Tracey T. Travis
Executive Vice President and Chief Financial Officer at Estée Lauder Companies
Thank you, Fabrizio, and hello everyone, I will briefly cover the fiscal 2022 fourth quarter and full year results followed by our thoughts on the outlook for fiscal 2023. Our fourth quarter organic net sales fell 8%, a bit better than we expected reflecting the disruptions in China related to COVID restrictions including travel retail in Hignan as well as the suspension of our commercial business in Russia and Ukraine. These matters more than offset continued growth from the recovery in the Americas and the rest of the EMEA region.
Reported sales growth included approximately one percentage point from the addition of sales from DECIEM while currency translation negatively impacted growth by approximately three percentage points. From a regional perspective, net sales in the Americas rose 9% organically, led by double-digit increases in makeup and fragrance. Consumers continue their return to brick and mortar leading to strong growth in freestanding retail and specialty multi-stores. We grew sales in nearly every market in the region with particular strength in Canada and across Latin America.
Net sales in our Europe, the Middle East and Africa region decreased 9% organically driven almost entirely by the disruptions in travel retail in China and the suspension of business in Russia and Ukraine. Of the remaining markets in the region 10 rose double-digit as return to the region and consumer traffic in brick and mortar retail thrived. The makeup fragrance and hair care categories rose strong double digits in EMEA while the decline in skincare reflected the soft travel retail sales in Asia.
Global travel retail, which is primarily reported in this region declined in Asia due to the COVID restrictions in China. Hainan, in particular, was impacted as stores were closed for a portion of the quarter, travel was curtailed to the island and courier services for online deliveries were disrupted. However, travel retail in European markets and in the Americas rose triple digits as airport traffic returned and doors in the channel reopened.
Net sales in the Asia-Pacific region, fell 19% organically, Greater China and Korea net sales were the most impacted by the COVID restrictions. Hardest hit was Shanghai where the citywide lockdown lasted two months impacting our distribution capacity serving all of China through the end of May.
Overall, our brands performed well for the important 618-holiday festival and maintained top rankings across the beauty space on both Tmall and JD. Elsewhere in Asia, there were some other bright spots, Malaysia, Japan, the Philippines, and Vietnam continue to recover and have begun to reopen to tourism.
Looking now at net sales by product category fragrance led organic growth with net sales rising 22% versus prior year. The fragrance category grew double-digits across all regions. Luxury fragrances continue to resonate with consumers looking for indulgence and our brands, including Tom Ford Beauty, Jo Malone London and Le Labo were over once again star performers.
Net sales in makeup rose 8% organically driven by the continued recovery and increased usage occasions in Western markets where makeup is generally the largest category. MAC and Clinique were top brand performers driven by hero products like Max Studio Fix and the newly launched MACStack mascara as well as Clinique's Almost Lipstick in Black Honey. Continued success and expansion in specialty multi doors is also aiding category growth.
Hair care net sales grew 5% organically. Excellent performance from Bumble and bumble and specialty-multi contributed to growth. The launch of Aveda's vegan hair color in EMEA and a successful activation around the brand's hero and body Invati franchise in Korea also aided category growth.
Net sales in skincare were the most impacted by the COVID-related restrictions in China affecting Greater China, Asian travel retail and Korea. Skincare continues to represent approximately two-thirds of our business in the Asia-Pacific region. Net sales fell 21% in the quarter due to the disruption of the Shanghai distribution center with the greatest impact felt by Estee Lauder and La Mer brands. Skincare growth benefited from the addition of DECIEM sales in the quarter by approximately three percentage points.
Our gross margin declined 370 basis points compared to the fourth quarter last year driven primarily by factors affecting our supply chain. Global transportation delays, port congestion, labor and container shortages, and higher costs for both ocean and air transport have increasingly pressured our cost of goods. Unfavorable category mix from softer skincare sales also contributed to the decline.
Operating expenses decreased 9% driven by the curtailment of spending this quarter as COVID restrictions sharply reduced store traffic in China, including Hainan. We delivered operating income of $207 million for the quarter compared to $385 million in the prior year quarter. Diluted earnings per share of $0.42 included $0.03 dilution from the acquisition of DECIEM.
Shifting now to our full-year results given the volatility experienced throughout the year the results reflect the benefit derived from the diversification of our top-line growth as well as the incredible agility of our teams and their ability to effectively manage costs while also simultaneously investing selectively for future growth. Net sales rose 8% organically with double-digit gains in three out of four product categories and two out of three regions.
Sales of our products online continue to thrive even as brick and mortar recovered rising 11% for the year and representing 28% of sales. Among brick and mortar retail most channels grew double-digit while department stores end of the year downed slightly as pressure from COVID restrictions in Asia offset growth in other regions.and our business In travel retail also grew ending fiscal 2022 at 27% of sales. Our gross margin fell 60 basis points to 75.8%. Favorable pricing and currency were more than offset by higher supply chain costs, which were more pronounced in the back half of the year, the impact of the acquisition of DECIEM and higher costs for new products and sets. Operating expenses declined 150 basis points to 56% of sales. Disciplined expense management and general and administrative costs was the largest contributor to the decline. The changes in our channel mix continue to reduce selling costs, and additionally, we continue to drive more effective resource allocation in our advertising and promotional mix. These favorable trends were partially offset by increased shipping costs. During the year, we continue to create more flexibility in our cost structure to absorb inflation in wages, media, and logistics. We achieved significant savings from our cost initiatives, including the post-COVID Business Acceleration Program. This has enabled us to realize greater expense leverage while also reinvesting in areas that support profitable growth, resulting in an overall improvement in our operating margin. Our full-year operating margin was 19.7%, representing an 80 basis point improvement over last year. This improvement includes the absorption of 60 basis points of dilution from DECIEM. Our effective tax rate for the year was 21.3%, a 260 basis point increase over the prior year primarily driven by a lower current year tax benefit associated with share-based compensation and the prior-year favorable impact of the US government issuance of final GILTI tax regulations that provided for a retroactive high-tax exception. Net earnings rose 11% to $2.6 billion and diluted EPS increased 12% to $7.24. Earnings per share includes $0.04 accretion from currency translation and $0.05 dilution from the acquisition of DECIEM. The post-COVID Business Acceleration Program is ramping up with final estimated restructuring charges of $500 to $515 million at the top end of our original projections. We are pleased with the progress we achieved from this program. We realigned our brand portfolio by exiting four designer fragrance brands as well as the BECCA and RODIN brands and we are streamlining our market distribution for Smashbox and GLAMGLOW to improve their long-term viability. We optimized our brick and mortar distribution network, we have been and will continue to close under-productive freestanding retail stores as we rebalance our distribution network. By the end of fiscal 2023, we expect to have closed nearly 250 freestanding retail stores under the program. We've also rationalized department store counters and other retail locations improving our ability to focus our efforts on driving more profitable omnichannel opportunities in our remaining distribution. We also approved initiatives to optimize our organization across regions and throughout global functions to reduce complexity, leverage our scale and enhance our go-to-market capabilities. When we are finished, executing the program, we expect a net reduction of between 2,500 and 3,000 positions globally. We expect to execute the remaining projects to achieve estimated annualized gross savings of between $390 and $410 million before taxes, beginning in fiscal 2024. A portion of these savings have been and will continue to be reinvested in capabilities that sustain our long-term growth including data analytics, online, and advertising. Turning now to our cash flow, we generated $3 billion in cash from operations, a 16% decrease from the $3.6 billion in the prior year period. The primary driver was higher working capital due to the end-of-year disruptions related to the pandemic, the past few years, as well as inventory to support future growth and to help mitigate the supply chain challenges we have faced in certain raw material and component tree areas. We utilized $1 billion for capital improvements, an increase of approximately $400 million over last year. We continue to invest in capacity and other supply chain improvements. We increased consumer facing investments to support in-store experiences and recovery markets. We renovated office space and we continue to invest in information technology. We also returned cash to stockholders at an accelerated pace this year as the need for more stringent cash conservation subsided with the progression of the recovery. During the year, we repurchased 7.4 million shares for $2.3 billion and we paid $840 million in dividends, reflecting the 13% increase in our dividend rate that became effective in our fiscal second quarter. All in all, we delivered a strong year, despite significant disruptions, including continued outbreaks of COVID, higher inflation, supply chain constraints, and the invasion in Ukraine, and we also continue to invest in foundational capabilities for the future, including new production capacity and innovation to support growth. Now looking ahead to fiscal 2023. We believe that the prestige beauty category has ample opportunities for continued strong growth. Global prestige beauty is expected to grow mid to high single digits, driven by the continued recovery and the gradual reopening of the remaining markets impacted by COVID restrictions. Additionally, we look forward to the continued resumption of international travel, especially in Hainan and the Rest of Asia. We are concerned, however, that the recovery this fiscal year will once again not be a smooth one. Record inflation and the threat of recession or slowdown in many markets could temporarily dampen consumer enthusiasm and is causing some retailers to be more cautious regarding inventories. The strengthening dollar is putting pressure on our international earnings. Additionally, heightened geopolitical tensions could prove to be disruptive. With that backdrop in mind for the full fiscal year organic net sales are forecasted to grow 7% to 9%. We discontinued four designer fragrance licenses at the end of fiscal 2022. These brands generated 250 million in sales in fiscal 2022. In fiscal '23, we will sell some remaining inventory to the new licensees, primarily in the first half. Sales from both years will be excluded from our organic growth figures. At current levels, currency is projected to be a significant drag on our reported results in fiscal '23 as the US dollar strengthened against key currencies. Based on July 31 spot rates at 1.018 for the euro, 1.215 for the Pound, 6.746 for the Chinese Yuan and 1303 for the Korean Won we expect currency translation to dilute reported sales growth for the full fiscal year by three percentage points as well as an additional one point due to the impacts of foreign currency transactions in key international travel retail markets. There are a few other items impacting our sales growth in fiscal 2023. Our list price increases are expected to add approximately 5.5 points of growth helping to offset inflationary cost pressures. We take most of our pricing actions at the beginning of our fiscal year. New distribution including new doors in existing markets, new markets for certain brands, and expansion on new online platforms could add another two points. Conversely, the loss of sales in Russia and Ukraine are expected to trim about one percentage point from sales growth. We plan to continue to drive margin expansion through operational efficiencies and cost savings while fueling additional advertising investment where appropriate. Our full-year effective tax rate is expected to be approximately 23%. Diluted EPS is expected to range between $7.39 and $7.54 before restructuring and other charges. This includes approximately $0.20 of dilution from currency translation. In constant currency, we expect EPS to rise by 5% to 7%. The impact from foreign currency transactions and key international travel retail market is also expected to negatively impact adjusted diluted earnings per common share by growth by six percentage points. At this time, we expect organic sales for our first quarter to fall 4% to 6%. The impact of sales from certain designer license exits are expected to dilute reported growth By approximately one point and currency is expected to be dilutive by approximately three points. Our first quarter sales are expected to be negatively impacted by continued COVID restrictions in China and Hainan. As you may recall, last year we mentioned that some of our retailers in North America secured holiday shipments earlier due to supply chain concern contributing 1.5 points to our growth in the first quarter of fiscal 2022. This year, retailers in the US have been tightening their inventories causing our net sales to trail retail sale. We expect China and travel retail in APAC to gradually improve throughout the first half of the fiscal year as COVID restrictions lift and comparisons should ease in the back half of the year as we lap the invasion of Ukraine and the significant impact of COVID restrictions in China. We expect first quarter EPS of $1.22 to $1.32. Currency translation is expected to be dilutive to EPS by $0.04. The impact from foreign currency transactions in key international travel retail markets is expected to negatively impact adjusted diluted earnings per common share growth by five percentage points. In closing, we remain confident about the long-term prospects for global prestige beauty and in our strategy to outpace industry growth. Our multiple engines of growth delivered in fiscal 2022 and we anticipate this more diversified growth can continue in the coming year. And importantly, we continue to reinforce the fundamental drivers of our business that both enable and contribute to continued strong future sales and EPS growth. I would like to close by extending our heartfelt gratitude to our employees around the globe for continuing to deliver our results during this challenging macro environment. That concludes our prepared remarks, we'll be happy to take your questions at this time.