Tracey T. Travis
Executive Vice President and Chief Financial Officer at Estée Lauder Companies
Thank you, Fabrizio, and hello, everyone. I'll begin by reviewing our financial results for the first quarter, followed by the outlook that we are prepared to share today. As Fabrizio mentioned, our first quarter organic net sales declined 5% at the lower end of our expectations. Our adjusted earnings per share was $0.14, which exceeded our initial outlook for the quarter, primarily due to the timing of certain expenses. Starting with our regions. Organic net sales in our Asia Pacific region decreased 11% mainly driven by further softening in overall prestige beauty due in large part to our consumer sentiment in Mainland China. In addition, we experienced a net sales decline in Hong Kong SAR, where sales were pressured by lower spending from traveling consumers as well as reduced foot traffic at retail. These lines were partially offset by continued strength in Japan, where domestic and traveling consumers drove double-digit growth in both brick-and-mortar and online channels. Organic net sales in our Europe, the Middle East and Africa region decreased 4%, driven largely by the ongoing challenges in our Asia travel retail business. Our global travel retail net sales decreased double digits due to lower replenishment orders in Asia travel retail. This reflected the further retail market deceleration and worsened consumer sentiment in China, resulting in lower conversion rates. Consequently, while we managed to reduce our overall initial overall inventory levels in the trade, it was a slower pace than we initially expected. Elsewhere in EMEA, net sales grew low single digits, benefiting from commercial activations like Estee Lauder night campaign as well as both existing products and new product launches, including the Clinique caplet franchise.
Luxury fragrances was also strong, led by Le Labo. Retailer and pure-play sites drove overall double-digit growth from online channels. Organic net sales in the Americas decreased 1%.In North America, our retail sales in the US accelerated sequentially. However, our soft retail sales from M.A.C, TOM FORD and Too Faced led to overall lower net sales, reflecting fewer replenishment orders for these brands. A strong competitive environment and the continued moderation of growth in prestige beauty in the US also contributed to the net sales decline. Our team remains focused on evolving our channel distribution mix towards fast-growing channels with the consumer as evidenced by the launch of seven brands in the last eight months in Amazon's US premium beauty store, including our most recent launch of Estee Lauder, as Fabrizio mentioned. This strategic pivot drove our double-digit online growth in growth in the US. In Latin America, continued net sales Brazil, led by makeup drove double-digit increases in our freestanding stores and specialty multi-channels. From a category standpoint, organic net sales declined 8% in skin care and 6% in hair care. In skin care, the organic net sales decline was largely due to the pressures in Asia Pacific and in our Asia travel retail business, which more than offset the growth we experienced. In the Americas and the markets of EMEA, including from Estee Lauder with its successful night activations in West and shipment for the products launch in Amazon's US Premium Beauty store. Organic net sales in makeup decreased 2%, driven by declines from MAC and Too Faced primarily reflecting the brand's retail softness in North America.
These declines were partially offset by standout performance from Clinique, which saw strong overall double-digit net sales growth, driven by contributions from all regions. The brand's existing products and new innovation in its Clinique Pop and almost lipstick product franchises, along with its launch in Amazon's US Premium Beauty Store in fiscal 2024 primarily drove the brand's growth in the quarter. Organic net sales in fragrance decreased 1%, mainly due to declines from TOM FORD, Clinique and Estee Lauder, driven by pressures in both our Asia travel retail business in North America. These decreases were partially offset by growth from the rest of our luxury fragrances, particularly in the Asia Pacific region and the markets of EMEA driven by products, new innovation and targeted expanded consumer reach. Our gross margin expanded 310 basis points compared to last year, largely due to a reduction in obsolescence charges as we better aligned our inventory on hand with our shipments throughout last year. We also better capitalized on our strategic pricing initiatives by reducing discounts related to excess production and promotions, while leveraging our pricing power ahead of inflation through an enhanced more granular pricing methodology. This was partially offset by the unfavorable change in mix, particularly the decline in skin care and the corresponding fixed deleverage. Our gross margin for the quarter also improved 90 basis points sequentially versus our fourth quarter.
With this progress, we are pleased that key initiatives under the PRGP are beginning to address the specific pressures to gross margin that we experienced over the past two years, including the sales pressure we continue to experience in the quarter. We obviously still have much more to do, and the company remains focused on controlling excess and obsolescence through our integrated business planning process to better align our forecast accuracy and demand planning as well as addressing other cost opportunities in the supply chain. Operating expenses increased 190 basis points as a percent of sales during the quarter primarily driven by selling expense deleverage and advertising to support new product launches. This deleverage offset the net benefits and expenses realized under the PRGP in the quarter. As I mentioned in August, most of the PRGP's estimated net benefits this year are expected to be realized in improving our gross profit margin with approximately 20% of the benefits realized in reducing certain operating expenses. We expect to achieve greater net benefits and operating expenses for the remainder of the year from the plan as initiatives are further operationalized and as benefits from our restructuring program progress. Operating income increased 33% to $144 million, and our operating margin expanded 120 basis points to 4.3% compared to 3.1% last year. Our effective tax rate for the quarter was 38.8%, compared to 17.9% last year.
The increase is mainly due to the lower tax base in the prior year, which included the utilization of income tax credits and benefits from previously issued stock-based compensation. Diluted EPS was $0.14, compared to $0.11 last year due to the improving operating profit performance. Our plans under our previously communicated PRGP are on track and advancing well. We also continue to explore additional savings initiatives to offset some of the impacts from the incremental sales pressure we are experiencing globally, as well as mitigate the impact of reduced volume on certain initiatives within the PRGP. As it relates to our restructuring program, to date, we have taken $221 million of charges, primarily related to initiatives designed to optimize and rightsize our value chain by reducing spans and layers. Additionally, we intend to expand our shared services capabilities to streamline and standardize key processes that should enable us to better leverage our sales growth as it occurs. During the quarter, we utilized $670 million in net cash flows from operating activities, compared to $408 million last year. The increase in net cash utilization is mainly due to lower net earnings compared to last year and higher taxes paid. In addition, from late August through October of this year, we entered into agreements with certain plaintiff law firms to settle approximately 70% of pending talcum powder cases and established annual capped amounts with each participating law firm for potential future claims over the next five years, starting on January 1, 2025. As a result, we recorded a charge of $159 million related to these agreements.
We entered into these agreements in response the rising number of cases brought against the company, as well as to proactively help to mitigate future risk from the evolving litigation landscape related to talc. We invested $141 million in capital expenditures and we returned $240 million in cash to stockholders through dividends. As you read in our press release this morning, we declared a quarterly dividend of $0.35 per share, a reduction from our previous quarterly dividend of $0.66 per share as we reduce our dividend to a more appropriate payout ratio given our earnings outlook. And now turning to our outlook. As Fabrizio mentioned, we have taken the decision to withdraw the full year outlook we provided in August and are only providing an outlook for the near-term second quarter today. We have not made this decision lightly and believe it is the right action given the current environment, including the difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail and in the context of upcoming leadership changes. Let me expand a bit on some of these incremental pressures on the business. First, as we discussed in August, our initial outlook anticipated pressures in both Mainland China and Asia travel retail, expecting these changes to significantly impact our first quarter results, but moderate sequentially throughout the year, including a modest return to net sales growth in the second quarter. While our first quarter results are generally aligned with those expectations, the worsening consumer sentiment in these areas has been greater than anticipated and is also now expected to persist in the near-term.
Although, we are cautiously optimistic about the potential medium to long-term opportunities presented by the new economic stimulus measures in China. We believe both the timing and the magnitude of their impact on our business in the region are uncertain. As a result, we now anticipate continued near-term net sales declines in these areas of our business and overall for the second quarter, adding pressure to our EPS. Second, continued normalization of prestige beauty growth in other markets post pandemic, along with near-term residual impacts of the previous inflationary period on consumer sentiment has created some uncertainty about the level at which market stabilization will occur and is expected to further pressure our second quarter results. As mentioned earlier, we remain focused on realizing net benefits from our PRGP initiatives, given the anticipated incremental sales pressure, we acknowledge the need to continuously evaluate the plan and more importantly, take decisive action to maximize its benefits, identify new opportunities for growth and pursue additional savings initiatives. Using October 24 spot rates of 1.078 for the euro, 1.293 for the pound, 7.126 for the Chinese yuan, and $13.80 for the Korean won currency translation is not expected to have a material impact to reported sales and EPS for the second quarter. We now expect organic net sales for our second quarter to decrease 6% to 8% compared the prior year period, largely due to the ongoing challenges in Mainland China and in Asia Travel Retail. We have discussed as well as persistent low conversion rates by trailing consumers in Hong Kong SAR.
In terms of gross margin, we expect expansion in the second quarter compared to last year, although it is not expected to be at the same magnitude as the level of expansion we saw in the first quarter. Recall that last year's first quarter gross margin was the lowest of the fiscal year as it was more affected by high obsolescence charges, and discounts than in the other three quarters, and it did not reflect the benefits of the strategic actions we implemented later in year as these pressures and improve gross margin. We now expect our second quarter effective tax rate to be approximately 43% compared to 37.7% last year. The increase primarily reflects the unfavorable impact of previously issued stock-based compensation, which tends to have a disproportionate effect in the second quarter due to the timing of equity award vesting and our estimate of lower earnings compared to last year. We now expect second quarter adjusted EPS of $0.20 to $0.35 for a decrease between 60% to 77% versus prior year. This has undoubtedly been a challenging period for our teams and all of us to manage through. However, as Fabrizio mentioned, we are encouraged by some bright spots that we are starting to see from proactive measures we have taken previously. There is clearly more to be done, and we have confidence in our teams, including our new leadership team to continue to drive progress forward. As I close this earnings call, I want to express my sincere gratitude to our dedicated employees, your steadfast commitment, hard work, incredible passion for our brands and resilience have been vital to our success over these years and certainly will be in the future.
And reflecting on my past 12-plus years with the company, I am immensely proud of the many things that we have accomplished together. To our valued investors, thank you for your continued support. Your patience and confidence in our long-term growth strategy and initial PRGP actions have been instrumental as we navigate through this intense period of volatility and the resulting impact it has had on our performance. I am optimistic in the company's ability to continue to take the appropriate decisive actions to manage through this prolonged period of volatility and supported by the PRGP and the strong result of our employees to progressively return to more consistent and sustainable sales growth and stronger profitable recovery.
Thank you and that concludes our prepared remarks. So we'll be happy to take your questions at this time.
