touch services of, you know, an advise or the service of customization of the service or trying the products was exclusively done in its stores. And then online at the beginning was merely a convenience buying opportunity or what you already knew was in brick and mortar buying was online. This has changed forever now that he's shopping in brick and mortar and that he's shopping online. What I mean with that is that the high touch services of customization, of the advice of recommendation are now super priced into line and the consumer really catering to the service like never before. So we spoke in our prepared remarks about the availability of chats with consultancy EBITDA Virtual Train on the viability of live streaming opportunities. All this is increasing and the engagement of consumers online is increasing. We mentioned that, you know, we have 30 minutes presence on the ground. That's only a few minutes in the past. So the combination of new consumers and particularly more mature consumer, better services online with a lot more time and more engagement.

[00:40:53] And the development of this opportunity for everyone, I think is going to be a sustainable and growing segment for many years to come. But obviously, we absolutely believe that omnichannel will be also important in the future. And the brick and mortar, we go back to the right level of TVT, to the right level of traffic, and it will be a combination of the two. There will be an even better combination of that in the past.

[Operator]

[00:41:27] Thank you. Our next question will come from the line of Dana Telsey with Telsey Advisory Group.

[Dana Telsey, Telsey Advisory Group]

[00:41:32] Good morning, everyone, and nice to see the progress as you think about the makeup category. How are you planning for innovation going forward? What is the timeline look like? And also, Fabrizio, when you talk about channels, what are your thoughts on the specialty multi-channel going forward? Thank you.

[Fabrizio Freda, President and Chief Executive Officer]

[00:41:51] So our point of view and make up, we go back to be a very attractive, a very fast growing category, once called We Retreat and is you know, the makeup is very much linked to use educations for makeup. And the use of occasion for makeup include business. Obviously meetings or, you know, going to the office includes social gathering of any kind and include also positive mood of recovery and in the interest of expressing ourselves. And so the oldies will come back, that will come back strongly and they will come back with it. And as we said in the prepared remarks. There are certain categories of the which are already coming back. Already growing is visible. The makeup is much stronger where covid a bit like in Asia and is so is obviously going to come back and we will be ready for that. We are preparing starting from the categories that in our opinion, we come back first and and we are investing not only in ready to sustain the recovery, but also investing in innovation in the category that will be the first one to come back. If you take today, the eye makeup is much stronger than other categories just because in a period of masking eye makeup is more relevant and then out of the lips, for example. And and so is there is a very positive trend in our opinion, just a matter of time. And that time will depend on the content in terms of your second part of the specialty, mostly around the world, we remain a very strong channel, very strong. But for us, a strong channel of growth and specialty. The strength, in our opinion, would also be the fact that the retail docomo, this channel should continue to increase fashion to get out, to be very, very strong is the specialty malls. The key opportunity is to continue to be strong in in-store, obviously, but particularly to become equally strong in the retail to come and to bring the services and the experiences that have been so strong in brick and mortar to the retail to come in the long term everywhere in the world.

[Dana Telsey, Telsey Advisory Group]

[00:44:08] Thank you.

[Operator]

[00:44:11] And our next question will come from the line of Steve Powers with Deutsche Bank.

[Steve Powers, Deutsche Bank]

[00:44:17] Yes, hey, good morning, thanks. Can we just talk a little bit more about the exit rates and consumption coming out of the first quarter and what you're seeing in terms of momentum with a little bit more granularity, whether by geography or category channel, however you think is most instructive. And if you're able to share a little bit of data around October results, that would be great because we clearly saw volatility in shipments and timing over the course of the September quarter. So I'm just curious as to how you're thinking about that month to month lumpiness as we look through and out towards the end of the calendar year as well. Thank you.

[Fabrizio Freda, President and Chief Executive Officer]

[00:44:53] Yeah, start in the street. Yeah, and your perspective is, if you understand correctly, your question. So the strength by category is in consumption is clearly in skin care and this remains very strong and in certain regions, further accelerating and within skin care, there are certain subcategories like moisturizers, serum, musks, which are really flying or eye products or products for the contour of the eye, etc.. So the skincare and certain skincare cardelli is clearly the fastest growing consumption makeup. I just answer one question. Midcaps dependent by category. I'm a cop, a strong consumption's. And believe me, makeup is under pressure in this moment. But even with this, we didn't cover this. Allow us to focus more on the growth consumption in this category. Fragrances are surprisingly back faster than what we originally thought. And this is great news for the early days. In fact, we are we are ready to try to push fragrance is really the best possible way during the holidays that we believe is a big opportunity, particularly our High-End fragrances and our artisanal sciences like John Malone for al Qaeda. And alienable is doing extraordinarily well everywhere in the world. And so then hair care know, I think is playing in your prepared remarks that Aveda is doing exceptionally well for us, that is having great innovation and a great program, great work online in support of also the solutions that were made. And and this brand is also hitting all the areas because it is obviously it is about national, is about taking care of the world, and so is also very much into the consumer space of sustainability.

[00:46:48] And this is something the big dividends. So haircare also is strong on consumption. And so net by category is a skinks strong healthcare strong. Saigon's recovery and midcap is the more gradual recovery that we assume for the for the long term in terms of the dynamic of the region. Obviously, you have a consumption recovery in Asia, which is much faster than anyone else. And and on the contrary, in in the US and in Europe, the impact of the recovery has been has been much bigger. But we see progress everywhere. That's the important thing. The important thing is that the level of progress is recovery is consistent. Every part of the world, despite the Easley's ahead in the trend of recovery. And then in terms of consumer groups consumption, I found particularly interesting that the consumption has been extraordinary in a more mature consumers. And and that's what we see. That is a long term benefit. I mean, the younger consumer is being the driver of many cars, particularly midcaps. And in this moment, that's less the case. But the mature consumer is being a bit more following the young consumer in the last probably five years. I think this is changing and the mature consumer are getting a much more active, even instrumenting and trying new innovation. And again, this is for us is a very positive sign for the long term. So consumption overall is gradually recovering and is gradually recovery across every segment, but with very different rhythm and speed by segment.

[Tracey Travis]

[00:48:32] And then in terms of the the the money for the second quarter, October came in, is coming in as as we expected. So and and it is reflected in our guidance. So I know we had starting in July, a little bit of a shipment to, you know, to restart the business, given the fact that some of our inventory levels were were low, particularly in North America. We don't see anything like that in the second quarter. And as you probably know, Steve, October is the smaller of the three months in the second quarter, obviously November and December with for us both Singles Day in China and in Asia, as well as holiday November and December are by far the two bigger months.

[Steve Powers, Deutsche Bank]

[00:49:24] Yes, thanks so much.

[Operator]

[00:49:27] And our next question will come from the line of Erinn Murphy, Piper Sandler.

[Erinn Murphy, Piper Sandler & Co.]

[00:49:34] My question is around travel, retail, it improve very nicely in the quarter. Can you just share a little bit about how much was driven from the higher duty free allowances in Hainan Island? And then how are you thinking about travel retail for the balance of the year? Thank you.

[Fabrizio Freda, President and Chief Executive Officer]

[00:49:50] Travel, retail as an exceptional performance and clearly the West, meaning Europe and the Americas, are very basically closed or very, very small to travel. So the first thing is that the recovery has been driven by Asia and within Asia. There are three elements which are driving this recovery. The first, as we discussed, is the acceleration of domestic travel within China with Hainan at the center of that. And Hinan has been seen both an increase of traffic, domestic tourism that came back at a very high percentage. I think the number published, they are really about 80 percent of what they started anywhere in terms of domestic travel and in terms of traffic and then the increase of possibility of buying per consumer that together it generated the very big growth we have seen and we believe this is so sustainable. Then there is the opening on certain corridors in Asia, which has started multigrain Kong, Macao, and we see and Korea is also starting to be more solid. So and then is the pretty on line the ability to reserve online the product, which is accelerating dramatically. Obviously, in a moment where the consumers are still concerned to go in stores with a lot of people, the ability to do pretty is serving their purpose and make them feel safer and protected.

[00:51:26] So the combination of those three things is as very important results, which is increasing conversion, as I said several times, to try to detail the results are driven by traffic and conversion. And in this moment, even in presence of lower traffic, we are seeing a dramatic increase in conversion. And what do we see for the long term? And the long term will be dependent, obviously, how traffic will be restored. The domestic traffic in China is a new element. And obviously this, we believe, will remain an opportunity for the long term. The when when international traffic will be reestablished will depend on covid, obviously, and we will monitor closely and served its purpose. But the increase of retail as a percentage, particularly in Asia, will remain a very positive development for the long term because we have extraordinarily positive impacts on conversion even when international traffic will restart that. Because of these is the combination of what's happened during college and the opportunity of traffic recovery in the long term will make this channel, in our opinion, will remain one of the most interesting channels for the long term.

[Operator]

[00:52:49] Thank you. Our next question will come from Jason English, Goldman Sachs.

[Jason English, Goldman Sachs]

[00:52:56] Hey, good morning, folks. Congratulations on thank you, graduations on sequential improvement, especially in trouble. Impressive. I want to come back to some of the questions on margins as we were closing fiscal 19. I think you finished with 17 percent, even margin. Your 50 bips algorithm would have landed us to around a 19 and a half by fiscal 20. Great. And I referenced fiscal twenty three because it may be like the first year where we're back to sort of normal because we don't have a lot of turbulence obviously for the remainder of this year. And then residual spillover just on door closures, et cetera, in twenty two. But if we're tracking towards a 90 and a half and twenty three or four, is there any reason that we can't get to it if not actually exceed it. Right. You're pulling a lot of cost out. Right now I imagine you'll discover that not all the need to go back and you've got this is pretty compelling from a margin perspective tailwind. Why are there any offsets that would prevent you from getting to that 90 and a half, if not actually exceeding it, assuming twenty three is indeed normalized?

[Tracey Travis]

[00:54:02] I mean, I think on the last call, Jason, we you know, we indicated that we expected to get, you know, potentially to our fiscal 19 margins by fiscal 20 to now, you know, part of the post covid acceleration program certainly is is helping to accelerate, accelerate the achievement of that. But I think, you know, that math is a little aggressive right now for fiscal fiscal 2003 as we think about the recovery of the business. And and obviously, it all depends on how quickly we get back to to your point, normal as it relates to normal consumption from a brick and mortar standpoint and where the balance of the channel mix, you know, plays out.

[00:54:52] So so that's a little bit aggressive.

[00:54:55] But, you know, recognize that certainly given the cost actions we take as it relates to postcoital and to accelerate our brick and mortar productivity and therefore help our margin and some of the favorable mix items that Lauren, you know, indicated earlier from the growth of online as well as when travel retail resumes, which is another, you know, factor for us. We had good travel, retail performance, quarter travel. Retail is another accretive channel for us and international travel whenever that resumes. And what that looks like will also be will also be a factor. So we're very comfortable that we will have margin margin progression and we will get to to the 19 and a half that year that you were referencing. It's just a matter of timing.

[Operator]

[00:55:51] Thank you. Our next question will come from the line of Rob Ottenstein, Evercore.

[Robert Ottenstein, Evercore ISI]

[00:55:57] Great. Thank you very much. I'd love to to circle back to mainland China. And perhaps you can tell us a little bit about the overall sales growth online and offline, kind of what sort of impact travel retail had on the business. And given, you know, your comments about increases in domestic travel, retail in China and Henein, should we kind of think that over mainland China X travel retail may not see the kind of growth that it's had before and then, you know, finally related to China, any kind of impact for timing on 11, 11? You know, did that have any impact? Thank you.

[Fabrizio Freda, President and Chief Executive Officer]

[00:56:43] So, no, I think we look at the Chinese consumers in total, and indeed it was another extraordinary quarter for Chinese consumer consumption. We estimate that the total Chinese consumer consumption was about 20 percent and we were lost 20 to 30 range. So is that when you look at the total, so extraordinary? Actually, I think we have developed the strength that when when the Chinese consumer shopping mainly online, we are online and there a high traffic moment where it is up. And when they come back to the store, we have there in brick and mortar. And this was a gain at double digit growth in brick and mortar for the first time after covid. When they go domestically, Tri-Valley, go to China. We are among the first being that being ready for that. So look at us as being dynamically following the Chinese consumer wherever they choose to shop and wherever the traffic is side by quarter and see that flexibility is a strength rather than having every single China having to perform in the same way that course. This is not going to happen. China is a very dynamic market. And and in fact, the the the online the 11, 11 and and then the 18 six minute the June events, which are two huge to do create the fact that in July, August is online is less strong.

[00:58:10] But then domestic travel was much stronger and in the real strength is to be able to be there at the right moment in every one of these channels. So Chinese consumers are strong. Our growth in China is strong. We are a local organization in China, really focus on the long term with enormously built in flexibility and collaboration between different groups. Discoursed. That was particularly interesting because we had the more cities as explained. Brick and mortar went back to double digit growth. Domestic travel went to about 80 percent of traffic. New consumers were coming in our brands, particularly from lower tier cities, via online and via the travel. And we launched the two new brands, as you heard, of fragrances. On top of that, we are expanding our scientific presence and investing in a new research center and randy center in guy that will give us new capabilities to even more locally relevant. So is a very strong momentum for China. And we personally, I personally believe that the consumption of Chinese consumers will be growing strongly for the long term.

[Operator]

[00:59:31] Thank you. And our next question will come from the line of Fulvio Kasel with Berenberg.

[Fulvio Cazzol, Berenberg]

[00:59:38] Yes, good morning and thank you for taking my question. I was wanting to ask about the innovation pipeline. There was some mentions made in the prepared remarks. And I remember in previous quarters you highlighted that you were being opportunistic in terms of product launches, trying to time them when they could be the most effective. So I was just wondering if you could give us a bit of color on how your first quarter played out, if that benefit from some of the shifts of innovations from previous quarter, or was it maybe normalized? And then following up on that, how should we think about Q2 and maybe even Twenty twenty one? Is there a lot of up, let's say, innovations to come out and and help your growth along, please? Thank you.

[Fabrizio Freda, President and Chief Executive Officer]

[01:00:30] Yeah. First of all, our innovation has been very strong as 30 percent of sales in the previous quarter has been 20 25. So frankly, we don't aim to a specific percentage of innovation is very strong and we have a great pipeline. So your question is how do we decide how to focus Oishi innovation? This obviously was the moment where skin care was the most demanded from consumers. And we we tend to focus our innovation where there is the strongest trend and the stronger consumer demand for the skin care was a big focus. Now, obviously, on skin care, you cannot plan innovation in a few months is a very important investment for the long term. So we had this extraordinary innovation advisory idea and the amount that we have planned for that period. It's just that we went even deeper, even stronger because we saw the opportunity. So the innovation timing is set that we have flexibility obviously, to move them when needed. But the most important thing which is flexible, is the amount of investment to demand the focus that we can have on different innovation, depending on the consumer demand in that specific moment and in a very different location. So I would it is about we tailor innovation locally and so the local teams have the opportunity to launch it, like launch a big deeper postponed. Ordinands anticipate or announcing a lot of flexibility to tailor the innovation to the local consumers. But the fundamental innovation is is done with a very accurate pipeline for the long term. And that's why we say that our pipeline has never been stronger, frankly, and this was already in place before covid.

[Tracey Travis]

[01:02:20] And the only thing I would add to that and also very strong innovation, we spoke about the fact that the fragrance category has been a nice surprise for us and that has been driven by innovation, you know, across the board with our fragrance brands and then obviously haircare with Aveda. Aveda has had a couple of very strong innovation launches this year that really has driven a lot of momentum for us in hair care and certainly helped from a recovery standpoint where we did see some shifts in innovation and from a timing standpoint is in the makeup category, understandably so. So we do have strong programs lined up for the second half of the year, in addition to skincare and fragrance and and hair care also for our makeup category. Hopefully, you know, as people start to gradually wear more makeup and perhaps become more socially active, that that that innovation will actually pan out to help to continue to grow that makeup category.

[Fulvio Cazzol, Berenberg]

[01:03:26] Fantastic. Thank you.

[Operator]

[01:03:29] Thank you, that concludes the question and answer portion of today's call, if you were unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today through November 16th. To hear a recording of the call, please dial eight five five eight five nine two zero five six passcode one seven nine seven eight nine four again eight five five eight five nine two zero five six. And then enter passcode one seven nine seven eight nine four. That concludes today's stay lawter conference call. I would like to thank you all for your participation and wish you all a good day.