Estee Lauder 2004 Annual Report Download

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THE EST{E LAUDER COMPANIES INC.
767 FIFTH AVENUE NEW YORK, NEW YORK 10153
THE EST{E LAUDER COMPANIES INC. 2004 ANNUAL REPORT
THE
COMPANIES INC.
ANNUAL
EST{E LAUDER
2004
REPORT
THE EST{E LAUDER COMPANIES INC. 2004 ANNUAL REPORT

Table of contents

  • Page 1
    ... CO M PA N I E S I N C . 2 0 0 4 A N N UA L R E P O R T THE EST{E LAUDER COMPANIES INC. 2004 ANNUAL REPORT T H E E S T { E L AU D E R CO M PA N I E S I N C . 2 0 0 4 A N N UA L R E P O R T T H E E S T { E L AU D E R CO 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 1015...

  • Page 2
    BRINGING THE BEST TO EVERYONE WE TOUCH

  • Page 3
    ..., makeup, fragrance and hair care products. The Company's products are sold in over 130 countries and territories under well-recognized brand names, including Estée Lauder, Clinique, Aramis, Prescriptives, Origins, M.A. C, Bobbi Brown, Tommy Hilfiger, La Mer, Donna Karan, Aveda, Stila, Jo Malone...

  • Page 4
    02 PHOTO BY VICTOR SKREBNESKI

  • Page 5
    ... invented. A skin care pioneer, she later became one of the world's leading fragrance noses, creating a host of best-selling scents, including the legendary Youth-Dew. At the same time, Mrs. Lauder was a visionary businesswoman developing globally successful brands such as Aramis and Clinique, and...

  • Page 6
    ... and superior quality . Select products: Perfectionist Correcting Serum for Lines/Wrinkles, Idealist Skin Refinisher and Idealist Micro-D Deep Thermal Refinisher, Advanced Night Repair, Electric Intense LipCreme, Pure Color Long Lasting Lipstick, MagnaScopic Maximum Volume Mascara, Ideal Matte...

  • Page 7
    ... 30 countries and territories . A professional beauty line developed by celebrated makeup artist Bobbi Brown, encompassing color cosmetics, skin care, professional makeup brushes, accessories and fragrance . Select products: Foundation Stick, Creamy Concealer Kit, Lip Color, Lip Gloss, Shimmer Brick...

  • Page 8
    ... Mist, DKNY The Fragrance for Women and DKNY The Fragrance for Men. 06 AVEDA Acquired in 1997 . Sold in more than 25 countries and territories . Premium professional and consumer hair care, styling, professional hair color, skin, body and spa, aroma, makeup and lifestyle products based on the art...

  • Page 9
    ... fragrance . Michael Kors for Men fragrance features selected products such as Eau de Toilette Spray and After Shave Balm. DARPHIN Acquired in 2003 . Sold in more than 55 countries and territories . A well-established Paris-based brand offering prestige skin care, makeup and personal care products...

  • Page 10
    ... NEW PRODUCTS FOR OUR CONSUMERS Our scientists continue to amaze and delight us. For example, Clinique's Perfectly Real Makeup utilizes a new patent-pending mirror technology to create a more natural look. Our rapidly growing, highly exclusive La Mer introduced The Lifting Face Serum and The Lifting...

  • Page 11
    ...hand and arm treatments with edibles to launch Jo Malone's new coffee fragrance collections. Whether in apothecaries or airports, specialty stores or online, we seek to touch our consumer in a meaningful way that not only sells products, but builds brand enthusiasm. Each of these channels allows our...

  • Page 12
    ... and global business opportunities. In October 2003, BeautyBank's first project was born. We entered into a strategic alliance with Kohl's department stores to build and manage new cosmetic departments for their stores. We are currently the sole provider of branded cosmetics and skin care for...

  • Page 13
    ... to operate as a world-class public Company and keep the spirit of the family alive for all our employees. I know that William will hold true to the traditions created by Mrs. Estée Lauder and enhanced by Fred Langhammer during his distinguished service as our Chief Executive Officer. 11 FRED...

  • Page 14
    ... as President and Chief Executive Officer, William P. Lauder. He has worked closely with me over the last few years and has been a key participant in formulating strategy and directing the Company. His particular focus on two major factors for success - building brands and developing talent - is...

  • Page 15
    ... certainly describe the employees of The Estée Lauder Companies. From the scientists at our R&D Centers who keep us on the leading edge of innovation to the people in Operations who ensure that we have a highly efficient supply chain producing and delivering the best products to stores around the...

  • Page 16
    ... a reported basis and 10% in constant currency. The improvements were driven by the resurgence of the travel retail channel, where 60% of the cosmetics sales in the channel are generated by fragrance, as well as several new launches - including Estée Lauder Beyond Paradise, Aramis Life and Clinique...

  • Page 17
    ... prestigious award for the best new eye product from Cosmetic Executive Women for MagnaScopic Maximum Volume Mascara. Foundation also continued to show strong sales in North America, Europe and Asia for Clinique and Estée Lauder. TWO OF OUR CATEGORIES, SKIN CARE AND MAKEUP, REACHED MILESTONES THIS...

  • Page 18
    Estée Lauder showcases its dynamic fragrance brands in a deluxe travel retail setting in the U.S. Virgin Islands.

  • Page 19
    ... the top ten best-selling fragrances in United States prestige department stores in fiscal 2004. International markets hold untapped opportunities for our fragrances, as the Company's brands are currently under-represented in Europe and travel retail. The strength of our fragrance launches, as well...

  • Page 20
    ... Life with Andre Agassi, bringing new life to the men's fragrance category and capturing the Cosmetic Executive Women award for best new men's fragrance in 2004. At the same time, Aramis Classic celebrated 40 years as a classic men's fragrance. Celebrity cachet added an aspirational touch to our...

  • Page 21
    ... Jo Malone had a strong year both in the United States and the United Kingdom, opening a new shop on prestigious Madison Avenue in New York City as the lifestyle fragrance brand continues to develop its loyal following. Designer fragrance Michael Kors continued to sell selectively around the world...

  • Page 22
    20 M.A . C brings makeup excitement to Latin America with its first free-standing store in Brazil.

  • Page 23
    ...-performance foundations. Estée Lauder's Pure Color lip and nail line continues to grow internationally and is leading the brand's renewal in the makeup category. Success in the makeup category in fiscal 2004 was driven by launches of Perfectly Real Makeup, High Impact Mascara and High Impact Eye...

  • Page 24
    ... top rankings. Recognizing that not all lashes are created equal has led Estée Lauder to develop 11 different formulas to meet the needs of women around the world, while Clinique has nine innovative formulas. 22 Sales growth also reï¬,ects the impact of makeup artist brands M.A. C and Bobbi Brown...

  • Page 25
    ... makeup's role in fighting lines and wrinkles. New products take advantage of this new-age technology to do more than cover. Multibenefit products such as foundation with sunscreen, foundations that balance and foundations that moisturize are being launched by brands like Clinique, whose Perfectly...

  • Page 26
    24

  • Page 27
    ... THE ABSENCE OF RADIANCE THAT DIMINISHES BEAUTY AT ANY AGE." - EST{E LAUDER 25 Anti-aging, dermatologist brands, high technology, performance luxury and advanced sun protection are the top-line drivers in skin care this year. Skin care sales have been supported by a baby boomer population that is...

  • Page 28
    ...and The Lifting Intensifier, while Estée Lauder's Re-Nutriv line of products experienced dynamic growth around the world. In the dermatologist-developed segment, Prescriptives continues to launch skin care products that bring the benefits of a doctor's knowledge to skin care. The addition of Rodan...

  • Page 29
    .... Both Estée Lauder and Clinique have launched whitening products developed specifically for the Asian consumer to treat the effects of sun on delicate Asian skin - Estée Lauder White Light EX and Clinique Active White Lab Solutions. Sun protection was a focus for brands such as Bobbi Brown which...

  • Page 30
    28 Aveda opens its first Japanese ï¬,agship in Tokyo, winning "Store of the Year" for its authentic design.

  • Page 31
    ... favorites with beauty professionals and consumers alike. Breakthrough product technology, consistent performance by existing offerings, new doors and exclusive salons and educational centers deepen the relationships that both brands have with their customers. Last September, Aveda opened its first...

  • Page 32
    ...to hone business skills such as strategic and financial management, retailing and customer service. Important product launches also contributed to hair care's growth in fiscal 2004. Aveda's Damage Remedy Shampoo and Conditioner, created to address the special challenges faced by Asian hair, became...

  • Page 33
    ...important category for our Company-owned retail stores. Clinique is a leading hair care brand in United States department stores with products like Gentle Wash Shampoo, Healthy Shine Serum and Shaping Wax, among others, while Clear Head Mint Shampoo and Rich Rewards Intensive treatment for scalp and...

  • Page 34
    32 Estée Lauder models Liya Kebede, Elizabeth Hurley and Carolyn Murphy are featured together for the first time for the Future Perfect Anti-Wrinkle Radiance Crème ad campaign.

  • Page 35
    ... look for beauty information is crucial in this era of hyper-communication. Our brands take a leading position in all media while relying on advertising, public relations, special events and promotions to continually build excitement at the counter. Estée Lauder launched its new fragrance, Beyond...

  • Page 36
    .... WILLIAM P. LAUDER President Chief Executive Officer The Estée Lauder Companies Inc. 1 Member of Audit Committee 2 Member of Compensation Committee (NOTE: Ms. Bravo will replace Mr. Rose on November 5, 2004) 3 Member of Nominating and Board Affairs Committee 4 Member of Stock Plan Subcommittee...

  • Page 37
    ... Senior Vice President Global Human Resources HARVEY GEDEON Executive Vice President Research & Development RICHARD W. KUNES Senior Vice President Chief Financial Officer EVELYN H. LAUDER Senior Corporate Vice President LEONARD A. LAUDER Chairman RONALD S. LAUDER Chairman Clinique Laboratories...

  • Page 38
    ..., we sold the assets and operations of our former reporting unit that sold jane brand products. As a result, fiscal 2004, 2003 and 2002 information has been restated to reï¬,ect that reporting unit as discontinued operations. A HERITAGE OF UNINTERRUPTED SALES GROW TH 1953 1972 $100 million 1985...

  • Page 39
    ... share would have been higher by $.06 and $.05, respectively. (c) In December 2003, we committed to a plan to sell the assets and operations of our former reporting unit that sold jane brand products and we sold them in February 2004. As a result, all consolidated statements of earnings information...

  • Page 40
    ...23.4 $ 168.5 $ $ $ $ .80 (.09) .71 .79 (.09) .70 238.2 241.1 Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Restructuring Special charges Related party royalties Operating Income Interest expense, net Earnings before Income Taxes, Minority Interest and...

  • Page 41
    ... sales are recorded at the time the product is shipped to the customer. We report our sales levels on a net sales basis, which is computed by deducting from gross sales the amount of actual returns received and an amount established for anticipated returns. As is customary in the cosmetics...

  • Page 42
    ... in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This Statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years...

  • Page 43
    ... meet our definition of skin care, makeup, fragrance and hair care have been included in the "other" category. In February 2004, we sold the assets and operations of our reporting unit that sold jane brand products. Prior to the sale of the business, in December 2003, we committed to a plan to sell...

  • Page 44
    ...fiscal 2003 results as reported and results prior to adjustment for a special pre-tax charge of $22.0 million, or $13.5 million after tax, equal to $.06 per diluted common share, in connection with the proposed settlement of a class action lawsuit brought against us and a number of other defendants...

  • Page 45
    ... $76.9 million after tax (of which $0.5 million was included in discontinued operations), equal to $.32 per diluted common share. The restructuring charges were related to repositioning certain businesses as part of a globalization and reorganization initiative and are described in greater detail in...

  • Page 46
    ... Estée Lauder and Perfectly Real Makeup and Colour Surge Bare Brilliance by Clinique. Also contributing to net sales growth were strong sales of High Impact Mascara, High Impact Eye Shadow and Skin Clarifying Makeup by Clinique, as well as Pure Color Lip Vinyl and Artist's Lip and Eye Pencils from...

  • Page 47
    ... growth rate in net sales, particularly in the travel retail business, as well as our ongoing cost containment efforts to maintain expenses in line with our business needs, partially offset by operating expenses related to BeautyBank, the higher operating costs associated with newly acquired brands...

  • Page 48
    ... was supported by strong sales of Comforting Cream Cleanser, Moisture Surge Extra Thirsty Skin Relief and Moisture Surge Eye Gel, and products in the 3-Step Skin Care System by Clinique, as well as by Re-Nutriv Ultimate Lifting Creme from Estée Lauder, and A Perfect World line of products by...

  • Page 49
    ... and Loose Powder, as well as from new and existing products in the Pure Color line. Offsetting this increase were lower net sales of certain existing products such as Sumptuous Lipstick from Estée Lauder, and Gentle Light Makeup and Powder and High Impact Eye Shadow Duos by Clinique. Excluding the...

  • Page 50
    ... with purchase activities, discussed as a component of cost of sales) which supported our sales growth and built momentum going into the second half of fiscal 2003. Changes in advertising, sampling and merchandising spending result from the type, timing and level of activities related to product...

  • Page 51
    ... at any time at face value, but may not be redeemed by us until May 24, 2005. If put to us on or before June 30, 2005, we would have up to 120 days after the exercise date of the put to pay for the shares. If the remaining shares of 2015 Preferred Stock 49 T H E E S T { E L AU DE R COM...

  • Page 52
    ... in fiscal 2005, higher accounts receivable in line with sales growth, and changes in other assets and accrued liabilities that reflect receipts and accruals from employee compensation and benefit related transactions as well as selling, advertising and merchandising activities. We expect cash...

  • Page 53
    ... On November 5, 2003, the Board of Directors declared an annual dividend of $.30 per share on our Class A and Class B Common Stock, payable on January 6, 2004 to stockholders of record at the close of business on December 16, 2003. Common stock dividends paid during the fiscal years 2004, 2003...

  • Page 54
    ... a deferred compensation account in fiscal 2005 based on a decision of the Compensation Committee of the Board of Directors in August 2004. Derivative Financial Instruments and Hedging Activities We address certain financial exposures through a controlled program of risk management that includes...

  • Page 55
    ... to a new law regarding prescription drug benefits under Medicare ("Medicare Part D") and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, Statement of Financial Accounting Standard No...

  • Page 56
    ...: (1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses, some of which have greater resources than we do; (2) our ability to develop, produce and market new products on which future operating results may depend; T H E E S T { E L AU DE R COM...

  • Page 57
    ...) our ability to acquire or develop new information and distribution technologies, on a timely basis and within our cost estimates; (13) our ability to capitalize on opportunities for improved efficiency, such as globalization, and to integrate acquired businesses and realize value therefrom; and...

  • Page 58
    ... Long-term debt Other noncurrent liabilities Total noncurrent liabilities Commitments and Contingencies (see Note 15) $6.50 Cumulative Redeemable Preferred Stock, at redemption value Minority interest Stockholders' Equity Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares...

  • Page 59
    ... stock dividends Common stock dividends Net earnings for the year Retained earnings, end of year Accumulated other comprehensive income (loss), beginning of year Other comprehensive income Accumulated other comprehensive income (loss), end of year Treasury stock, beginning of year Acquisition...

  • Page 60
    ... Repayments and redemptions of long-term debt Net proceeds from employee stock transactions Payments to acquire treasury stock Dividends paid to stockholders Distributions made to minority holders of consolidated subsidiaries Net cash ï¬,ows used for financing activities Effect of Exchange Rate...

  • Page 61
    ...Lauder, Clinique, Aramis, Prescriptives, Origins, M . A . C, Bobbi Brown, La Mer, Aveda, Stila, Jo Malone, Bumble and bumble, Darphin and Rodan + Fields. The Estée Lauder Companies Inc. is also the global licensee of the Tommy Hilfiger, Donna Karan, kate spade and Michael Kors brands for fragrances...

  • Page 62
    ...Other Intangible 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...

  • Page 63
    ... impacted the Company's makeup category. In February 2004, the Company sold the assets and operations of its reporting unit that sold jane brand prod- ucts. Prior to the sale of the business, in December 2003, the Company committed to a plan to sell such assets and operations. At the time the...

  • Page 64
    ... Recognition Generally, revenues from merchandise sales are recorded at the time the product is shipped to the customer. The Company reports its sales levels on a net sales basis, which is computed by deducting from gross sales the amount of actual returns received and an amount established for...

  • Page 65
    ...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, perfumeries and specialty retailers. The Company grants credit to all qualified customers and does...

  • Page 66
    ... to a new law regarding prescription drug benefits under Medicare ("Medicare Part D") and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, Statement of Financial Accounting Standard No...

  • Page 67
    ... sale of these shares. The cost of this offering was borne by the selling stockholder. NOTE 4 - ACQUISITION AND DIVESTITURE OF BUSINESSES AND LICENSE ARRANGEMENTS In December 2003, the Company committed to a plan to sell the assets and operations of its reporting unit that sold jane brand products...

  • Page 68
    ... charge to write off the related Gloss.com acquisition goodwill. • Supply Chain. Building on previously announced supply chain initiatives, the Company restructured certain manufacturing, distribution, research and development, information systems and quality assurance operations in the United...

  • Page 69
    ... JUNE 30 Current: Federal Foreign...stock dividends...related reserves Pension plan reserves Postretirement benefit obligations Various accruals not currently deductible Net operating loss and credit carryforwards Other differences between tax and financial statement values...Company intends to reinvest...

  • Page 70
    ... recorded to reï¬,ect the tax benefits of the losses not...Advertising and promotional accruals Employee compensation Restructuring and special charges Other NOTE 8 - DEBT The Company's short-term and long... 2015 Preferred Stock Other long-term borrowings Other short-term borrowings Commercial paper...

  • Page 71
    ... 31, 2004 is 0.994%. The $68.4 million 2015 Preferred Stock may be put to the Company at any time at face value but may not be redeemed by the Company until May 24, 2005. As a result, the liability is recorded at its redemption value and is classified as current at June 30, 2004. As of June 30...

  • Page 72
    ..., are recorded in accumulated other comprehensive income within equity. Furthermore, changes in the fair value of other derivative instruments are reported in current-period earnings. For each derivative contract entered into where the Company looks to obtain special hedge accounting treatment, the...

  • Page 73
    ... included in the current portion of long-term debt pursuant to the provisions of SFAS No. 150. Cumulative redeemable preferred stock: In fiscal 2003, the fair value of the cumulative redeemable preferred stock was estimated utilizing a cash ï¬,ow analysis at a discount rate equal to rates available...

  • Page 74
    ... 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 75
    ...paid Plan amendments Special termination benefits Acquisitions, divestitures, adjustments Settlements and curtailments Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Foreign currency exchange rate impact Employer...

  • Page 76
    ... - Prior service cost 0.5 Actuarial loss (gain) 6.2 Special termination benefits - Settlements and curtailments - Net periodic benefit cost Weighted-average assumptions used to determine benefit obligations at June 30: Pre-retirement discount rate Postretirement discount rate Rate of compensation...

  • Page 77
    ... benefit obligation, accumulated benefit obligation, fair value of plan assets and the other comprehensive loss due to change in minimum liability recognition for the Company's pension plans at June 30 are as follows: Pension Plans Retirement Growth Account 2004 (In millions) Restoration 2004 $67...

  • Page 78
    ... The Company accrues for deferred compensation and interest thereon and for the increase in the value of share units pursuant to agreements with a key executive, a former executive and outside directors. The amounts included in the accompanying consolidated balance sheets under these plans were...

  • Page 79
    ... 16.7 million shares have been purchased under this program. 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 Share Incentive Plan (collectively, the...

  • Page 80
    ...(a) Does not include approximately 1,467,300 shares which will become exercisable on July 1, 2004 due to the retirement of an executive on June 30, 2004, based on the original terms of the option grant. Summarized information about the Company's stock options outstanding and exercisable at June 30...

  • Page 81
    ... the Department Store Defendants, the Company and eight other manufacturers of cosmetics (the "Manufacturer Defendants") conspired to fix and maintain retail prices and to limit the supply of prestige cosmetics products sold by the Department Store Defendants in violation of state and Federal laws...

  • Page 82
    ... products and services that do not fit the definition of skin care, makeup, fragrance and hair care. The Company evaluates segment performance based upon operating income, which represents earnings before income taxes, minority interest and net interest income or expense. The accounting policies...

  • Page 83
    ... Care Other Operating Income: Skin Care Makeup Fragrance Hair Care Other Reconciliation: Restructuring and special charges Interest expense, net Earnings before income taxes, minority interest and discontinued operations GEOGRAPHIC DATA Net Sales: The Americas Europe, the Middle East & Africa Asia...

  • Page 84
    ..., 2004. Pursuant to the Company's authorized share repurchase program, subsequent to June 30, 2004 and through August 31, 2004, the Company purchased an additional 1.3 million shares of Class A Common Stock for $54.9 million bringing the cumulative total of acquired shares to 18.0 million under this...

  • Page 85
    ... Registered Public Accounting Firm The Board of Directors and Stockholders The Estée Lauder Companies Inc.: We have audited the accompanying consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of...

  • Page 86
    ..., Idealist, Jo Malone, La Mer, Light Elements, Lab Series for Men, M . A . C, ૺ magic by Prescriptives, MagnaScopic, No Puffery, Origins, Peace of Mind, Perfectionist, Perfectly Real, Pro Lash, Prescriptives, Pure Abundance, Re-Nutriv, Repairwear, Resilience Lift, Rich Rewards, Rodan + Fields, Sap...