Estee Lauder CEO Freda Says ‘Sorry’ for Deception Over Testing

(Bloomberg) -- Estee Lauder Cos. Chief Executive Officer Fabrizio Freda apologized for false ad claims on certain cosmetics and said a comprehensive review is under way.

“We recently learned that some testing related to certain products advertising claims had been intentionally altered for some time by a small group of employees,” Freda said Wednesday on a conference call with analysts. “This clearly does not meet our standards.”

Freda didn't disclose which products were affected by the manipulated tests, saying only that there were no safety issues and that some of the companies' advertised claims will be changed -- some minor and some “more significant.” The shares fell the most in almost three years.

“We are sorry this occurred and we take full responsibility for this matter,” Freda said.

The testing disclosure put a cloud over the company's third-quarter financial report, which showed that revenue was powered by sales in Asia, e-commerce and skincare products. Estee Lauder, which owns dozens of makeup and skincare brands including Clinique and Mac, is benefiting from its strong lineup of higher-end labels, while budget brands -- the kind found at pharmacies or discount retailers -- are struggling to attract shoppers.

Estee Lauder shares sank as much as 6.9 percent to $135, the biggest intraday decline since August 2015. They had climbed 14 percent this year through Tuesday's close.

Millennial Connections

The cosmetics company expects prestige beauty to grow as much as 7 percent globally this fiscal year.

The 72-year-old company has been aggressive in its efforts to connect with millennial customers through opportunistic acquisitions and the willingness to try out new digital tactics in e-commerce. Since 2015, Estee Lauder has been on a buying spree, scooping up such brands as Glamglow, Becca, Kilian, and Too Faced.

Standouts included Clinique skincare, Estee Lauder brand makeup and Jo Malone London fragrances. Each posted double-digit growth in most regions.

In Asia, the company saw gains across all its brands, especially in China, Hong Kong, Taiwan and the Philippines. Consumers in the region flocked to the highest-end products, such as La Mer and Tom Ford.

Revenue of $3.37 billion topped analysts' projections of $3.24 billion. Excluding some items, earnings amounted to $1.17 a share, compared with estimates for $1.07.

Estee Lauder boosted its full-year adjusted earnings forecast to $4.38 to $4.42 a share, up from as much as $4.32 previously. Sales this fiscal year will rise 15 to 16 percent, it said.

--With assistance from Vivian Li

To contact the reporter on this story: Kim Bhasin in New York at kbhasin4@bloomberg.net.

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Lisa Wolfson, Jonathan Roeder

©2018 Bloomberg L.P.