Estee Lauder 2007 Annual Report Download

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THE EST{E LAUDER
COMPANIES INC.
2007
ANNUAL REPORT
BRINGING THE BEST TO EVERYONE WE TOUCH

Table of contents

  • Page 1
    BRINGING THE BEST TO EVERYONE WE TOUCH THE EST{E LAUDER COMPANIES INC. 2007 ANNUAL REPORT

  • Page 2
    ... Aramis, Clinique, Prescriptives, Lab Series Skincare for Men, Origins, Tommy Hilfiger, M.A. C, Kiton, Bobbi Brown, La Mer, Donna Karan, Aveda, Jo Malone, Bumble and bumble, Michael Kors, Darphin, American Beauty, Flirt!, Good Skin, Grassroots, Sean John Fragrances, Missoni, Daisy Fuentes, Tom Ford...

  • Page 3

  • Page 4
    PorTFoLiO f BRaNds

  • Page 5
    ... Makeup, Anti-AGE Advanced Protection Lotion SPF 25, ,magic by Prescriptives Liquid Powder and Lash Envy Volumizing Mascara. LAB SERIES SKINCARE FOR MEN Introduced in 1987. Sold in more than 55 countries and territories. A global leader and authority in men's skin care, Lab Series Skincare For Men...

  • Page 6
    ... original, best-selling Crème de la Mer into a complete range of facial skin care and body products. Select products: The Eye Balm, The Lifting Face Serum and The Radiant Infusion. BOBBI BROWN Acquired in 1995. Sold in select retailers in more than 35 countries and territories. An exclusive beauty...

  • Page 7
    ... island destination fragrances including Island Michael Kors Fiji (2006) and Island Michael Kors Hawaii (2007). DARPHIN Acquired in 2003. Sold in more than 50 countries and territories. A well-established, Paris-based brand offering prestige skin care, makeup and spa-inspired body products created...

  • Page 8
    ... at Kohl's Department Stores nationwide and online at kohls.com. Other select products: Dianoche Body Shimmer All-Over Moisturizing Lotion and Dianoche Firming Body Cream. TOM FORD BEAUTY Exclusive global license agreement signed in 2005. Sold in 16 countries and select travel retail locations. In...

  • Page 9
    Dear Fellow Stockholders: I am particularly proud of our Company's performance in Fiscal Year 2007. Our results speak for themselves. Our sales were over $7 billion, breaking all previous records. We achieved respectable growth in the difficult U.S. market and delivered spectacular results in many ...

  • Page 10
    ..., we held conferences around the world to communicate our direction for growth to the financial and supplier communities. We have also initiated a more proactive approach to communicating with our 28,500 employees worldwide to foster high engagement in their jobs. More robust daily reporting on our...

  • Page 11
    ... to the latest technology and the most environmentally friendly packaging - keeping the new product excitement high. We have research centers in Asia, Europe, Canada and the United States that focus on the specific needs of the many faces of global beauty. The global prestige cosmetics business is...

  • Page 12
    ... duty-free shops around the world. In Fiscal 2007, sales from our travel retail business grew 16%. Our retail strategies in this arena are setting a new standard for how some of our brands touch consumers. The beautiful Jo Malone store at Heathrow airport in London is a model for the brand's global...

  • Page 13

  • Page 14
    OuR bRAnds oUr cHaNNels OuR wOrld smooth infusion smooths and softens hair up to 60%* â„¢ Sleek hair styles start with new Smooth Infusionâ„¢ Shampoo and Conditioner. Our exclusive plant infusion blend creates a smooth new surface on hair, making it more manageable and easier to style. A ...

  • Page 15
    fRaGrAnc

  • Page 16
    ... fragrances for men and women to lifestyle fragrances, aromatherapy fragrances and accessory fragrances that are an integral part of any personal signature. Four of our women's fragrances rank among the top 12 fragrances in U.S. prestige department stores. Classics like Beautiful, Estée Lauder...

  • Page 17
    ...doors in Europe and in select travel retail locations. From the far corners of the Earth comes Tom Ford's Private Blend Collection, a breathtaking line of 12 highly individual fragrances made from a rare and exotic blend of ingredients. Tom Ford for Men is a new, innovative take on the classic woods...

  • Page 18
    ...British Society of Perfumers with the 2006 McCorkey Award for Best Female Fragrance. Jo Malone arrived on the fashionably chic and elegant avenues of Cannes this year with its first free-standing store in France. Aerin Lauder debuted her luxurious new fragrance, Private Collection Tuberose Gardenia...

  • Page 19
    ... the lead over prestige skin care and fragrance. Our M.A. C artists create 22 million consumer experiences a year, selling 35 eye shadows and 21 lip glosses per minute in the United States, alone. M.A. C is number one in lip gloss, pressed powder and eye shadow in U.S. department stores. The makeup...

  • Page 20

  • Page 21
    ... Concealer, an under-eye cream that brings the concept of customization to a new level by giving women the option to select multiple benefits, optics, moisturization and coverage. One out of every three foundations sold in North American department stores is a Clinique foundation. Best-selling...

  • Page 22
    ... a different not-for-profit organization annually, during holiday time, to help save animals from extinction and harm. A one-of-a-kind plush animal is created for Origins and sold alongside its makeup and skin care products. Proceeds from the sale are given to the designated charity. mAke uP 21

  • Page 23
    KiN CaRe

  • Page 24
    ... women from the visible signs of aging are quickly gaining traction at the counter. Advanced technology is giving rise to a new generation of ultraluxe beauty where no ingredient is too luxurious or costly. Mrs. Estée Lauder launched Advanced Night Repair, the original prestige anti-aging product...

  • Page 25
    ...out of every five skin care products sold in department stores are Clinique products. Clinique celebrates its heritage with its award-winning 3-Step line of skin care basics. New Liquid Facial Soap joins Dramatically Different Moisturizing Lotion and Clarifying Lotion as the number-one choices for...

  • Page 26
    ...signs of aging. Men's skin care choices continue to expand beyond grooming. Lab Series Skincare for Men received two Grooming Awards from Men's Health magazine for Instant Moisture Eye Gel and Oil Control Daily Hydrator. Enhanced R&D facilities in Japan provide a leading edge for developing products...

  • Page 27
    ..."beauty destinations," offering equal access to the world's best hair designs and products. The robust global health of the hair care category drives double-digit growth for our brands and their salon partners. Of the top 200 fastest-growing salons in the United States, 142 carry Aveda and/or Bumble...

  • Page 28

  • Page 29
    ... and Advanced Academies teach seasoned pros new tricks. A new curriculum reinforces the brand's commitment to men. Salon owners and managers who have completed the three courses offered by Aveda's Business College report sales growth of up to 110 percent. The Aveda mission - to care for the world we...

  • Page 30
    ... Dresser Smooth styling cream. We are targeting men at department stores with Lab Series Root Power Treatment Shampoo and Clinique Skin Supplies for Men Hair Maximizing Serum. Darphin's Volume Shampoo with Gleditschia brings high-end hair care to the pharmacy channel, while Grassroots Time to Shine...

  • Page 31
    ... Chairman The Estée Lauder Companies Inc. Wilmer Cutler Pickering Hale and Dorr LLP MELLODY HOBSON 1 President Ariel Capital Management, LLC IRVINE O. HOCKADAY, JR.1 Retired President and Chief Executive Officer Hallmark Cards, Inc. AERIN LAUDER Senior Vice President Creative Director Est...

  • Page 32
    ... Corporate Vice President ROGER CARACAPPA Executive Vice President Global Packaging, Quality Assurance, Store Development, Design and Merchandising LEONARD A. LAUDER Chairman RONALD S. LAUDER Chairman Clinique Laboratories, LLC JOHN DEMSEY WILLIAM P. LAUDER Group President President Chief Executive...

  • Page 33
    ... sold jane brand products. As a result, statements of earnings information for all periods presented has been restated to reï¬,ect those reporting units as discontinued operations. A HERITAGE OF UNINTERRUPTED SALES GROWTH 1953 $100 million 1972 $1 billion 1985 $2 billion 1991 $7 billion 2007...

  • Page 34
    ... repay long-term commercial paper, which was used to fund our accelerated stock repurchase program, and to pay transaction fees and expenses related to this offering. (g) During fiscal 2007, we repurchased 22,461,642 shares of our outstanding common stock, of which 15,960,842 shares were purchased...

  • Page 35
    ... the time the product is shipped to the customer and in the Europe, Middle East & Africa and Asia/Pacific regions sales are generally recognized based upon the customer's receipt. In certain circumstances, transfer of title takes place at the point of sale, for example, at our retail stores. Sales...

  • Page 36
    ... effect on fiscal 2007 pension expense: 25 Basis-Point Increase (In millions) 25 Basis-Point Decrease $2.7 $1.5 Discount rate Expected return on assets $(2.5) $(1.5) Our post-retirement plans are comprised of health care plans that could be impacted by health care cost trend rates, which may...

  • Page 37
    ... Increase (In millions) One-PercentagePoint Decrease Effect on total service and interest costs Effect on post-retirement benefit obligations $ 1.5 $12.1 $ (1.3) $(10.8) For fiscal 2008, we are using a pre-retirement discount rate for the Domestic Plans of 6.25% and varying rates...

  • Page 38
    ... OVERVIEW We manufacture, market and sell skin care, makeup, fragrance and hair care products which are distributed in over 135 countries and territories. We believe that the best way to increase stockholder value is to provide our customers and consumers with the products and services that they...

  • Page 39
    .... Origins has recently expanded into the French pharmacy channel. We also began to expand the number of Company-owned Jo Malone retail stores in Europe, including the brand's first French store in Cannes. We continued to make progress on our Strategic Modernization Initiative ("SMI"). In May 2007...

  • Page 40
    ....8 1,260.6 273.9 26.6 $6,280.0 By Product Category: Skin Care Makeup Fragrance Hair Care Other $2,601.0 2,712.7 1,308.6 377.1 38.1 $7,037.5 OPERATING INCOME By Region: The Americas Europe, the Middle East & Africa Asia/Pacific Special charges related to cost savings initiative* $ 336.4 321.4 93...

  • Page 41
    ...combined. Net sales increases from our fast-growing La Mer brand, Resilience Lift Extreme Ultra Firming products and other existing Advanced Night Repair products from Estée Lauder, along with products in the Clinique 3-Step Skin Care System and Superdefense from Clinique, totaled approximately $97...

  • Page 42
    ... expenses related to our pharmacy channel for organizational costs, costs to streamline the distribution of goods, and the impairment of goodwill and other intangible assets. An increase in costs incurred related to the implementation of our Strategic Modernization Initiative and higher stock-based...

  • Page 43
    ...our core brands, retailer consolidation and costs to develop new brands in the United States. Operating income growth from our makeup artist brands, hair care business and our internet distribution partially offset these results. In Europe, the Middle East & Africa, operating income increased 8%, or...

  • Page 44
    ... sales decreased 2%. Hair Care Hair care net sales increased 16%, or $44.8 million, to $318.7 million, primarily due to sales growth from Bumble and bumble and Aveda products. Bumble and bumble sales benefited from sales growth due to new points of distribution, increases in sales of core products...

  • Page 45
    ... at a major retailer. On a local currency basis, net sales in Asia/Pacific increased 7%. 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 increased to 26...

  • Page 46
    ...growth. In fiscal 2006, the merger of Federated Department Stores, Inc. and The May Department Stores Company had a negative impact on the operating results of our skin care, makeup and fragrance product categories, while incremental operating expenses associated with new accounting rules for stock...

  • Page 47
    ... Financial Statements - Segment Data and Related Information. In order to facilitate the transition of the Stila business to the Purchaser, we agreed to provide certain information systems, accounting and other back office services to the Purchaser in exchange for monthly service fees designed...

  • Page 48
    ...-annually on May 15 and November 15, commencing November 15, 2007. We used the net proceeds of this offering to repay longterm commercial paper, which was used to fund our accelerated stock repurchase program, and to pay transaction fees and expenses related to this offering. We have a fixed rate...

  • Page 49
    ..., store improvements and counter construction. Fiscal 2007 investing activities also reï¬,ected the purchase of the remaining equity interest in Bumble and Bumble Products, LLC and Bumble and Bumble, LLC, as well as the acquisition of businesses engaged in the wholesale distribution and retail sale...

  • Page 50
    ... employee stock option transactions. Dividends On October 25, 2006, the Board of Directors declared an annual dividend of $.50 per share on our Class A and Class B Common Stock, of which an aggregate of $103.6 million was paid on December 27, 2006 to stockholders of record at the close of business...

  • Page 51
    ... of pension and other post-retirement benefit obligations, commitments pursuant to executive compensation arrangements and obligations related to our cost savings initiative. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for...

  • Page 52
    ...past 250-day period. The measured valueat-risk, calculated as an average, for the twelve months ended June 30, 2007 related to our foreign exchange contracts and our interest rate contracts was $10.2 million and $7.5 million, respectively. The model estimates were 51 THE EST{E LAUDER COMPANIES INC.

  • Page 53
    ...on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159") to permit all entities to choose to elect, at specified election dates, to measure 52 THE EST{E LAUDER COMPANIES INC.

  • Page 54
    ...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 and to successfully address challenges in our core brands, including gift with purchase...

  • Page 55
    ... to products which are less profitable; (14) our ability to acquire, develop or implement new information and distribution technologies, on a timely basis and within our cost estimates; (15) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced cost-savings...

  • Page 56
    ... 13.9 712.9 293.7 (9.3) 409.9 (3.8) $ 406.1 $ $ $ $ 1.82 (.02) 1.80 1.80 (.02) 1.78 225.3 228.6 .40 Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Special charges related to cost savings initiative Operating Income Interest expense, net Earnings before...

  • Page 57
    ... in millions) 2007 2006 ASSETS Current Assets Cash and cash equivalents Accounts receivable, net Inventory and promotional merchandise, net Prepaid expenses and other current assets Total current assets Property, Plant and Equipment, net Other Assets Investments, at cost or market value Goodwill...

  • Page 58
    ...initially apply FASB Statement No. 158, net of tax (Note 10) Accumulated other comprehensive income, end of year Treasury stock, beginning of year Acquisition of treasury stock, net of issuances Treasury stock, end of year Total stockholders... financial statements. THE EST{E LAUDER COMPANIES INC. ...

  • Page 59
    ... settlement of interest rate derivatives Repayments and redemptions of long-term debt Net proceeds from employee stock transactions Excess tax benefits from stock-based compensation arrangements Payments to acquire treasury stock Dividends paid to stockholders Distributions made to minority holders...

  • Page 60
    ... Companies 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, Aramis, Clinique, Prescriptives, Lab Series, Origins, M.A. C, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble...

  • Page 61
    ... at the time the merchandise is shipped to the Company's customers. Included in inventory and promotional merchandise is an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated realizable value, based on various product sales projections...

  • Page 62
    ... 2007 $ 14.3 245.8 54.5 336.7 $651.3 Skin Care Makeup Fragrance Hair Care Total $92.6 Other Intangible Assets Other intangible assets include trademarks and patents, as well as license agreements and other intangible assets resulting from or related to businesses purchased by the Company. Inde...

  • Page 63
    ...19.7 95.0 0.3 $115.0 Total Net Book Value $23.2 53.6 0.2 $77.0 JUNE 30, 2007 (In millions) JUNE 30, 2006 (In millions) License agreements Trademarks and other Patents Total License agreements Trademarks and other Patents Total The aggregate amortization expense related to amortizable intangible...

  • Page 64
    ... time the product is shipped to the customer and in the Europe, Middle East & Africa and Asia/Pacific regions sales are generally recognized based upon the customer's receipt. In certain circumstances, transfer of title takes place at the point of sale, for example, at the Company's retail stores...

  • 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
    ...108 In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108"), which sets forth the SEC Staff's views on...

  • Page 67
    ... and Related Information. In order to facilitate the transition of the Stila business to the Purchaser, the Company agreed to provide certain information systems, accounting and other back office services to the Purchaser in exchange for monthly service fees designed to recover the estimated costs...

  • Page 68
    ... net sales are earned while advertising and promotional expenses are accrued at the time these costs are incurred. NOTE 5 - COST SAVINGS INITIATIVE During fiscal 2006, the Company recorded special charges associated with a cost savings initiative that was designed to support its long-term financial...

  • Page 69
    ... obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently deductible Net operating loss and credit carryforwards Other differences between tax and financial statement values Valuation allowance for deferred tax assets Total deferred tax assets...

  • Page 70
    ... complex issues that may require an extended period of time for resolution. The Company's U.S. Federal income tax returns have been examined and settled through fiscal 2001. The Company is currently under examination by the Internal Revenue Service for fiscal years 2002 through 2005. In addition...

  • Page 71
    ...281.0 15.4 342.8 $963.9 2006 $334.5 260.5 40.7 312.8 $948.5 Advertising, merchandising and sampling Employee compensation Special charges related to cost savings initiative Other The Company's short-term and long-term debt and available financing consist of the following: Available financing at...

  • Page 72
    ...or the lender's ï¬,oating call rate agreed to by the Company at each borrowing. There were no debt issuance costs incurred related to this agreement. The THE EST{E LAUDER COMPANIES INC. outstanding balance at June 30, 2007 ($9.4 million at the exchange rate at June 30, 2007) is classified as short...

  • Page 73
    .... The associated gains and losses on these derivatives are recorded in cost of goods sold and selling, general and administrative expenses in the accompanying statements of earnings. On the date the derivative contract is entered into, the Company designates the derivative as (i) a hedge of the fair...

  • Page 74
    ... rating agency. In April 2007, the Company entered into interest rate swap agreements with a notional amount totaling $250.0 million to effectively convert the fixed rate interest on its 2017 Senior Notes to variable interest rates based on sixmonth LIBOR. The interest rate swaps were designated...

  • Page 75
    ... connection with international employee transfers. Retirement Growth Account Plan (U.S.) The Retirement Growth Account Plan is a trust-based, noncontributory qualified defined benefit pension plan. The Company's funding policy consists of an annual contribution at a rate that provides for future...

  • Page 76
    ... expected to be amortized as components of net periodic benefit cost during fiscal 2008 are as follows: Pension Plans U.S. (In millions) Other than Pension Plans Post-retirement $ - 0.1 International $0.3 7.5 Prior service cost Net actuarial loss $0.6 1.7 THE EST{E LAUDER COMPANIES INC. 75

  • Page 77
    ... Plans U.S. 2007 (In millions) Other than Pension Plans International Post-retirement 2007 2006 2006 2007 2006 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 78
    ... care cost trend rates for fiscal 2007 would have had the following effects: One-Percentage-Point Increase (In millions) One-Percentage-Point Decrease $ (1.3) $(10.8) Effect on total service and interest costs Effect on post-retirement benefit obligations $ 1.5 $12.1 THE EST{E LAUDER COMPANIES...

  • Page 79
    ... benefit obligation, fair value of plan assets and the other comprehensive (income) 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 2007 (In millions) Restoration 2007 $89.3 71.8 - 2006...

  • Page 80
    ...treasury stock, carried at cost, and reï¬,ected as a reduction to stockholders' equity. The financial counterparty is expected to purchase shares for its own account in the open market over a period ending no later than October 2007. At the end of that period, the Company will receive or pay a price...

  • Page 81
    ..., that the Company might owe as a price adjustment, divided by the market price of its common stock on the settlement date. The maximum number of shares potentially issuable is 25,000,000. The following table provides information as of June 30, 2007 regarding the accelerated share repurchase program...

  • Page 82
    ... continued employment or retirement of the grantees. Certain RSUs granted in fiscal 2007 are accompanied by dividend equivalent rights that will be payable in cash upon settlement of the RSU and, as such, were valued at the closing market value of the Company's Class A Common Stock on the date of...

  • Page 83
    ...of pension and other postretirement benefit obligations, commitments pursuant to executive compensation arrangements and obligations related to the Company's cost savings initiative. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales...

  • Page 84
    ... effect on the Company's consolidated financial condition. In the Federal action, the plaintiffs, purporting to represent a class of all U.S. residents who purchased prestige cosmetics products at retail for personal use from eight department stores groups that sold such products in the United...

  • Page 85
    ... to industry statistics. Accordingly, net sales, depreciation and amortization, and operating income are available with respect to the manufacture and distribution of skin care, makeup, fragrance, hair care and other products. These product categories meet the FASB's definition of operating...

  • Page 86
    ... (Loss): Skin Care Makeup Fragrance Hair Care Other Special charges related to cost savings initiative Reconciliation: Interest expense, net Earnings before income taxes, minority interest and discontinued operations GEOGRAPHIC DATA Net Sales: The Americas Europe, the Middle East & Africa Asia/Paci...

  • Page 87
    ... and sold Stila brand products. NOTE 19 - UNAUDITED SUBSEQUENT EVENTS In July 2007, the Company acquired Ojon Corporation, which markets and sells Ojon hair care and skin care products primarily through direct response television and specialty stores. In August 2007, the Company sold Rodan + Fields...

  • Page 88
    ... independent registered public accounting firm that audits the Company's consolidated financial statements has issued its attestation report on management's assessment of internal control over financial reporting. That attestation report follows this report. William P. Lauder President and Chief...

  • Page 89
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of earnings, stockholders' equity and comprehensive income...

  • Page 90
    ... 30, 2007, the Company adopted Statement of Financial Accounting Standard No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)." We also have audited, in accordance with the standards of the Public...

  • Page 91
    ...Step Skin Care System, A Perfect World, Advanced Night Repair, Age Rescue, Ain't Misbehavin, All Bright, All Calm, All Firm, All is Forgiven, American Beauty, Anti-Age Advanced Protection Lotion, Aramis, Arovita C, Aveda, Bb Big Shine, Bb Creme de Coco, Be Curly, Beauty Boost, Beautiful, Beyond Long...

  • Page 92
    ...S&P 500 Index and a market weighted index of publicly traded peers. The returns are calculated by assuming an investment of $100 in the Class A Common Stock and in each index on June 30, 2002, for the five-year graph, and November 16, 1995 (the Company's initial public offering date) for the twelve...

  • Page 93
    THE EST{E LAUDER COMPANIES INC. ANNUAL REPORT ENVIRONMENTAL FIGURES The Estée Lauder Companies Inc. Annual Report is printed on recycled paper that contains 100% post-consumer recycled (PCR) fiber. This recycled paper is made from fiber sourced from well-managed forests and other controlled wood ...

  • Page 94
    BRINGING THE BEST TO EVERYONE WE TOUCH

  • Page 95
    T H E E ST { E L A U D E R CO M PA N I E S I N C . 767 FIFTH AVENUE NEW YORK, NEW YORK 10153