Estee Lauder 2002 Annual Report Download

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THE EST{E LAUDER COMPANIES INC. 2002 ANNUAL REPORT

Table of contents

  • Page 1
    T H E E S T { E L A U D E R C O M PA N I E S I N C . 2 0 0 2 A N N UA L R E P O R T

  • Page 2
    ... Clinique, Prescriptives, Origins, M . A . C, La Mer, Bobbi Brown, Tommy Hilfiger, jane, Donna Karan, Aveda, Stila, Jo Malone, Bumble and bumble, and kate spade beauty. 2 4 10 34 35 36 37 38 39 54 55 56 57 78 80 Portfolio of Brands Chairman's Message Chief Executive's Review Board of Directors Of...

  • Page 3

  • Page 4
    ... • Select products: Intuition, Idealist Skin Refinisher, Re-Nutriv Ultimate Lifting Creme, Advanced Night Repair Eye Recovery Complex, So Ingenious MultiDimension Powder Makeup, Illusionist Maximum Curling Mascara, Pure Color Long Lasting Lipstick, Pure Color Nail Lacquer and Pure Color EyeShadow...

  • Page 5
    ...: New Dimensions for Our Portfolio of Brands 2001: Global Brands: Fine-tuning the Engine for Global Growth Dear Fellow Stockholders: World events were not for the faint-of-heart during fiscal 2002. Yet, The Estée Lauder Companies still achieved its 51st year of uninterrupted sales growth...

  • Page 6
    ... our laboratories consistently develop market-leading formulas, such as Estée Lauder Advanced Night Repair Eye Recovery Complex, Clinique Total Turnaround Visible Skin Renewer, Origins A Perfect World White Tea Skin Guardian and Crème de la Mer, that help protect and repair aging skin. • We have...

  • Page 7
    ... shares many of our beliefs in the nurturing of employees, community and culture. Irv also brings wisdom from his experience on the boards of several major public companies. • Richard D. Parsons, the brilliant new Chief Executive Officer of AOL Time Warner and a leading citizen of New York City...

  • Page 8
    ... all brands and categories while we enjoy one of the highest employee retention rates in the industry. 7 OURS SHOULD BE AN ORGANIZATION WITH THE OF A PUBLIC AND THE OF A - WHERE EVERYONE IS FAMILY. COMPANY BUSINESS DISCIPLINE SOUL FAMILY New product introductions like Advanced Night Repair Eye...

  • Page 9

  • Page 10
    GREATEST WEALTH OF A COMPANY IS IN ITS PEOPLE, WE ARE A VERY WEALTHY COMPANY. IF THE LEONARD A. LAUDER

  • Page 11
    ... translation; the slowdown in U.S. department store and shopping mall traffic; the decline in international travel following the events of September 11th that led to a significant drop in our travel retail business and inventory contraction by U.S. retailers. This was an extraordinary convergence...

  • Page 12
    ... it. Collectively, The Estée Lauder Companies produces more than 70 individual fragrances and four of the top ten prestige fragrances sold at U.S. department stores during fiscal year 2002. The hair care category posted the strongest sales growth, off a smaller base, with reported net sales up 19...

  • Page 13
    ... 5, 2002, the Company was honored by the Foreign Policy Association and received its award for Social Responsibility in recognition of our outstanding corporate citizenship. We at The Estée Lauder Companies strive to find new ways to be of service to our consumers, stockholders and employees, as...

  • Page 14
    ... travel retail business. We will benefit from cost savings resulting from this year's restructuring and will reinvest a portion of those savings to build sales momentum. I believe the commitment to invest in sales growth sets the stage for strong performance and a return to strong earnings growth...

  • Page 15

  • Page 16
    ...Murphy, in a campaign for the launch of Advanced Night Repair Eye Recovery Complex, while Intuition for Men celebrated its June launch in suitable style by ringing the closing bell at the New York Stock Exchange. And, finally, Bobbi Brown's efforts for Dress for Success joined the long tradition of...

  • Page 17

  • Page 18
    ... and amber. The brand also introduced new fragrance forms such as the limited-edition Estée Lauder pleasures Liquid Summer and Intuition Fragrance Silk. Jo Malone added 154, named for the address of her first London store, and Red Roses, a lush ï¬,oral that arrived in time for Valentine's Day. 17

  • Page 19
    18 New from Bobbi Brown is Bobbi Brown Beach, a summery fragrance combining sand jasmine, sea spray, dianthus, neroli and driftwood. Love, an Aveda classic, returned with a new formula incorporating sandalwood sourced from sustainably managed forests in Australia, along with organic ylang ylang, ...

  • Page 20
    ... latest trend of mixing scent with shimmer. Cashmere Mist, the nine-year-old scent from Donna Karan, recorded its best United States performance ever. Meanwhile, DKNY Women and DKNY Men continued to be strong performers in international markets. The Tommy Hilfiger fragrance business was driven by...

  • Page 21

  • Page 22
    ... was extended to makeup with Active White Light Reï¬,ecting Powder Makeup, Whitening Lab Formula Essence and Stay True Powder Makeup. Unique transparent packaging created for Estée Lauder's Pure Color makeup line supported the brand's distinctive, modern and sophisticated image. And So Ingenious is...

  • Page 23
    ... foundation, won Cosmetic Executive Women's Best in Beauty Award for Best New Makeup Product for Face. Traceless adjusts skin's light reï¬,ection to neutralize imperfections and even skin tone. Also new is Incredible Lip Color, 25 shades that moisturize, condition and protect. The Bobbi Brown brand...

  • Page 24
    ... Lip Glaze Palette, composed of five split pans containing 10 shades. The brand expanded its Convertible Color line with Convertible Eye Color, a portable eye product that contains a shadow, liner and smudger, and launched Illuminating Liquid Foundation, a liquid version of its Illuminating Powder...

  • Page 25

  • Page 26
    ... packaging available to individual brands. For example, Jo Malone's new skin care line contains products from this resource - products such as Juniper Skin Tonic, Protein Skin Serum and Orange & Geranium Night Cream. The Estée Lauder brand benefited from the global launch of Advanced Night Repair...

  • Page 27
    ... in Europe, where Clinique remained the second fastest-growing and fourth largest skin care line among the top ten in prestige distribution. Meanwhile, Clinique Sun Care Body Spray SPF 30 Sun Block won Cosmetic Executive Women's Best in Beauty Award for Best New Sun Product in the United States.

  • Page 28
    ... Brown is Intensive Skin Supplement, an advanced, multi-benefit serum that refines skin's appearance while helping to prevent the visible signs of aging. This product launch, along with the Extra Skincare Collection, helped drive sales for Bobbi Brown in skin care. Lab Series for Men by Aramis...

  • Page 29

  • Page 30
    ... and support the brand's philosophy of environmental responsibility. Clinique's Simple Hair Care remains the category leader in United States prestige department stores. The brand added to its styling collection this year with Shaping Wax, which offers ï¬,exible, long-lasting style and texture...

  • Page 31
    ... increased product sales. New to the line are Alojoba Shampoo and Alojoba Conditioner, moisture-rich formulas containing aloe vera, jojoba, cucumber and chamomile, and Sumotech, a paste/wax hybrid that imparts hold without stiffness. In addition to product innovation, the brand has set new marketing...

  • Page 32
    ... as the brand extended the ginger scent of its body products to hair care with Ginger Up Aromatic Shampoo and Conditioner. The line also benefited from the ongoing popularity of Clear Head Shampoo and Knot Free Finishing Rinse. Cashmere Mist Shampoo, a luxurious, volume-building cleanser, and...

  • Page 33

  • Page 34
    ... World White Tea Skin Guardian and Estée Lauder Advanced Night Repair Eye Recovery Complex. Building relationships with consumers through philanthropic activity is a key objective for brands like M.A . C. Viva Glam IV is the fourth lipstick in the line benefiting the M.A. C AIDS Fund with ads...

  • Page 35
    ...cer The Estée Lauder Companies Inc. RONALD S. LAUDER Chairman Clinique Laboratories, Inc. Private Investor WILLIAM P. LAUDER Group President The Estée Lauder Companies Inc. MARSHALL ROSE 2,4 Managing Partner The Georgetown Group RICHARD D. PARSONS 2,3 Chief Executive Officer AOL Time Warner Inc...

  • Page 36
    ... RICHARD W. KUNES Senior Vice President Chief Financial Officer EVELYN H. LAUDER Senior Corporate Vice President WILLIAM P. LAUDER Group President PHILIP SHEARER Group President, International EDWARD M. STRAW President Global Operations SALLY SUSMAN Senior Vice President Global Communications 35

  • Page 37
    ... 1999 2000 2001 2002 1998 1999 2000 2001 2002 * Fiscal 2002 information is reported before considering the effect of restructuring charges of $117.4 million ($76.9 million after tax), or $.32 per common share, and before the cumulative effect of adopting a new accounting principle in the...

  • Page 38
    ... 26, 1999, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend on all of our outstanding Class A and Class B Common Stock. The stock dividend was paid on June 2, 1999 to all holders of record of shares of our Common Stock at the close of business on May 10...

  • Page 39
    ...237.7 242.5 Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Restructuring Other non-recurring Related party royalties Operating Income Interest expense, net Earnings before Income Taxes, Minority Interest and Accounting Change Provision for income taxes...

  • Page 40
    ... retail stores that in the aggregate accounted for approximately $1.20 billion, or 25%, of our consolidated net sales in fiscal 2002 and $177.8 million, or 28%, of our accounts receivable at June 30, 2002. These groups sell products primarily within North America. Although management believes...

  • Page 41
    ... an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. For fiscal 2003, we will use a pre-retirement discount rate of 7.0% and anticipate using an expected return on plan assets of 8.75%, both of which will result in...

  • Page 42
    ... presented. Sales of products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the "other" category. YEAR ENDED JUNE 30 (In millions) 2002 2001 2000 NET SALES By Region: The Americas Europe, the Middle East & Africa Asia/Paci...

  • Page 43
    ... to recently launched products such as Total Turnaround Visible Skin Renewer, Advanced Night Repair Eye Recovery Complex, Moisture Surge Extra and Moisture Surge Eye Gel, A Perfect World, LightSource Transforming Moisture Lotion and Cream, and Re-Nutriv Ultimate Lifting Creme. Partially offsetting...

  • Page 44
    ... Aveda, which benefited from recently launched texture lotion products and Color Conserve Shampoo and an increase in the number of Company-owned Aveda Environmental Lifestyle Stores. Sales of Bumble and bumble products increased due to an expanded product line and an increase in the number of points...

  • Page 45
    ...resources on the most productive sales channels and markets. As a result, we closed our operations in Argentina and the remaining customers will be serviced by our Chilean affiliate. We are also closing all remaining in-store "tommy's shops" and we are closing other select points of distribution. We...

  • Page 46
    ... in virtually all markets in which we do business. Net sales growth was primarily attributable to a combination of new and recently launched products, the inclusion of newer brands such as Bumble and bumble and changes in distribution, including additional retail locations. Excluding the impact...

  • Page 47
    ... products such as Idealist Skin Refinisher, Anti-Gravity Firming Lift Cream, Anti-Gravity Firming Eye Lift Cream and Pro-Preferred Skincare products, the first skin care line for our M.A. C brand. By introducing new products into lines such as Re-Nutriv, the Origins Ginger Bath and Body Collection...

  • Page 48
    ...store "tommy's shops," located in the United States, and for related product returns. • Information systems and other assets. In response to changing technology and our new strategic direction, the charge included a $16.2 million provision for costs associated with the reevaluation of supply chain...

  • Page 49
    ... prior year, primarily due to net sales increases related to new and recently launched products, strong growth in our M.A. C business and the inclusion of Bumble and bumble, partially offset by a decline in fragrance net sales. In Europe, the Middle East & Africa, operating income increased 19% or...

  • Page 50
    ... of new brands; a shift in the timing of Christmas production at the end of fiscal 2001 as compared with the prior year; reconfiguration of some of our distribution to improve service levels; and softer retail sales than projected in the Americas. Accounts receivable increased due to sales growth...

  • Page 51
    ... total of acquired shares to 7.0 million. The Board of Directors declared, and we paid, quarterly dividends on our Class A Common Stock and Class B Common Stock at the rate of $.05 per share in each quarter of fiscal 2002, 2001 and 2000. In fiscal 2002, 2001 and 2000, dividends declared on...

  • Page 52
    ... calculated over the past 250 day period. The measured valueat-risk, calculated as an average, for the twelve months ended June 30, 2002, related to our foreign exchange contracts, using a variance/co-variance model with a 95 percent confidence level and assuming normal market conditions, was $10...

  • Page 53
    ...Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future", and Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products". Issue No. 00-14 addressed...

  • Page 54
    ... the number of retail locations at which we sell our products; (xi) changes in product mix to products which are less profitable; (xii) our ability to acquire or develop e-commerce capabilities, and other new information and distribution technologies, on a timely basis and within our cost estimates...

  • Page 55
    ... Retained earnings Accumulated other comprehensive income (loss) Less: Treasury stock, at cost; 2,377,860 Class A shares at June 30, 2002 and 877,860 Class A shares at June 30, 2001 Total stockholders' equity Total liabilities and stockholders' equity $ 6.6 216.4 110.0 626.6 959.6 403.9 231.1 635...

  • Page 56
    ... millions) 2002 2001 2000 STOCKHOLDERS' EQUIT Y Common stock, beginning of year Common stock, end of year Paid-in capital, beginning of year Stock compensation programs Paid-in capital, end of year Retained earnings, beginning of year Preferred stock dividends Common stock dividends Issuance of...

  • Page 57
    ...-term debt, net Proceeds from issuance of long-term debt, net Repayments of long-term debt Net proceeds from employee stock transactions Payments to acquire treasury stock Dividends paid Net cash ï¬,ows used for financing activities Effect of Exchange Rate Changes on Cash and Cash Equivalents Net...

  • Page 58
    ... Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care products around the world. Products are marketed under the following brand names: Estée Lauder, Clinique, Aramis, Prescriptives, Origins, M.A. C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble and bumble...

  • Page 59
    ... Assets". These statements established financial accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized...

  • Page 60
    ... Preferred stock dividends Reported Net Earnings Attributable to Common Stock Add back: Goodwill amortization, net of tax Adjusted Net Earnings Basic net earnings per common share: Reported net earnings attributable to common stock before accounting change Cumulative effect of a change in accounting...

  • Page 61
    ..., respectively. These amounts include expenses relating to purchase with purchase and gift with purchase promotions that are now reï¬,ected in net sales and cost of sales due to a change in generally accepted accounting principles. Advertising and promotional expenses included in operating expenses...

  • Page 62
    ... Note 14 "Stock Programs". Concentration of Credit Risk The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. Domestic and international sales are made primarily to department stores, specialty retailers, perfumeries and pharmacies...

  • Page 63
    ... of hair care products, and Bumble and Bumble, LLC, which operates a salon in New York City. In April 2000, the Company acquired, for cash, the business of Gloss.com, Inc. a multi-brand Internet beauty site. In October 1999, the Company acquired Jo Malone Limited, a London-based marketer of...

  • Page 64
    ...," located in the United States, and for related product returns. • Information systems and other assets. In response to changing technology and the Company's new strategic direction, the charge included a $16.2 million provision for costs associated with the reevaluation of supply chain systems...

  • Page 65
    ... (In millions) Restructuring Cost of Sales Operating Expenses $ 1.5 (0.4) - - $ 1.1 $ 4.8 4.4 4.6 23.8 $37.6 Other Non-Recurring Expenses $ 4.1 - 11.6 0.6 $16.3 Total $16.1 6.3 16.2 24.4 63.0 (22.7) $40.3 jane "tommy's shops" Information systems and other assets Global brand reorganization Total...

  • Page 66
    ...consist of the following: JUNE 30 (In millions) 2002 $213.5 169.9 61.2 182.0 $626.6 2001 $157.0 182.6 35.2 157.3 $532.1 Advertising and promotional accruals Employee compensation Restructuring Other NOTE 8 - DEBT The Company's short-term and long-term debt and available financing consist of the...

  • Page 67
    In January 2002, the Company issued and sold $250.0 million of 6% Senior Notes due 2012 ("6% Senior Notes") in a public offering. The 6% Senior Notes were priced at 99.538% with a yield of 6.062%. Interest payments are required to be made semi-annually on January 15 and July 15 of each year. The fi...

  • Page 68
    ..., or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively. Foreign Exchange Risk Management The Company enters into forward exchange contracts to hedge anticipated transactions as well as...

  • Page 69
    ... with international employee transfers. Retirement Growth Account Plan (U.S.) The Retirement Growth Account Plan is a trust-based, noncontributory defined benefit pension plan. The Company's funding policy consists of an annual contribution at a rate that provides for future plan benefits...

  • Page 70
    ... Plans U.S. 2002 (In millions) Other than Pension Plans Postretirement 2002 2001 International 2001 2002 2001 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participant contributions Actuarial loss (gain) Foreign currency exchange rate...

  • Page 71
    ... the amounts reported for the health care plans. A onepercentage-point change in assumed health care cost trend rates for fiscal 2002 would have had the following effects: One-Percentage-Point Increase (In millions) One-Percentage-Point Decrease $(0.5) $(4.6) Effect on total service and interest...

  • Page 72
    ...level and years of service. The Company's contributions were approximately $6.7 million for the fiscal years ended June 30, 2002 and 2001, and $5.8 million in fiscal 2000. Shares of the Company's Class A Common Stock are not an investment option in the Savings Plan and the Company does not use such...

  • Page 73
    ... open market or in privately negotiated transactions, depending on market conditions and other factors. NOTE 14 - STOCK PROGRAMS The Company has established the fiscal 2002 Share Incentive Plan, the Fiscal 1999 Share Incentive Plan, the Fiscal 1996 Share Incentive Plan and the Non-Employee Director...

  • Page 74
    ...-pricing model with the following assumptions: YEAR ENDED JUNE 30 2002 31% 7 years 4.9% .50% 2001 31% 7 years 5.9% .50% 2000 30% 7 years 6.1% .50% Expected volatility Average expected option life Average risk-free interest rate Dividend yield Summarized information about the Company's stock...

  • Page 75
    ...,700 of the Company's Class A Common Stock with an exercise price equal to fair market value on the date of grant. In addition, subsequent to June 30, 2002 the Company granted approximately 55,100 share units to a key executive pursuant to the terms of the Fiscal 2002 Share Incentive Plan. NOTE 15...

  • Page 76
    ... Standards Board's definition of operating segments and therefore, additional financial data are provided below. The "other" segment includes the sales and related results of ancillary products and services that do not fit the definition of skin care, makeup, fragrance and hair care. The Company...

  • Page 77
    ... Care Other Operating Income: Skin Care Makeup Fragrance Hair Care Other Reconciliation: Restructuring and other non-recurring expenses Interest expense, net Earnings before Income Taxes, Minority Interest and Accounting Change GEOGRAPHIC DATA Net Sales: The Americas Europe, the Middle East & Africa...

  • Page 78
    ... Hedging Activities". NOTE 20 - UNAUDITED SUBSEQUENT EVENT Pursuant to the Company's authorized share repurchase program, subsequent to June 30, 2002, the Company purchased an additional 4.4 million shares of Class A Common Stock for $138.1 million, bringing the cumulative total of acquired shares...

  • Page 79
    ...DE PE N DE N T AU DI TOR S ' R E P OR T The Board of Directors and Stockholders The Estée Lauder Companies Inc.: We have audited the accompanying consolidated balance sheet of The Estée Lauder Companies Inc. and subsidiaries as of June 30, 2002, and the related consolidated statements of earnings...

  • Page 80
    ... We have audited the accompanying consolidated balance sheets of The Estée Lauder Companies Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash ï¬,ows for each of the...

  • Page 81
    ...this report include: 154, 3-Step Skin Care System, A Perfect World White Tea Skin Guardian, Active White, Advanced Night Repair, Age Rescue, All Over Shimmer, Aramis, Aromatics Elixir, Aveda, Aveda Love, Be Curly, Beautiful, Bobbi Brown, Bobbi Brown Beach, Bobbi Brown Extra, Bumble and bumble, Calyx...

  • Page 82
    BRINGING THE BEST TO EVERYONE WE TOUCH

  • Page 83
    T H E E S T { E L A U D E R C O M PA N I E S I N C . 767 F I F T H AV E N U E N E W YO R K , N E W YO R K 10 15 3