Estee Lauder 2004 Annual Report Download - page 49

THE EST{E LAUDER COMPANIES INC.
Also contributing to growth were strong sales from Estée
Lauder brand products including So Ingenious Multi-
Dimension Liquid Makeup 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
impact of foreign currency translation, makeup net sales
increased 4%.
Fragrance Net sales of fragrance products increased 4%
or $42.3 million to $1,059.6 million, primarily reflecting
the effects of favorable foreign currency exchange rates to
the U.S. dollar. The fragrance industry continues to expe-
rience a difficult environment. The travel retail business,
which depends substantially on fragrance products, began
to improve in the middle of the fiscal year relative to the
prior year, however the latter part of fiscal 2003 was
adversely affected by international uncertainties stem-
ming from events in Iraq and concerns relating to SARS.
In fiscal 2003, we successfully launched Estée Lauder
pleasures intense, T girl by Tommy Hilfiger, Clinique Happy
Heart, Lauder Intuition for Men and Donna Karan Black
Cashmere. Net sales also benefited from strong sales of
Beautiful by Estée Lauder and Aromatics Elixir from
Clinique. Offsetting these increases and sales from new
product launches were lower net sales of certain Tommy
Hilfiger products, Intuition by Estée Lauder and Estée
Lauder pleasures. Excluding the impact of foreign
currency translation, fragrance net sales were relatively
unchanged from the prior year.
Hair Care Hair care net sales increased 6% or $13.1 mil-
lion to $228.9 million. This increase was primarily the
result of sales growth from Aveda and Bumble and
bumble products. We also increased the number of
Company-owned Aveda Experience Centers and strate-
gically decreased the number of salons that offer Aveda
products. Partially offsetting the increase were lower net
sales of Clinique’s Simple Hair Care System.
The introduction of new products may have some can-
nibalizing effect on sales of existing products, which we
take into account in our business planning.
Geographic Regions
Net sales in the Americas increased 3% or $85.8 million to
$2,931.8 million primarily reflecting growth from our newer
brands as well as the success of newly launched products.
Despite the increase, we continued to experience a soft
retail environment in the United States in fiscal 2003.
In Europe, the Middle East & Africa, net sales increased
19% or $245.3 million to $1,506.4 million. Net sales in
the United Kingdom, Spain, Italy, France, Switzerland and
Greece experienced double-digit growth. Also contribut-
ing to the increase with double-digit growth was our
worldwide travel retail business, as sales recovered from
the levels experienced after September 11, 2001. How-
ever, our travel retail business was adversely affected at
the end of fiscal 2003 by certain world events including
the lingering effects of the war in Iraq and concerns
associated with SARS. Excluding the impact of foreign
currency translation, Europe, the Middle East & Africa net
sales increased 8%.
Net sales in Asia/Pacific increased 8% or $47.2 million
to $657.8 million primarily due to higher net sales in
Korea, Japan, Australia and Thailand. Despite increased
net sales in Japan, the country remained a difficult mar-
ket due to local economic conditions and competition.
Excluding the impact of foreign currency translation,
Asia/Pacific net sales increased 3%.
We strategically stagger our new product launches by
geographic market, which may account for differences in
regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales improved to
26.0% from 26.8%, reflecting production and supply chain
efficiencies and lower costs from promotional activities.
We continued to emphasize sourcing initiatives and
overall supply chain management which resulted in lower
manufacturing costs, whereas in the prior year we experi-
enced under-absorption of overhead as a result of the
impact of the events of September 11, 2001.
The inclusion of promotional merchandise as a com-
ponent of cost of sales results in lower margins. A strategic
shift to reduce these activities in fiscal 2003 contributed
to the improvement in our gross profit margin for the year.
The inclusion of the cost of purchase with purchase and
gift with purchase merchandise as a component of cost of
sales resulted from our adoption of EITF Issue No. 01-9.
Since the cost of these promotional activities is a compo-
nent of cost of sales and the timing and level of promo-
tions vary with our promotional calendar, we experienced,
and expect to continue to experience, fluctuations in the
cost of sales percentage.
OPERATING EXPENSES
Operating expenses decreased to 64.1% of net sales as
compared with 66.0% of net sales in the prior-year
period. The fiscal 2003 results were impacted by a charge
related to the pending settlement of a legal proceeding of
47