Q3 2024 Earnings Summary
- Strong recovery in travel retail: The company reports robust traffic recovery across the travel retail channel, with retail sales growth in EMEA, Americas, and parts of Asia-Pacific, and strong improvements in inventory levels, reaching targets ahead of schedule.
- Profit Recovery Plan to improve profitability: The company is implementing a Profit Recovery Plan expected to deliver $1.1 billion to $1.4 billion of incremental operating profit over two years, focusing on restoring gross margins, supply chain efficiencies, and greater leverage of expenses.
- Growth in North America driven by key brands: North America grew low single digits in Q3, approaching mid-single digits when excluding the impact of the M·A·C loyalty program, driven by innovation and investments in M·A·C and Clinique.
- Ongoing softness in Mainland China's prestige beauty market is leading to lower-than-expected net sales and is anticipated to continue pressuring growth due to subdued consumer confidence and softness during key shopping moments.
- Potential short-term volatility in Asia Travel Retail sales is expected due to actions certain retailers are taking to increase their profitability, which could negatively impact the company's performance in this important region.
- Softening consumer sentiment and moderating market growth in North America, with pressure in certain channels, pose challenges in maintaining sales momentum in the region.
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Profit Recovery Plan and Margins
Q: How will the profit recovery plan affect margins and reinvestment?
A: The plan focuses on restoring gross margins through price realization, inventory management to control discounts and obsolescence, supply chain efficiencies, and accretive innovation. It aims to deliver $1.1 to $1.4 billion in incremental operating profit over two years, with slightly more in fiscal '25 than '26. Savings will fund increased investment in consumer activation, including advertising. Detailed guidance on timing will be provided in August. , -
China Sales and Outlook
Q: What's causing Mainland China sales weakness, and what's the outlook?
A: The softness is due to a slowdown in the overall prestige market, especially among middle-class consumers prioritizing experiences over goods post-COVID. Total Chinese consumer consumption, including travel retail and international sales, shows solid progress. Investments in local R&D and innovations launching in Q4 aim to boost growth. Despite short-term softness, the long-term trend is positive and expected to accelerate. , , -
Q4 Margin Guidance
Q: Why is Q4 margin expected to step down from Q3 despite similar revenues?
A: The margin step-down is due to shifts in advertising expenses from Q3 to Q4 to support innovation and holidays. Shipments in Asia Travel Retail resumed earlier than expected in Q3. Additionally, softer growth in Mainland China, macro uncertainties, cautious retailers, and higher-than-expected currency pressures are impacting Q4 performance and EPS. Expense savings are helping offset some of these pressures. -
Inventory Levels in Asia Travel Retail
Q: Have you reached targeted inventory levels in Asia Travel Retail, and what's the impact?
A: Inventory targets were met ahead of schedule in Q3, leading to earlier replenishment shipments. This increased Q3 shipments and anticipates retail sell-through acceleration in Q4. Due to prior year disruptions, there may be a disconnect between retail and net sales for a couple of quarters, but inventory levels will remain within agreed ranges. , , -
Spending Levels and Advertising Shifts
Q: Why are advertising spending plans shifting between quarters?
A: Underperformance of key holidays in China led to shifting advertising spend from Q3 to Q4 to support upcoming holidays and the 618 festival in June. This reflects agility in matching spend with consumer response and maximizing effectiveness. , -
U.S. Sales Performance
Q: Are U.S. sales accelerating, and how are investments impacting performance?
A: North America grew low single digits in Q3; excluding the M·A·C loyalty program impact, growth approaches mid-single digits. Despite softer consumer sentiment and moderating market growth, Q3 was positive and aligned with expectations. Investments in M·A·C and Clinique, including Clinique's launch on Amazon, are expected to positively impact future results. -
Clinique on Amazon
Q: Why launch Clinique on Amazon now?
A: Amazon now better aligns with Clinique's brand, offering expanded reach and the ability to engage and educate new consumers. Initial results are very promising, supporting Clinique's relaunch focusing on active derma. The platform's evolution allows the brand to effectively communicate its heritage and science. ,