Tracey T. Travis
Executive Vice President of Finance and Chief Financial Officer at Estée Lauder Companies
Thank you, Fabrizio, and hello, everyone.
I concur with Fabrizio in thanking our incredible team who have demonstrated great resilience during the pandemic. Navigating through the highly uneven recovery this past year has certainly required greater agility and flexibility. And our teams across the globe rose to the occasion, delivering superb results for the fiscal year, while also establishing a stronger foundation for future growth and profitability.
We delivered exceptional net sales growth of 56% in our fourth quarter, as we anniversaried pandemic-related store closures in the prior year. The inclusion of six weeks of sales from DECIEM added approximately three points to growth in the quarter. Our performance also exceeded the pre-pandemic levels of the fiscal 2019 fourth quarter by 9%, driven by significant sales increases in Mainland China, the Skin Care and Fragrance categories, global Online, and travel retail in Asia.
All three regions grew and all product categories within each region grew during the quarter. Net sales in the Americas region rose 86% against the prior year period with almost no brick-and-mortar retail open. Throughout the quarter, consumer confidence in the US grew as COVID restrictions abated and people resumed shopping in stores again. Our brands responded with strong program, supporting recovery, new product launches and animating key brand shopping events like Mother's Day.
Sales in the region remained below fiscal '19 level for the quarter, reflecting in part the loss of over 900 retail locations that represented nearly $170 million in annual sales. Additionally, Makeup has historically been the largest category in the region, and the category has yet to fully recoup sales lost during the pandemic. Nevertheless, we are encouraged by the sequential acceleration in North American sales, which has been better than we expected.
Net Sales in our Europe, the Middle East and Africa region increased 65%, with all markets contributing to growth as COVID restrictions eased throughout the quarter. Global travel retail, which is primarily reported in this region, continued to suffer from a significant drop in international passenger traffic, but grew strong double-digits in the quarter as comparisons eased and local tourism in China, especially to Hainan, remained robust.
Across developed markets in the region, store traffic has begun to pick up and retailers have become more comfortable with restocking. Emerging markets in the region saw strong retail in the quarter, driven by locally relevant holiday activation, retailer events and online performance.
Sales in the region were slightly above fiscal '19 levels for the quarter, primarily due to the resilience of travel retail.
Net sales in the Asia/Pacific region rose 30%. Virtually every country contributed to growth, although the pace of improvement varied widely among the markets and a resurgence of COVID has slowed a full recovery.
Sales of our products online continued to rise strong double-digit in the region, driven by the successful 6.18 shopping festival campaign in China and including the continued strength of social e-commerce. Mainland China continued to experience robust double-digit growth with broad-based improvement across product categories, brands and channels. Other markets in the region, including Korea, Hong Kong and Japan grew exceptionally against prior year brick-and-mortar lockdown.
Sales in the region were 50% above 2019 levels, largely reflecting China's rapid emergence from the pandemic last year.
Net sales in all product categories grew sharply this quarter. And Skin Care, Fragrance and Hair Care drove higher sales than fiscal 2019. Fragrance led growth with net sales rising 150% versus prior year. Luxury fragrances resonated with consumers looking for self-care and indulgence and among Chinese consumers increasingly attracted to the category.
Home, bath and body products have also gained traction during the pandemic and helped to attract new consumers. Jo Malone London saw recovery to pre-pandemic levels in brick-and-mortar, and the brand's Blossom and Brit collections were popular in Asia. Standouts from Tom Ford Beauty include the recent launch of Tubereuse Nue and the continued strength of Bitter Peach and Rose Prick.
Net sales in Makeup jumped 70% against the prior year that reflected the greatest beauty category impact of COVID-19, particularly in western markets, where Makeup is the largest category. The Makeup category in prestige beauty has proven to be especially sensitive to brick-and-mortar recovery due to the use of testers and in-store services by consumers. Estee Lauder saw strong growth of Futurist and Double Wear foundations in Asia, and MAC liquid lip color and eye products, especially mascara, outperformed.
Hair Care net sales grew 52% as salons and stores reopened. The launch of Aveda's Blonde Revival Shampoo and Conditioner also contributed to category growth, adding to other strong innovation programs over the past several months from Aveda.
Net sales in Skin Care continued to thrive. They rose 42% in the quarter, driven by strong increases from the La Mer, Estee Lauder, Clinique and Dr. Jart brands, particularly in Asia. Skin Care sales growth also benefited from the addition of DECIEM in the quarter by approximately 4% points.
Our gross margin improved 650 basis points compared to the fourth quarter last year. This favorability reflected significant improvements in obsolescence and manufacturing efficiencies compared to the prior year impact of COVID-19 on our sales and on our manufacturing locations.
Operating expenses rose 36%, driven by the planned increase in advertising and selling costs to support the reopening of retail and the recovery. Additionally, we sharply curtailed spending last year in response to the onset of the pandemic and some of these costs were reinstated, primarily compensation.
We delivered operating income of $385 million for the quarter compared to a $228 million operating loss in the prior year quarter.
Diluted earnings per share of $0.78 included $0.02 of favorable currency translation and $0.02 dilution from the acquisition of DECIEM.
Our full year results reflect the benefits of our strategic focus as we leaned into current growth drivers and invested behind future areas of growth, while effectively managing both costs and cash.
The sequential acceleration of our business throughout the year culminated in net sales growth of 11%. The strength of Chinese consumer demand, both at home and in travel retail, the resilience of the Skin Care and Fragrance categories, and the momentum we drove in our online channels, all supported our growth.
Our distribution mix continued to revolve even as brick-and-mortar reopened. Sales of our products through all online channels continued to thrive as they rose 34% for the year and represented 28% of sales. Despite the continued curtailment of international travel, our business in the travel retail channel grew, ending fiscal 2021 at 29% of sales.
Among brick-and-mortar retail, specialty multi and perfumeries grew, while department stores and freestanding stores experienced the greatest impact from the ongoing pandemic and declined for the year.
Our gross margin rose 120 basis points to 76.4%, driven by favorable pricing, lower obsolescence, increased manufacturing efficiencies and lower costs for testers in stores, and partially offset by currency due to the weakening of the US dollar.
Operating expenses declined 300 basis points to 57.5% of sales. Selling and store operating costs decreased as high service stores were either closed for part of the year or they reopened with reduced traffic and staffing levels. Additionally, in-store merchandising costs decreased while advertising investments, primarily digital media, rose faster than sales to support our brands in the recovery. We achieved significant savings from our cost initiatives, including Leading Beauty Forward and the preliminary benefits from the Post-COVID Business Acceleration Program. And this gave us the flexibility to reinvest in necessary capabilities, absorb some of the inflation in media and logistics costs, as well as support the reinstatement of certain compensation elements that were reduced or frozen due to the onset of the pandemic.
Our full year operating margin was 18.9%, representing a 420 basis point improvement over last year and 140 basis points above fiscal 2019. This year also includes 50 basis points of dilution from the inclusion of Dr. Jart and DECIEM.
Our effective tax rate for the year was 18.7%, a decrease of 450 basis points over the prior year, primarily driven by the geographic mix of earnings, which included a favorable one-time adjustment for fiscal years 2019 and 2020 related to recently issued GILTI Tax Regulations.
Net earnings rose 57% to $2.4 billion and diluted EPS increased 57% to $6.45. Earnings per share includes $0.11 accretion from currency translation and $0.08 dilution from the acquisitions of Dr. Jart and DECIEM.
In fiscal 2021, we recorded 148 million after-tax or $0.40 per share of impairment charges related to our Smashbox and GLAMGLOW brand, as well as certain freestanding retail stores. Restructuring and other charges related primarily to the Post-COVID Business Acceleration Program, were $176 million after-tax or $0.48 per share. These charges were more than offset by the one-time gain on our minority interest in DECIEM of $847 million after-tax or $2.30 per share.
The Post-COVID Business Acceleration Program is progressing quickly, with projects underway across all regions. We have closed nearly 500 doors or counters, including about 50 freestanding stores under the program in fiscal 2021. We also closed approximately 100 additional freestanding stores outside of the program and upon lease expiration, primarily in North America and in Europe.
We've realigned our go-to-market organizations to better reflect our evolving channel mix. We're also winding down certain brands such as BECCA and Rodan. These actions are expected to continue into fiscal 2022. For the total program, we continue to expect to take charges of between $400 million and $500 million through fiscal 2022, and generate savings of $300 million to 400 million before tax by fiscal 2023, a portion of which will be reinvested.
We continue to focus on maintaining strong liquidity while also investing for future growth during the year. Cash generated from operations rose 59% to $3.6 billion, primarily reflecting the higher net earnings. We utilized $637 million for capital improvements, supporting increased capacity and other supply chain improvements, further e-commerce development and information technology.
We repaid $750 million of debt outstanding from our revolving credit facility, issued $600 million of new long-term debt and retired $450 million of debt. We used $1.1 billion net of cash acquired to increase our ownership interest in DECIEM, and we returned $1.5 billion in cash to stockholders during the year via increased dividends and the reinstatement of share repurchase activities in the second half of the fiscal year.
So looking ahead to fiscal 2022, we are encouraged by the increasing vaccination rates and reopening of markets around the world. We look forward to the resumption of international travel, increasing foot traffic in brick-and-mortar retail and the development of our recent acquisitions. We are still mindful, however, that the recovery has evolved unevenly and some markets are seeing their third or fourth waves of COVID, including increasing effects of new more contagious strains of the virus hindering a return to normal life. This has been particularly evident in the US over the past several weeks. Additionally, increasing climate and geopolitical events make it difficult to predict the corresponding impact on our business.
Nevertheless, given the strength of our programs, we are cautiously optimistic and therefore providing a range of sales and EPS expectations for the fiscal year caveated with the following underlying assumptions. Progressive recovery in the Makeup category as full vaccination rates increase; and mask wearing abates in western markets during the first half of the fiscal year; beginning of the resumption of international travel in the second half of the fiscal year; the addition of new retail accounts for some of our brands should provide broader access to new consumers, notably through Sephora at Kohl's and Ulta at Target in North America and the addition of JD.com in China online; the inclusion of incremental sales from DECIEM, benefiting sales growth for the fiscal year, primarily in the Americas and AMEA region and in the Skin Care category; pricing is expected to add approximately 3 points of growth, helping to offset inflation risk and freight, media, labor and commodities; increased advertising support as markets reopen and further investment behind select capabilities, including data analytics, innovation, technology, and sustainability initiatives while maintaining good cost discipline elsewhere. We forecast increasing benefits from our Post-COVID Business Acceleration Program as it ramps up this year.
Approximately, $200 million of the cost we cut during the pandemic are expected to be reinstated. These primarily include hiring, travel and meeting expenses, furloughs and other leaves of absence, and compensation.
In addition to these assumptions, there are a few non-operating items you should be aware of as you adjust your models. Our full year effective tax rate is expected to return to a more normalized level of approximately 23% from 18.7% in fiscal 2021.
Net interest and investment expense is expected to be around $150 million. The increase is primarily due to the comparison to last year when we recorded the benefits of our minority interest in DECIEM through May 18th 2021.
At that time, we acquired a majority ownership in DECIEM and we began to fully consolidate the entire business and deduct a portion of the income we don't own as a charge to net earnings attributable to non-controlling interest. This charge is expected to be less than $5 million in fiscal 2022.
Net cash flows from operating activities are forecast between $3.2 billion and $3.4 billion.
Capital expenditures are planned at approximately 5% of projected Sales. As we develop additional manufacturing and distribution capacity, notably for the building of our new facility in Japan. We also expect to fund more robust research and development capabilities in China and North America; increase investment in technology and support new distribution and e-commerce for our brands. Our capex plan for the year also includes some spending differed from last year.
Also, beginning in fiscal 2022, we plan to entry -- introduce the concept of organic sales growth in our earnings materials and investor presentations, organic growth, adjust reported sales growth for both currency and changes in structure, such as acquisitions, divestitures, and brand closures. This should help provide a more meaningful understanding of the performance of our comparable business.
Additionally, reflecting the level of volatility still in the environment, we are at this point widening our guidance ranges for the year.
For the full fiscal year, organic net sales are forecasted to grow 9% to 12%, based on August 13 spot rates of $1.17 for the Euro, $1.381 for the Pound, $11.64 for the Korean Won and $6.479 for the Chinese Yuan. We expect currency translation to add one point to reported sales growth for the full fiscal year. As I mentioned earlier, this range excludes approximately three points from acquisitions, divestitures and brand closures, primarily, the inclusion of DECIEM theme.
Diluted EPS is expected to range between $7.23 and $7.38 before restructuring and other charges. This includes approximately $0.19 of accretion from currency translation. In constant currency, we expect EPS to rise by 9% to 12%. This also includes approximately $0.03 accretion from DECIEM.
At this time, we expect organic sales for our first quarter to rise 11% to 13%. The incremental sales from acquisitions, divestitures and brand closures are expected to add about 3 points to reported growth and currency is expected to be accretive by approximately 3 points.
Operating expenses are expected to rise in the first quarter as we invest in the reopening and recovery of brick-and-mortar retail around the world and some of the temporary cost measures start to ease.
We expect first quarter EPS of $1.55 to $1.65. Currency is expected to be accretive to EPS by $0.05 and DECIEM is forecast to have no impact.
In closing, while we're cautious about the uneven recovery to date, we remain confident about the strategic actions we continue to take to support sustainable, profitable growth post-pandemic, and the agility we have demonstrated this past year. On behalf of the entire Estee Lauder Companies' leadership team, we give thanks to our incredible teams 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.
