Estee Lauder 2007 Annual Report Download - page 39

38 THE EST{E LAUDER COMPANIES INC.
Despite the rise in energy and raw material costs, we
were able to improve our overall cost of goods margin by
negotiating new contracts with suppliers and achieving
signifi cant savings by sourcing from Asia. We also reduced
the number of our global manufacturing and distribution
facilities by increasing the use of third-parties to control
shipping and warehousing costs. In addition, we improved
speed to market of new SKUs and expanded our hub
warehouse concept, which allows us to take components
on a just-in-time basis.
During fi scal 2007, we also faced challenges, many of
which we expect to be ongoing in fiscal 2008. For
instance, we continue to see challenges for certain of our
core brands due in part to the consolidation and changes
taking place among retailers and the decline in effective-
ness of gift-with-purchase promotions. In addition, the
fragrance business model continues to be a challenge,
with even the most successful launches having diffi culty
becoming profi table. Efforts to expand geographically
are complicated by increasing regulatory issues and
cultural barriers.
As we continue to implement our strategic imperatives,
we expect to make selective investments, embark on new
business endeavors, and pursue initiatives that we believe
will have long-term benefits. The timing, impact and
magnitude of any particular actions, such as an acquisi-
tion to strengthen our product categories and/or diversify
our distribution channels, are subject to numerous factors
and cannot be predicted.
The following table is a comparative summary of
operating results from continuing operations for fi scal
2007, 2006 and 2005 and refl ects the basis of presen-
tation described in Note 2 and Note 17 to the Notes
to Consolidated Financial Statements for all periods
presented. Products and services that do not meet our
defi nition of skin care, makeup, fragrance and hair care
have been included in the “other” category.
In fi scal 2007, we continued to fi nd ways to strengthen
our core brands and product categories, maximize high-
growth brands, incubate and develop next generation
brands and divest non-strategic brands. Net sales from
Estée Lauder and Clinique grew on a global basis, fueled
by strong demand overseas. Our faster growing M.A.C,
Bobbi Brown, La Mer, Jo Malone and Aveda brands con-
tinued to grow in virtually all regions and we acquired the
remaining equity interest in Bumble and bumble. Sean
John Unforgivable continued to be a success at retail in
North America and we rolled out the brand in certain
international markets during fi scal 2007. We launched
products under the Tom Ford brand name in North
America and Europe and entered into a license agreement
with Ford Motor Company to create a fragrance using the
name Mustang. In July 2007, we acquired the Ojon
Corporation, a privately held hair care and skin care
company based in Canada. In August 2007, we sold
Rodan + Fields back to its founders.
The majority of our net sales continue to be generated
outside the United States. Around the globe, we gener-
ated growth in sales and profi ts in our travel retail business
and increased our presence in China and Russia. We also
acquired a distributor in Turkey and established an affi liate
in Brazil.
In alternative distribution channels, we continued to
grow our online business in North America, where
products from most of our brands are available at
Company-owned websites. However, in order to stream-
line this business, we terminated our majority-owned
Gloss.com joint venture. In addition, we recently
expanded the online business into the United Kingdom,
Australia and France. Certain of our products are now
available at specialty retailers such as Sephora, ULTA, and
Shoppers Drug Mart. We made strategic investments to
establish the platform upon which we intend to build our
pharmacy channel business in Europe. 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
fi rst French store in Cannes.
We continued to make progress on our Strategic
Modernization Initiative (“SMI”). In May 2007, our Aveda
operating unit began using SAP software, a critical part of
SMI. We anticipate SMI implementation will continue at
additional locations in fi scal 2008, with the majority of our
locations to be implemented through fi scal 2010.