Estee Lauder Companies Inc (NYSE: EL) Q3 2020 Earnings Call Transcript

Estee Lauder Companies Inc (EL) Q3 2020 earnings call dated May. 01, 2020

Corporate Participants:

Rainey Mancini — Senior Vice President of Investor Relations

Fabrizio Freda — President and Chief Executive Officer

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

Analysts:

Lauren Lieberman — Barclays — Analyst

Steve Powers — Deutsche Bank — Analyst

Olivia Tong — Bank of America — Analyst

Erinn Murphy — Piper Sandler — Analyst

Michael Binetti — Credit Suisse — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Presentation:

Operator

Good day everyone and welcome to The Estee Lauder Companies Fiscal 2020 Third 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 the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Rainey Mancini — Senior Vice President of Investor Relations

Thank you. 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 other reports filed with the SEC where you’ll find factors that could cause actual results to differ materially from these 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 and adjustments disclosed in our press release. All net sales growth numbers are in constant currency.

You can find reconciliations between GAAP and non-GAAP figures on our press release and on the Investors section of our website. During the Q&A session, we ask 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.

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Fabrizio Freda — President and Chief Executive Officer

Thank you, Rainey and hello everyone. I hope you are in good health during this difficult time as the world confronts COVID-19. My heart goes out to those afflicted and my deep gratitude goes to everyone around the world who is part of the global relief efforts. Before I discuss results and our strategies to navigate through this challenging environment, I want to first thank our employees at The Estee Lauder Companies. The care and compassion you have shown one another since the outbreak while also balancing new work routines for yourselves and caring for your families has been truly inspiring. Your creativity, a sense of collaboration have risen to new heights as we have adapted our business from marketing to sales to manufacturing and more. Our employees have truly exemplified our belief in leadership from every chair [Phonetic].

The Estee Lauder Companies and some of its charitable foundations have made donations to help limit the spread of the virus and ease the related hardship faced by those it affected. To date, we have made donations and commitments to Doctors Without Borders, the New York City COVID-19 Response & Impact Fund, Red Cross Society of China, Shanghai Charity Foundation, Give2Asia, and Community Chest of Korea. This week, we established the ELC Cares Employee Relief Fund, our newest giving initiative, which would be funded to our contributions from the company, the Lauder family, and our employees. It will provide immediate and critical financial relief to employees whose lives have been impacted by the pandemic.

Our brands have also found meaningful ways to contribute. The Estee Lauder brand donated 2 million surgical masks for frontline workers in New York while Clinique donated 50,000 skin care products to doctors and nurses in New York City’s hospitals. Aveda launched Aveda Cares, a relief program to benefit independent salons and stylists in the United States. The multi-facet initiative will help salons prepare to recover from COVID-19 related closures. The M.A.C VIVA GLAM fund is continuing its decades long giving by allocating $10 million to 250 local organizations all over the world that are providing essential needs and services to people at higher risk during the COVID-19 pandemic. I’m also especially proud of how the company mobilized to manufacture hand sanitizer for frontline workers, high-risk individuals, and our employees, thanks to the tremendous work of our global research and development and supply chain teams. Our facility in the United States, the United Kingdom, and Belgium are making over 1 million hand sanitizers.

Now turning to the quarter’s performance. As we discussed with you on our last earnings call in early February, we expected third quarter sales to decline. After a strong January globally, we anticipated pressure in February and March in our Asia/Pacific region and [Phonetic] our travel retail channel given the extent of the COVID-19 outbreak at that point in time. However, COVID-19 continued to spread around the world as the quarter progressed and social distancing measures began to impact retail traffic. As March evolved, travel was significantly curtailed and virtually all stores in the Americas and Europe, the Middle East and Africa temporarily closed hindering consumer’s primary access to supply such that the magnitude of the impact on our business was far greater than initially anticipated.

In this very complex and challenging environment, reported sales fell 9% in constant currency. Tracey will provide more details about our financial performance in a moment. In this volatile quarter, there were several bright spots in our business, which led to global prestige beauty share expansion. The Estee Lauder brand grew high-single digits while Darphin and Le Labo also delivered sales growth. Skin care sales grew internationally including Dr. Jart+. In our Asia/Pacific region, sales in Mainland China rose mid-single digit after returning to growth in March. Our online sales increased strong double-digits worldwide with growth accelerating significantly from February to March. The strength of our global travel retail business in January and February enabled it to deliver low-single digit sales growth for the quarter, excluding Dr. Jart+.

Each of our three regions are at different stages of impact from the COVID-19 outbreak as I speak with you today. Furthermore, within regions, the extent of containment and recovery varies. As a result and given how fluid the situation is, we are continuously fine-tuning our strategies with our brand and regional teams to both manage the present and plan for the future. Across the regions, a majority of our facilities have continued to manufacture and distribute products, though in a much reduced capacity. Most of our offices globally are operating in a work-from-home scenario, but that too is evolving.

Our China headquarters in Shanghai has fully reopened as all employees began working in the office daily three weeks ago after having been on a staggered schedule for several weeks. As office reopened, however, we are going back to work in a different way. We are employing additional safety measures for health and hygiene. We are also applying the experiences of work-from-home with new ways to collaborate and engage more effectively. In our Asia/Pacific region, our business in Mainland China is further improving as retail stores began to reopen with shortened hours in March. By mid-April, virtually every door had reopened. We are encouraged by China efforts in containing the virus and the initial signs of recovery. We expect to return to double-digit sales growth in Mainland China in the fourth quarter.

More recently, Sales in Korea have begun to grow and stores have started to reopen. However, Japan, Australia and markets in Southeast Asia are still in the containment phase with most retail stores closed as we speak. In Europe, the Middle East and Africa, retail stores in most countries have been closed since early March with the primary exception being in the Balkan Peninsula and the Nordic region. Some countries have recently announced plans to gradually reopen, most notably, Germany and Italy, which are promising signs. Prior to this temporary door closures, several countries in Western Europe had been experiencing lower retail traffic as tourism abated in response to COVID-19. We expect these headwinds to persist for some time to come.

In the Americas, most retail stores have been closed since mid-March although retailers started seeing much lower traffic earlier in the month as social distancing began. More recently, several states in the U.S. have announced guidelines for the recovery. We are starting to see very limited reopening with curbside pickup. We are closely monitoring the evolution of consumer behavior through this challenging time and we are developing strategies to address it.

We are using sophisticated social media listening tools, machine learning, and other qualitative and quantitative research techniques. Each day, we are assessing how consumers express their needs and desires from seeking positivity, self-care, and wellness to understand their at-home needs and routines to hearing their environmental and sustainability concerns. Our successful strategy built on multiple engines of growth is as vital as ever. Our diversified portfolio of categories, channels, geographies, brands, and price points give us many levers to fuel the business and will play a crucial role during recovery when stores reopen and consumer restock at home. Our robust global skin care portfolio, vibrant online business, a broad exposure in Asia/Pacific are the primary engines of growth in this moment. These engines had tremendous momentum before COVID-19 and are playing a crucial role during containment while brick and mortar is closed.

Let me first speak on skin care. Emerging trends are increasing the appeal of the category, bolstering already strong category dynamics. Taking care of one’s skin has become an expression of self-care, which has risen in importance. Consumers are actively exploring sub-categories and expanding their regimens finding peace of mind in the ritual of routine. Our focus on hero products is the right strategy as consumers seek brands and products they trust. Consumers are newly discovering and continuing to return to our heroes, beloved heroes like Estee Lauder’s Advanced Night Repair, La Mer, Creme de la Mer treatment lotion and concentrate, and Clinique’s Moisture Surge has seen strong global demand online since the outbreak, demonstrating the dynamism of big brands.

In these unprecedented times, we are staying true to our belief in the power of innovation on our hero franchises. We launched Estee Lauder Perfectionist Pro Rapid Brightening Treatment, Clinique Even Better Clinical Radical Dark Spot Corrector + Interrupter, and The NEW Eye Concentrate from La Mer. Consumer demand has been especially compelling. In fact, for the Perfectionist Serum, it’s March launch on Alibaba Hey Box was one of Estee Lauder’s best ever on the platform. Clinique Even Better serum is far exceeding expectation in Mainland China and has been highly sought online in the United States, and La Mer launch contributed to significant share gains in luxury on Tmall.

Among our channels, online is thriving around the world. As we discussed with you at our Investor Day last year, we have long believed in the excellent growth prospects of online and have been investing in this dynamic channel for years. Our presence is global with online sales in over 50 countries. We are highly diversified with over 300 brand.com sites, over 60 brand boutiques on platforms such as Tmall, and over 1,700 retail.com doors. Our online brand teams have been actively engaged since the containment measures took hold, optimizing product placement to address consumer current [Phonetic] wants and needs and showcases tools like virtual try-on to ease decision making.

The Estee Lauder brand expanded its online sales strategy to include a broad array of social selling activities from live shows on Instagram focused on self-care with global spokemodels to live streaming from its franchise with global and local megaparties to live chats with consumer on its brand site to personalized one-to-one outreach through various communication tools. M.A.C pivoted its long-awaited April launch for its newness Selena capsule collection to online and social selling to honor the commitment it had made to consumers. The brand employed an exciting digital activation in-place and in-person events for the global launch to tremendous success as the order sold out online in two days. Selena is the biggest collection launch to date in terms of total sales on maccosmetics.com.

Bobbi Brown began daily lessons with the brand’s pro makeup artists across digital channels, a topic most requested by consumers. Initial signs are positive and the brand is welcoming all new consumers thanks to this always-on artistry initiative. Jo Malone London has seen an influx of activity with its digital communities as consumers have sought to elevate and uplift their stays with the power of scent trying out the brand’s home fragrances and bath and body categories had doubled their mix of business.

Throughout actions like this in recent weeks, we drove conversion rates sharply higher and our sales have risen across all demographics. I’m especially encouraged by the online growth we have seen from the ageless consumers. Globally, our brands are seeing increases in new consumers, up 3 times to 4 times. Some rates are even higher. For La Mer in the United Kingdom, new consumer acquisition is higher by 5 times while in Thailand, across all brands, it is higher by 8 times. As consumer behavior has evolved during this time, we are unearthing [Phonetic] more data, leveraging our analytics capability to derive even better consumer insight to provide even better service. When retail stores reopen, we will be in a stronger position to further unlock the potential of omni-channel.

We’re also focusing on the areas of most immediate opportunity in Asia/Pacific with Mainland China as of March and Korea as of April moving from containment to recovery. We told you on our last earnings call that we stood ready to facilitate recovery as soon as the market supported it and we are doing just that. In Mainland China, we successfully piloted emerging business models for online and department stores to adapt to the changing landscape. For La Mer, personalized service across channels with curated and targeted communication drove both online sales and department store sales significantly higher in the month of March. The strengths of the La Mer repeat business model has been a key factor for its strong recovery and contributed to the brand’s outstanding prestige beauty share gains in Mainland China in the quarter.

As countries in Asia/Pacific move into recovery, we are mindful of the consumers in these markets who traditionally purchase our products in travel retail, but not able to do so with air travel largely curtailed. Our regional brand leads are working to meet this consumer demand in markets, be it in department stores, specialty multi, freestanding stores or online. Our travel retail team is also actively engaged as destinations in the channel reopen, already driving positive trends in Hainan or Macau. We remain focused on meeting the needs of Chinese and Asia consumers with local relevancy and local trends. Since we last spoke in February, we have advanced our work toward our new investment in a state-of-art innovation center, which will open in Shanghai.

In closing, this unprecedented time, I’m moved by how deeply we are leading our company values and how our intent of becoming an even better company through this challenging moment. With our extraordinary people and our successful strategy built on the multiple engines of growth, we stand ready to emerge strongly when the global recovery begins. Now, I will turn the call over to Tracy.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

Thank you, Fabrizio and hello everyone. COVID-19 is certainly proving to be the most significant challenge we have faced as a public company as much of our brick and mortar distribution globally has been deemed non-essential during the quarter by several jurisdictions and remains closed today. We continue to do our best to support our communities and our employees while also working to mitigate the business impact during this time. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call and net sales growth numbers are in constant currency.

So looking at our third quarter results, net sales fell 10% [Phonetic] driven by the rapidly evolving impacts from COVID-19 that occurred throughout the quarter. As the majority of our brick and mortar distribution throughout the world was closed as the quarter progressed, we quickly pivoted to drive sales online. Our online growth accelerated sharply at the end of March and continued to rise in April. Sales grew in travel retail from a strong January and February before travel restrictions were enacted and skin care remained our most resilient category.

The Americas region and the makeup category suffered the biggest shortfalls. The December acquisition of Dr. Jart+ added approximately 2 points of net sales growth. Our gross margin decreased 320 [Phonetic] basis points compared to the third quarter last year due to a combination of factors. In the first seven months of our fiscal year, we saw outstanding growth in our skin care category, much of it in Asia and in travel retail. To meet what has now been our third year of double-digit demand for our products, we supplemented our internal manufacturing capacity with additional third-party suppliers and we incurred increased air freight to support sales growth in areas distant from our manufacturing facilities. This resulted in higher supply chain costs in our third quarter. The impact of increased tariffs, higher obsolescence, and promotional activity also contributed as well as the inventory step-up related to Dr. Jart+.

Previous initiatives like Leading Beauty Forward, which is still projected to contribute approximately $425 million to $475 million in net savings by fiscal 2021 have put us on much stronger footing to weather normal economic downturns. However, the impact of COVID-19 has not been a normal downturn. The sudden and dramatic change in sales growth from the beginning of the third quarter to the end created a deleverage effect that could not be offset quickly enough by the significant cost actions we took, which totaled approximately $250 million. Therefore, operating expenses as a percentage of sales rose 250 basis points.

As we told you last quarter, we expect to see a greater impact from our third quarter cost actions including advertising and promotion reductions more aligned to sales performance, a hiring curtailment, and the benefits of work-from-home which yielded sharply reduced travel and meeting expense as well as consulting expenses in our fourth quarter. As it became apparent that store closures and social distancing measures would move beyond China to be adopted around the world, we implemented even more cost actions that will have a more meaningful impact on curtailment of expenses beginning in May.

These primarily include furloughs and other leaves of absence as well as temporary reduction in compensation for management and Board members. The capabilities we have built and the actions we are taking now enable us to manage through the situation today while funding targeted strategic investments going forward, which will position us well to emerge strongly when the recovery is more apparent. Our interest expense rose by $11 million to $28 million during the quarter reflecting higher debt levels to finance the acquisition of Dr. Jart+.

Our effective tax rate increased to 30.5% from 22.1% in last year’s third quarter, primarily attributable to a higher effective rate on the company’s foreign operations due to the mix of earnings. Adjusted diluted EPS of $0.85, fell 45% compared to the prior year. Currency diluted EPS by $0.01 and the acquisition of Dr. Jart+ diluted EPS by approximately $0.03. During the quarter, we recorded $346 million of impairment charges related to four brands and certain freestanding retail stores that have been further challenged by the impact of COVID-19 on consumer demand.

We believe that our strong balance sheet and ample liquidity provide core competitive advantages for our company, demonstrating the importance of scale. These position us to not only manage through a crisis, but to emerge from it stronger. During the quarter, we borrowed $1.3 billion under our $1.5 billion revolving credit facility and had $200 million of commercial paper outstanding, ending the quarter with nearly $5 billion in cash and cash equivalents. In April, we issued $700 million of 2.6% 10-year senior notes in order to further enhance our financial flexibility and liquidity and repaid the commercial paper with the remaining capacity under the revolving credit facility. We were able to do all of this while maintaining our strong single A credit rating.

For the nine months, we generated $1.95 billion in net cash flows from operating activities, an increase of 11% from the prior year. We invested $468 million in capital expenditures and $1.04 billion to acquire the remaining interest in Dr. Jart+. We also used $883 million to repurchase shares and $502 million to pay dividends. To further enhance near-term liquidity, we are focusing our capital investments on areas necessary for future growth and paring back in areas such as retail renovations and office improvements. We cut our planned capital expenditures by one-third and now expect to spend between $600 million and $650 million for the full year. Additionally, we have suspended share repurchases for the balance of this fiscal year and our quarterly dividend that would have been paid in June of 2020. All of these activities greatly enhance our ability to manage through the shutdown in brick and mortar for an extended period of time while we focus on stimulating greater consumption online.

History has not provided any truly comparable recent events we can use as guidance concerning the effects of the global pandemic. The disruption to our business caused by COVID-19 has clearly been more widespread and more pronounced than we had expected it would be when we last spoke with you just a few months ago in February. We delivered remarkably strong double-digit growth in sales and adjusted EPS through January, but that was followed by the dramatic spread of the pandemic and the related door closings and curtailment of travel that we spoke about. Due to the fluidity of the situation, it is both complex and difficult to predict the duration or the timing and trajectory of the recovery and the corresponding impact on our business.

At this point in the fourth quarter, the majority of our distribution, with the exception of China and a few other markets, remains closed and while we are encouraged by the weekly acceleration of our global online business, we do not have enough visibility into the progression of the rest of the business until more retail doors open in the coming months and we do believe traffic could initially return at a slower pace as some consumers remain tentative until a treatment is developed. Therefore, given the level of uncertainty, we are not providing explicit sales and EPS guidance for the year.

That said, there are a few guideposts that we can provide to you. The inclusion of six months of sales from the acquisition of Dr. Jart+ should add about 1 percentage point to sales growth for the year. It is expected to dilute EPS by about $0.14 due to purchase accounting. Currency translation is expected to negatively affect reported sales growth by 1 percentage point reflecting weighted average rates of 1.11 [Phonetic] for the euro, 1.26 [Phonetic] for the pound and 7.03 [Phonetic] for the won for the fiscal year. The related EPS dilution should be approximately $0.05. We are very encouraged as we see the beginnings of recovery in China and markets around the world begin to discuss gradually lifting retail and travel restrictions as the virus abates.

We expect strong online acceleration to continue as underlying consumer demand is driving both replenishment and new customers online. However, unlike the third quarter, where many of our global doors were open until the last month of the quarter, we expect that most of our retail distribution will remain closed for much of the fourth quarter and consumer traffic will likely recover slowly in brick and mortar. We expect greater sales and margin declines in the fourth quarter as a result. We estimate that global prestige beauty will decline double-digits in the second half of our fiscal year.

We’re also mindful of the risk of a global recession and a slow recovery in employment impacting consumer sentiment and discretionary spending. Our gross margin in the fourth quarter will reflect the adverse conditions we have been experiencing in March and April. The sudden and dramatic change to our volume forecast is expected to trigger an accounting rule requiring us to recognize the impact of reduced manufacturing volumes on our standard costs. Our plants have been running at meaningfully reduced capacity reflecting some temporary plant closures as well as reduced efficiencies to accommodate social distancing requirements, staggered shift changes, and other changes necessary in this environment.

We are also required to recognize expenses related to manufacturing employees who not working. These expenses are now recognized in the current period, instead of when the product is sold. The inclusion of Dr. Jart+ with the impact of the inventory step-up will also pressure our gross margin. We expect our belt tightening efforts to have a more pronounced impact in the fourth quarter to partially offset the negative impacts I’ve discussed. We are implementing some of the additional actions in May and expect to deliver fourth quarter savings of between $500 million and $600 million. Our full-year effective tax rate is expected to be approximately 24%. So those are some of the guideposts that we can provide to you for the year.

We are committed to continue to take the appropriate actions to rationalize our cost base relative to the new normal and return as quickly as possible to both sales growth and margin expansion as the COVID-19 situation stabilizes during the course of fiscal 2021. We delivered tremendous sales and profit growth through the first half of the year as our business continued to benefit from the strategic actions we took over the past several years to position our company for sustainable profitable growth. And while the unfortunate temporary shock of COVID-19 has made our outlook for the balance of this year uncertain, we have taken appropriate action to mitigate the effects of the pandemic while continuing to protect our business to be able to be well-positioned for both the near-term recovery and the long-term opportunities inherent in global prestige beauty.

On behalf of Fabrizio and The Estee Lauder Companies leadership team, we extend our immense gratitude to all of our employees around the world for their extraordinary efforts to manage during this unprecedented period. And that concludes our prepared remarks, we’ll be happy to take your questions at this time.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Lauren Lieberman from Barclays. Your line is now open.

Lauren Lieberman — Barclays — Analyst

Great, thanks, good morning. I wanted first to talk about — I have so many questions. So I wanted first to talk about travel retail and just what your data and analytics have told you over time about the sales historically through that channel, how much of it is sort of impulse, how much of it is new consumers discovering your brands, how much of it is sales that would have or could happen elsewhere like a replenishment type sale when someone travels because that could inform thinking about your ability to recapture some of that sales or what degree of that sales even assuming global travel remains depressed for a good amount of time. Thanks.

Fabrizio Freda — President and Chief Executive Officer

Yes, I think, first of all, your assumption is correct. Our data confirms that those are consumers that while traveling are buying, discovering or replenishing their products. So then there is business travel where that people for business brings back home gifts and obviously this creates consumption, but in travel retail, the most successful products all over the world tend to be what we call our hero products. So the products which have high loyalty, a high repurchase rate because both as a gift and for personal consumption, which are the two drivers for travel retail, people really wants to buy product that they are pretty sure will either replenish their habits or create exciting gifts. In that sense, there is the possibility to recover at least part of the travel retail sales in the country of origins and we are working on this in every country, many emerging markets, in China, in U.S., in Europe, and so there is a project to do this as much as possible.

However, in this moment, to be very clear, travel retail in Europe and U.S. is basically closed and so in the quarter four, there is a very big issue of closures that is in the middle of the travel retail sales, which are possible in the short-term. In Asia, we start seeing already amazing results when there are openings. In this moment, the travel retail within China, particularly in the Hainan Islands or the travel retail in Korea and the travel retail in Hong Kong and Macau, this start already coming back and is delivering good growth. We are focusing in this case very much more on conversion and it is working. So is again is [Indecipherable] but the real travel retail recovery will start happening in fiscal year ’21 with a gradual reopening of travel and will be probably one of the most gradual reopening in the recovery from our expectation and from our data.

Operator

Thank you. And our next question comes from Steve Powers from Deutsche Bank. Your line is now open.

Steve Powers — Deutsche Bank — Analyst

Great, thanks, Fabrizio and Tracey, hope you are well. I guess is it possible that you could talk a little bit more about what you saw in March relative to January, February, and what you’ve been seeing in April across your key categories, geographies, and channels because I think that too would help inform at least the near-term visibility and I guess relatedly, if you’re able, it sounds like have line of sight to some belt tightening initiatives in the fourth quarter, but I’m trying to juxtapose that against some of the near-term manufacturing and other COVID-related headwinds that you spoke to Tracey. So just a little bit more color about what you’ve seen and are seeing in the moment while things are shut down. Thank you.

Fabrizio Freda — President and Chief Executive Officer

I’ll start from what we are seeing on the sales side and then I’ll let Tracey cover all the financial implications and the financial aspects. So the recovery first of all is very different by region because the COVID-19 issue is a different speed and different level of depth in different markets and some markets are already, as you know, in recovery, other markets are still in the middle of the issue. So we are managing things in a very differentiated way by region, by country.

So what we see in this moment is that in — still the closures are in Europe and U.S. are 90% [Indecipherable] if you have seen some of the data that are emerging on the situation in United States in the last week of March or the first week of April, the market was minus 70% and the brick and mortar closure has a very big impact. So this will — we see the month of March, the month of April and part of month of May where closures are very big in EMEA and in North America has been probably the worst moments for that regions and then we see a gradual recovery as the brick and mortar will open in these regions meaning Europe and America and also in Europe and America we see already an extraordinary progress of the online. That’s the key important point.

On the other side, in April in places like China, Korea, Taiwan, we see already double-digit growth. We already see the recovery being very active and that’s for us is very encouraging because it shows that as soon as there is a recovery, as soon as there is the recovery from the consumer point of view, so when the consumer are back with the spirit of really going back to their normal habits like is starting as I said in China, Korea, or Taiwan, the double-digit growth comes back fast and because we see both increased consumption, we see a restocking in consumer homes and we see a restocking in trade, which happen at the same time. So the recovery is strong, but the recovery is for the moment only in these areas and I said is in global online.

In global online, most of the areas of the world is double-digit, but there are areas, which are triple-digit and then the recovery as I said, started in very few travel retail stores, which are open, as I said, mainly in China and Korea, but the rest of the world for the moment is still closed and so in fiscal year ’21, we expect to see all the engines, meaning, including the European and U.S. brick and mortar gradually coming back, but as Tracey has clarified in her prepared remarks, we believe the come back of brick and mortar will be gradual.

We have signs of this already in Asia where the recovery really starts online and starts gradually in brick and mortar and brick and mortar acceleration takes much more time because it takes not only the technical reopening, but takes the consumer confidence to buy in brick and mortar comes back, and this will only come back more gradually. So that what we see. In summary, we see faster recovery in Asia for the moment, a lot of closures still in Europe and U.S., very fast recovery online globally, and a more gradual recovery in travel retail.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

And Steve, to your question on the cost savings and the manufacturing variance, the way I would think about that in the fourth quarter, the $500 million to $600 million of cost savings, about a third of it is related to employee actions and the other two-thirds related to other expense areas that we’ve stepped up in terms of our cost savings: advertising, consulting, travel etc. So that’s generally the split in the fourth quarter.

As it relates to our gross profit margin and you saw the impact in the third quarter, we expect that we will continue to see in the fourth quarter, the impact obviously of the tariffs and of the higher third-party sourcing costs that will impact us in the fourth quarter. In addition to that, I spoke about the under-absorption of some of our overhead and labor costs that we need to expense in the fourth quarter. So the bigger impact will be in the fourth quarter on that. So our gross profit margins will decline further in the fourth quarter related to those one-time issues related to the lower production volumes. As we increase production volumes, as we emerge out of COVID-19, that will correct itself.

Operator

Thank you. And our next question comes from Olivia Tong from Bank of America. Your line is now open.

Olivia Tong — Bank of America — Analyst

Great, thank you. Good morning and hope you guys are well.

Fabrizio Freda — President and Chief Executive Officer

Good morning.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

Good morning, Olivia.

Olivia Tong — Bank of America — Analyst

Wanted to ask you about just with your sales and I think fairly impressive that China was only down for the month of February and that travel retail was still up in the quarter, but the U.S. decline was pretty staggering. So as we start thinking about when Western markets start to reopen, can you talk about the differences not only in underlying demand in these key markets, but obviously your infrastructure because clearly, e-commerce penetration is significantly higher in Asia than in the U.S. So can you talk about just your infrastructure — is e-commerce better developed just in China overall and how do you compare for that. And then just thinking later in the year, I know it’s still pretty far away, but what’s guiding how you plan for holiday, Singles Day, and things down the road as we think about the future. Thank you.

Fabrizio Freda — President and Chief Executive Officer

So I’ll start and then Tracey will add perspective is — so the penetration online actually is very strong in the United States, in the U.K. and in China. Those are the three markets where we have the stronger penetration online, where the market is very well developed online. So in terms of how we see the situation in the U.S., obviously our stabilization plan in the U.S. had been postponed by the COVID issue that emerged. So we’ll take a bit more time than what we originally were hoping — when we had an encouraging last quarter in calendar year ’19. So that is because of the closures of the brick and mortar.

In the United States, the online acceleration is outstanding as we speak and so actually is very reassuring to us that the percentage of business online will dramatically increase. Now this was already planned for the long-term, but this issue has accelerated it and as I explained in prepared remarks, what we are seeing in the U.K., in the U.S. and in China that particularly the ageless consumer, so the consumers above [Phonetic] 50, 55 that as you know, the online was mainly for millennials and the new generations, but frankly all these other consumers now are extra consumer that are using ec-ommerce much more in all its aspects and we believe that this change is here to stay and so the increase or the percentage of business online including retail.com, so it’s not only brand.com, its retail.com, its platform is in China and in other parts of the world is pure-plays in the U.K.

So in all the online channels, there is a increase of percentage of sales that goes online. To be clear, for the long-term, this is positive to us, it’s very positive. Online has always been one of our key drivers, one of our profitable drivers, and most importantly, make a stronger platform for the future of omni-channel, which is the way also particularly in luxury the distribution models will evolve on all fronts. So good development and we believe this is positive. Tracey, do you want to add perspective?

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

Then on our our infrastructure as well as our plans for holiday, clearly, we are mindful of and watching very closely in terms of as doors open, the productivity of those doors. So certainly, both with our retail partners as well as our own freestanding stores, just making sure as doors open that they are productive, that they are profitable and we will as we have over the last few years, take appropriate actions if we find that we do emerge out of this with brick and mortar doors that are less profitable, than we would like for them to be. As it relates to holiday, at the same time, one of the things that Fabrizio when he was speaking about online, the inference there is, we are very much focused on the fact that demand remained strong and it’s really the access to our products that has become challenging in markets like in Europe as well as in the Americas.

So lots of activity. Our program is shifting to online really to make sure that people can access our products. We also are focused on for holiday, what we think holiday will be like. We actually are hoping that by holiday things stabilize a bit. As I mentioned in my prepared remarks, we are mindful that there could be a recession certainly impact but hoping that by holiday people are ready to shop again. So our holiday programs remain intact. The quantities may be adjusted a bit given how much demand has come back by that time.

Operator

Thank you. And our next question comes from Erinn Murphy from Piper Sandler. Your line is now open.

Erinn Murphy — Piper Sandler — Analyst

Great, thank you. Good morning and I hope you both are well as well. I guess a follow-up just to the Americas, Tracey for you, when you think about sales down 23%, it was worse than we thought. Could you just quantify how much was truly the decline from store closures in the last two to three weeks of the quarter versus maybe pulling back on wholesale sell-in, and then bigger picture, as you think about the mix of business in the Americas, I guess Fabrizio you already addressed online clearly accelerating, but I’m more curious on kind of how you think about the reliance or the toggles between the department store, the specialty multi-channel as well as the freestanding stores on the other side of this crisis. Thank you.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

Sure, I mean in January as Fabrizio mentioned, we actually saw positive growth in all of our markets including in the Americas. We actually started to see some softness towards the end of February and to your point, the doors were not closed, but certainly it was apparent by that time that COVID-19 was starting to spread and consumers were starting to get a bit nervous about shopping in store and really focusing on stocking up on more essentials, and then March, we saw the biggest impact obviously with the doors closed half of March, but really the early part of March a tremendous decline in shopping because of the tentativeness of the consumer and really the consumer focused understandably so on health and essentials for their homes and their families.

Fabrizio Freda — President and Chief Executive Officer

Yeah and the other thing I want to add, obviously, our job is also to protect our profitability. When we saw this evolving, we started spending less already in February and then in March also our spending was reduced in order to mitigate the impact of the thing. So to be clear, we are anticipating the events and so the spending was reduced already starting gradually in February, the consumer sentiment started going down already in February, and then in March when the closures started in the United States, you know, sales went to zero because basically brick and mortar completely closed and the consumer was shocked that retailers stopped ordering. So you need to see the months of March like a very big dip [Phonetic] moment and that’s why the overall number of the quarter was negative, but to be clear till January included and was already was true in the last quarter of calendar ’19, we were stabilizing the business and this was going on the positive trends and again we plan when the market will be back to go back to our stabilization program.

In terms of what will happen — to your question of what will happen to the other part of the business, which is not online. Obviously, the percentage of online business will increase, the rest will be reduced and so in our opinion, there will be closures, there will be a reduction of brick and mortar stores overall and this will make the brick and mortar stores more productive and the ability to deliver experience better. So we don’t see this necessarily negatively short in the long-term, it will be obviously a negative in the short-term and we see the future of freestanding stores and brand.com being an omni-channel future. In this period it is fascinating to see how consumers are learning different way to use the online, the concept on last mile, the role of the small convenience stores meaning freestanding store versus brand.com, how the two combined can create new experiences.

So there is going to be some interesting and frankly, in our opinion, promising evolution of the ability to serve the consumer in a luxury environment in the future, but the transition is going to be complex, difficult, and in the transition, the biggest opportunity is the strong growth of online and again for us, this is also a positive because we have a great infrastructure, we are very strong in brand.com and retail.com in platform, in pure plays depending on which part of the world this channel had a different percentage of the online business, but we are well covered in each one of them and so driving this across the globe and in the United States is going to be in the transition out of COVID, the strongest opportunity.

Erinn Murphy — Piper Sandler — Analyst

Thank you.

Operator

Thank you. And our next question comes from Michael Binetti from Credit Suisse. Your line is now open.

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for taking our questions here. I guess, Fabrizio, just to follow that question. In the Americas, I guess you said January was positive and February a bit that slower, so March deeply negative. I guess still to average out negative 23%, it seems like you held some inventories that were probably ordered by the retailers in the U.S. when you saw this coming. Maybe you could comment on as we look to reopening what kind of inventory levels out in the channel do you see that we’re going to be working with as we reopen in the U.S. I guess and then I guess just go back to travel for a minute to get to the positive number and we were just looking at some of the passenger data in China, it looks like it was down maybe 70% or 80% through February.

So to get to your number to be positive in travel, I think you’ve commented to us that Chinese consumer is about half of that business before. It speaks to very big growth rates in Europe and in the U.S. for your entire business to land up positive in the quarter. I’m just wondering, I know you said it to be into fiscal ’21 till we really see a bonafide recovery in travel, but it seems like you’ve done some things in that channel that are driving a pretty meaningful share gain in the travel locations that were open heading into this. I wonder if you could comment on any of the strategy there that you think stands out recently.

Fabrizio Freda — President and Chief Executive Officer

Yeah, I’ll start answer your travel question and then Tracey will go on the inventory question. Basically you are right, I think what you were describing is what happened, but let me summarize it is January was another extraordinary month for travel. So that’s also what is in the mix. So in January, remember January is the Chinese New Year and Chinese New Year, yes started to be impacted but still some of it happened and so we gained market share, we were planning to do that, we had an amazing program in all the areas that were open and not only that, so travel was strong in the October-December period and continued to be very strong in January. Then, in February, there was a slow down obviously, but travel remained open in other parts of the world and then in March, travel really was closed and so yes in travel in the months of March was the worst month. So the mix of the three months explain our strong market share performance in the quarter.

I believe, however, our market share performance in travel will continue, but the market in quarter four will be probably the worst in travel retail because Europe and U.S. have really closed and in Asia, as I said, there is many Asia stores, which are closed, there are three really active areas which is within China, the domestic travel with Hainan to reach the gate at the center, which has been reactivated at a certain percentage, not fully, but with much higher conversion from travelers to purchases. So the key point here, remember that about 10% of travel buy something. The moment travel get reduced but is open and 30%, 40% of travel buy something for several reasons because of good marketing, because there is less people, because it’s easy, because less crowded, because there are good activities.

This changes and so in this moment, we are really seeing active few doors, but very important ones with very high conversion rates and that’s what is — then one — the other thing, which is encouraging in our travel retail reading in this moment is that in the moment, most of the world is closed, but when we see openings, the consumer is back very fast because the traffic will only be back gradually, but the conversion rates can be much better. And last thing I want to say, the other thing, which is the positive expectation for the long-term in travel retail also in this class is also in travel retail, the percentage of business in pretail [Phonetic] meaning the ability to pre-book online when ability to pre-book online when travel is increasing and as you can imagine, we have great capabilities in that, we have a good structure, we have invested in that. So we are ready and you can imagine that in this area particularly in the period of transition, where safe retail will still be important also traveling, you can expect a continuous increase of the online part also in travel retail. So very tough quarter for travel retail, but still I believe that the long-term of travel retail will remain extraordinarily strong and extraordinarily promising.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

And as far as the inventory in the trade with our wholesale customers, clearly with stores closed six to seven weeks, I would say the early part of the door closures we saw, we started to see a slow pickup in online and as we indicated, it has really progressed. So certainly our retailers, those that can share inventory between their brick and mortar and their online sites have been drawn down on some of the store — inventory planned for stores on their retailer.com sites and we’ve seen those progress quite nicely and sales really picking up strongly in the last two to three weeks in particular.

So as doors open, we expect that from a shipment standpoint, we’ll see a slow re-order from a replenishment standpoint, certainly from some of the fast movers that have moved most quickly on retailer.com sites, but as the quarter progresses, we would expect shipments to gradually strengthen throughout the quarter and by June really be much stronger.

Michael Binetti — Credit Suisse — Analyst

Thank you.

Operator

Thank you. And we have time for one more question. Our final question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is now open.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning and glad to hear everyone’s healthy and safe. With the expense reductions that you’ve put in place, how much of it do you think could be permanent versus transitory. And lastly, with the innovation plans underway, any shifts in timing and launches given the current situation. Thank you.

Tracey T. Travis — Executive Vice President of Finance and Chief Financial Officer

So, as you know, Dana, as we’ve announced, we have taken some short-term cost actions to improve the liquidity situation and we announced those in the middle of April and so those are some of the employee actions that we’ve taken. I mean, some of the other actions are also short-term as it relates to advertising, really rightsizing more our advertising to the current sales trends, which will obviously pickup as our sales trends pickup. There are other areas like travel.

I think we’re all getting used to the ability to work from home and communicate online and so there are other areas that are more discretionary, that we certainly are looking at more permanently having cost reductions in some of those other cost areas, but it’s something that, as you know, we have ongoing cost management programs in addition to the program for Leading Beauty Forward, we have other cost actions and we take advantage of the opportunities that we see to lock in savings whenever we can.

Fabrizio Freda — President and Chief Executive Officer

Yeah and just want to add to this that for the long-term, also, what were the most — the best drivers for our growth before the crisis are the one which are coming back the stronger that seems to be the one that will come out stronger out of the crisis. If you think that online channels globally is coming out stronger, the Chinese consumers is recovering first stronger, skin care is recovering first and stronger than any other part and within makeup, sales make-up, within fragrance, we have seasonal fragrances and within travel retail, the very efficient travel retail doors of Asia are recovering faster. So our key drivers of growth are recovering first and stronger for the long-term.

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So said in other words, I see all the signs that the key drivers of growth will come out of this crisis stronger for the long-term and even if in the short-term, we are going to be hit hard by the closures, particularly by the very understandable consumer shock in this moment in the medium, long-term, we will be a strong organization with our key long-term drivers further validated and one of these drivers will remain innovation to answer your last question is on innovation, we are continuing to innovate. As I said in my prepared remarks, we are reinforcing and investing in a Shanghai Center to make sure our innovation become even more relevant to Asia and to the Asian consumers and to the Chinese consumers particularly and we, however, are focusing our innovations much more than before in this period of transition.

We are focusing our innovation [Phonetic] on fewer and bigger innovation, we are focusing our innovation on what works better online in this transition or trying to pivot online where possible because of the closures and we have focused our innovation on hero franchises, meaning on the franchises, which that have high consumer loyalty and high consumer awareness, because in this moment of transition in the middle of the crisis and out of the COVID crisis, we clearly see the consumers are interested in the brands they trust, in the product they know, they go back first to loyalty even before very new adventures and so we are reflecting this in our innovation plan that in this moment I believe is one of the strongest we have had.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

Thank you. And that concludes today’s question-and-answer session. If you are unable to join for the entire call, a playback will be available at 1:00 PM Eastern Time today through May 15th. To hear a recording of the call, please dial 855-859-2056, passcode 4138908. That concludes today’s Estee Lauder conference call. I would like to thank you all for your participation and wish you all a good day.