Wednesday, October 04, 2006

Estée Lauder: Distinctive Odor of Nepotism?





For the latest fiscal year ended June 30, 2006, the cosmetic company Estée Lauder (EL-$39.91), whose brands include Aveda, Clinique, and Tommy Hilfiger, reported a nearly 40 percent drop in net income to $44.5 million, on a 3 percent rise in sales to approximately $6.5 billion.

In the Company’s recently file Annual Proxy it was revealed that Chairman Leonard A. Lauder cut his own salary by approximately 20 percent to $1.44 million for Fiscal 2006. He also was paid a cash bonus of about $1.37 million (a 15.5 percent decrease from the prior year). According to his employment agreement, the Compensation Committee has granted to Mr. Lauder aggregate bonus opportunities for fiscal 2007 with a target payout of $1.8 million. Why is he making any bonus at all?

The Board of Directors met only five times in fiscal year 2006. Mr. Lauder is also a member of the Nominating and Board Affairs Committee, which met four times. The Nominating Committee, among other things, reviews the compensation for service as a Board member.

If –and when—Mr. Lauder retires, the Company will continue to provide him with the office he currently occupies and a full-time executive secretary for as long as he would like.

Leonard Lauder, 73, worth an estimated $2.9 billion, will be comfortable in his golden years. If he were to retire currently, he is sitting on 3.0 million unexercised ‘in-the-money’ options valued at $17.7 million. His annual retirement benefits would be approximately $1.4 million. In addition, he is being paid approximately $2.0 million per year, pursuant to a deferred compensation arrangement in his current and former employment agreements. Payments under such arrangement commenced upon his 70th birthday in March 2003 and will continue until March 2013.

The Company may terminate Mr. Lauder's employment at any time if he becomes "permanently disabled," in which event Mr. Lauder will be entitled to (i) receive his current base salary of $1.44 million for a period of two years after termination and (ii) receive bonus compensation at an annual rate equal to the average of the actual bonuses paid to him prior to such termination. [Ed. note. Long-term disability is usually paid at a rate equal to 60 percent of current base salary]

Lauder Family Relationships

“Families aren’t dying. They’re merging into large conglomerates.” –Erma Bombeck

The Estée Lauder Companies is more than just a portfolio of skin care, makeup, fragrance and hair care products. Not surprisingly, it is also a company seeded with the family relations of the founders, Mrs. Estée Lauder and her husband, Joseph Lauder.

Leonard A. Lauder's wife, Evelyn H. Lauder, is Senior Corporate Vice President of the Company.

Leonard and Evelyn Lauder son, (billionaire) William P. Lauder, is President/ CEO and a Director of the Company.

Leonard’s brother, Ronald S. Lauder, is a Senior Vice President and a director of the Company and Chairman of Clinique Laboratories, LLC.

Ronald S. Lauder and his wife, Jo Carole Lauder, have two daughters, Aerin Lauder and Jane Lauder. Aerin Lauder is Senior Vice President—Global Creative Directions for the Estée Lauder brand and is a Director of the Company. Jane Lauder is Senior Vice President, Global Product Marketing for Clinique.

In Fiscal 2006, the Lauder Family Members received the following amounts from the Company as compensation: President and Chief Executive, William Lauder, earned a base salary of $1.5 million and cash bonus of $1.52 million; Ronald S. Lauder received $400,000 in salary; Evelyn H. Lauder received $575,980 in salary and a bonus of $221,400; Aerin Lauder received $260,000 in salary and a bonus of $72,450; and Jane Lauder received $180,100 in salary and a bonus of $59,500.

For Fiscal 2007, Evelyn H. Lauder received a raise in her base salary to $600,000 and bonus opportunities with a target payout of $287,000; Aerin Lauder will receive a base salary of $271,700 and bonus opportunities with a target payout of $107,150; and Jane Lauder received a promotion and a big jump in her base salary to $250,000 and bonus opportunities with a target payout of $100,000.

Stock Performance

The Common Stock sported a 13.45% gain in the past year, compared to a 9.85% change in the S&P 500 Index. Ergot, shareholders cannot complain about the scent of Lauders at the Company.

In our view, valuation metrics do suggest, however, that the stock is fairly valued, with an Enterprise Value at 1.33 times its trailing 12-months revenue. The Common Stock prices of competitors Avon Products (AVP-$30.23), Revlon (REV-$1.26) and Inter Parfums (IPAR-$18.51) fetch EV of 1.69, 1.41 and 1.20 times revenue, respectively.

Estée Lauder—like its peers—is struggling with department-store mergers, which has cut the number of selling locations. In particular, the Company said 1H:07 results will be hurt by the closing of stores last year due to the merger of Federated Department Stores (FD-$43.49) and May.

Management expects Fiscal 2007 share-net earnings of $2 to $2.10 a share and sales growth of between 5 percent and 7 percent. Analysts had been expecting earnings of $2.10 a share.

In his fable, “The Fox and the Lion,” Aesop wrote, “Familiarity brings contempt.”

As this proverb relates to family run (publicly-traded) companies, it is only when the stock price declines that this adage is true. Ask William Clay Ford, Jr.

Editor David J Phillips does not own any of the stocks mentioned in this article. You can see his portfolio holdings in the sidebar. The 10Q Detective has a full disclosure policy.

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