Estee Lauder 2004 Annual Report Download - page 48

THE EST{E LAUDER COMPANIES INC.
Product Categories
Operating income increased 23% to $336.3 million in
skin care, 25% to $257.7 million in makeup and 59% to
$23.6 million in hair care reflecting overall sales growth
and new product launches. Operating income decreased
23% to $24.8 million in fragrance reflecting the softness
in that product category in the United States as well as
increased support spending related to new product
launch activities.
Geographic Regions
Operating income in the Americas increased 25% or
$63.9 million to $319.2 million due to sales growth result-
ing from an improved retail environment, strong product
launches and growth from newer brands. In Europe, the
Middle East & Africa, operating income increased 21% or
$46.7 million to $274.4 million primarily due to signifi-
cantly improved results from our travel retail business,
improved operating results in the United Kingdom and
Spain as well as the addition of a full year of results of the
Darphin line of products. Partially offsetting these
increases were lower results in Switzerland and Italy due
to difficult market conditions. In Asia/Pacific, operating
income increased 18% or $7.7 million to $50.4 million.
This increase reflects improved results in Taiwan, Hong
Kong and Thailand, partially offset by lower results
in Korea.
INTEREST EXPENSE, NET
Net interest expense was $27.1 million as compared with
$8.1 million in the prior year. The increase in net interest
expense was due to the inclusion of the dividends on
redeemable preferred stock of $17.4 million as interest
expense in fiscal 2004. This change in reporting resulted
from a change in accounting standards which prohibits us
from restating the prior fiscal year results (see “Recently
Issued Accounting Standards”). To a lesser extent, inter-
est expense was also affected by higher average net bor-
rowings and a marginally higher effective interest rate on
our debt portfolio. In fiscal 2005, we expect a reduction in
interest expense as a result of the partial redemption of
preferred stock and the lower dividend rate on the
remaining preferred stock compared to fiscal 2004. See
“Liquidity and Capital Resources” for further details.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, for-
eign, state and local income taxes. The effective rate for
income taxes for fiscal 2004 was 37.7% as compared with
32.9% in the prior year. These rates differ from statutory
rates, reflecting the effect of state and local taxes, tax rates
in foreign jurisdictions and certain nondeductible
expenses. The increase in the effective income tax rate
was attributable to the inclusion of the dividends on
redeemable preferred stock as interest expense, which
are not deductible for income tax purposes, the mix of
global earnings and, to a lesser extent, the timing of cer-
tain tax planning initiatives. The prior year rate included
benefits derived from certain favorable tax negotiations.
FISCAL 2003 AS COMPARED WITH FISCAL 2002
NET SALES
Net sales increased 8% or $384.5 million to $5,096.0 mil-
lion, reflecting growth in all product categories and each
of our geographic regions. Product category results were
led by skin care, and our regions were led by Europe, the
Middle East & Africa, where results benefited from
favorable foreign exchange rates to the U.S. dollar and
improvements in the travel retail business. Travel retail
improved during the middle of fiscal 2003 compared with
lower results during the middle of fiscal 2002 but was
adversely affected during the last quarter of fiscal 2003
by certain world events, including the lingering effects
of the war in Iraq and concerns relating to SARS. Such
events may affect our future sales and earnings. Excluding
the impact of foreign currency translation, net sales
increased 4%.
Product Categories
Skin Care Net sales of skin care products increased 11%
or $190.4 million to $1,893.7 million, which was primarily
attributable to the recent launches of Perfectionist Cor-
recting Serum for Lines/Wrinkles and Resilience Lift
OverNight Face and Throat Crème by Estée Lauder, and
the Repairwear line of products and Advanced Stop Signs
from Clinique. Additionally, the increase 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 Origins. Partially offsetting this increase were lower net
sales of certain existing products such as Stop Signs, Total
Turnaround Cream and Turnaround Cream by Clinique
and Idealist Skin Refinisher by Estée Lauder. Excluding the
impact of foreign currency translation, skin care net sales
increased 7%.
Makeup Makeup net sales increased 7% or $129.5
million to $1,887.8 million due to strong sales of our
makeup artist lines and fiscal 2003 launches of Dewy
Smooth Anti-Aging Makeup and Colour Surge Lipstick by
Clinique, and MagnaScopic Maximum Volume Mascara
and Artist’s Lip and Eye Pencils from Estée Lauder.
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