Estee Lauder 2007 Annual Report Download - page 45

44 THE EST{E LAUDER COMPANIES INC.
offsetting these incremental costs were operating expense
margin improvements of approximately 90 basis points
primarily resulting from net sales growth in brands
and channels with lower advertising, merchandising and
sampling cost structures as well as an overall reduction in
this type of spending. Overall operating expenses
refl ected savings achieved during fi scal 2006 from our
cost savings initiative.
Changes in advertising, sampling and merchandising
spending result from the type, timing and level of activities
related to product launches and rollouts, as well as the
markets being emphasized.
During fi scal 2006, we recorded special charges asso-
ciated with a cost savings initiative that was designed to
support our long-term fi nancial objectives. As part of this
multi-faceted initiative, we identifi ed savings opportunities
that include streamlined processes and organizational
changes. The principal component of the initiative was a
voluntary separation program offered primarily to North
America-based employees. During the fourth quarter of
fi scal 2006, involuntary separations were communicated
to certain employees. Under this initiative, we incurred
expenses related to one-time termination benefi ts for 494
employees, of which 28 were involuntary, which benefi ts
were based principally upon years of service.
In addition, we identifi ed other cost savings opportuni-
ties to improve effi ciencies in our distribution network and
product offerings and to eliminate other nonessential
costs. These charges primarily related to employee sever-
ance for facilities that are closing, contract cancellations,
counter and door closings and product returns.
For the year ended June 30, 2006, aggregate expenses
of $92.1 million were recorded as special charges related
to the cost savings initiative in the accompanying consoli-
dated statement of earnings.
The following table summarizes the costs and expected
savings associated with our cost savings initiative, which
impacted, and will continue to impact, our operating
expenses and cost of sales:
well as the balancing of inventory levels 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 26.1% as compared with 25.5% in fi scal 2005. This
change refl ected an increase in obsolescence charges of
approximately 40 basis points, the net change in the mix
of our business within our geographic regions and prod-
uct categories of approximately 20 basis points, a charge
related to unutilized tooling of approximately 10 basis
points and 20 basis points related to commodity material
prices. Partially offsetting these increases were favorable
changes in promotional activities of approximately 30
basis points. The higher price of oil resulted in price
increases in certain oil-based chemicals, which had a
slight adverse effect on our cost of sales margin.
Since certain promotional activities are a component
of net sales or cost of sales and the timing and level of
promotions vary with our promotional calendar, we have
experienced fl uctuations in the cost of sales percentage.
OPERATING EXPENSES
Operating expenses increased to 64.3% of net sales as
compared with 62.9% of net sales in fi scal 2005. The fi scal
2006 operating expense margin was negatively impacted
by charges related to the implementation of our cost
savings initiative of approximately $92.1 million or approx-
imately 140 basis points, costs related to stock-based
compensation as a result of the fi scal 2006 adoption of
SFAS No. 123(R) of approximately 60 basis points, and
the estimated impact of both the merger of Federated
Department Stores, Inc. and The May Department Stores
Company and the hurricanes that affected the southern
United States of approximately 40 basis points. Partially
Fiscal 2006 expense Fiscal 2006 payments Accrued at June 30, 2006 Fiscal 2006 savings
(In millions)
Employee separation expenses $75.9 $20.7 $55.2 $17.5
Facility closures and product/
distribution rationalization 12.5 — 12.5 11.7
Advertising and promotional
effectiveness 3.7 2.5 1.2 9.8
$92.1 $23.2 $68.9 $39.0