Estee Lauder 2010 Annual Report Download - page 100

THE EST{E LAUDER COMPANIES INC. 99
information technology systems and infrastructure of
approximately 50 basis points, net losses from foreign
exchange transactions of approximately 40 basis points,
and charges resulting from the degradation of the busi-
nesses of certain of our retail customers of approximately
20 basis points.
OPERATING RESULTS
Operating income decreased 48%, or $392.3 million, to
$418.4 million. Operating margin decreased to 5.7% of
net sales as compared with 10.3% in fiscal 2008, reflect-
ing our lower gross margin and the increase in our operat-
ing expense margin as previously discussed. The following
discussions of Operating Results by Product Categories
and Geographic Regions exclude the impact of total
charges associated with restructuring activities of $91.7
million, or 1.3% of net sales. We believe the following
analysis of operating results better reflects the manner in
which we conduct and view our business.
Product Categories
Skin care operating income decreased 27%, or $111.5 mil-
lion, to $294.1 million and makeup operating income
decreased 22%, or $79.6 million, to $279.8 million. The
reduced operating results for the skin care and makeup
categories primarily reflected the decline in net sales and
charges for goodwill, other intangible asset and long-lived
asset impairments, as well as the majority of the impact of
the excess overhead charge, loss from foreign exchange
transactions and certain other operating expenses as
described above. Fragrance operating results decreased
over 100%, or $97.0 million, to an operating loss of $60.8
million primarily reflecting lower net sales of designer fra-
grance products and certain fragrances from our heritage
brands as well as a charge for intangible asset impairment,
which were partially offset by a reduction in selling, adver-
tising, merchandising and sampling spending. Hair care
operating income decreased 90%, or $10.4 million, to
$1.1 million primarily reflecting lower net sales and a
charge for intangible asset impairment.
Geographic Regions
Operating income in the Americas decreased 50%, or
$113.1 million, to $115.2 million. This decline reflected
charges for goodwill, other intangible asset and long-
lived asset impairments, the majority of the impact of
the excess overhead charge and the charge related
to the degradation of a certain retailer of approximately
$66 million, combined. Also contributing to the decline
were lower sales experienced by the majority of our busi-
nesses in the region due to current economic conditions,
or channels of distribution which have margin and prod-
uct cost structures different from those of our current mix
of business.
OPERATING EXPENSES
Operating expenses increased to 68.6% of net sales as
compared with 64.5% of net sales in fiscal 2008. In light
of the then current economic conditions, we applied vari-
ous cost-containment measures to maintain expenses in
line with our business needs. While the implementation of
these initiatives helped reduce total operating expenses
as compared with fiscal 2008, the dramatic decline in net
sales during fiscal 2009 was the principal factor that nega-
tively impacted our operating expense margin. In addition
to the decline in net sales, operating expense margin
increased by approximately 110 basis points due to
charges associated with restructuring activities, as previ-
ously discussed.
During fiscal 2009, we evaluated our goodwill, other
intangible assets and long-lived assets based upon certain
triggering events as well as our annual impairment test
of goodwill and other indefinite-lived intangible assets.
Inclusive of the impairment charges incurred during the
third quarter of fiscal 2009, we recorded impairment
charges of approximately $14 million related to goodwill,
approximately $23 million related to trademarks with
indefinite lives, approximately $17 million related to other
amortizable intangible assets and approximately $9 mil-
lion related to property, plant and equipment for the fiscal
year ended June 30, 2009. The principal factors that con-
tributed to these impairment charges were lower than
expected operating cash flow performance relative to the
reporting unit and/or affected assets being tested and
the impact of the current economic environment on
their projected future results of operations. Collectively,
these charges resulted in an increase to our operating
expense margin of approximately 90 basis points. For
further detailed discussion, refer to “Note 4 — Property,
Plant and Equipment” and “Note 5 — Goodwill and Other
Intangible Assets” of Notes to Consolidated Financial
Statements.
Despite a reduction in actual selling, advertising, mer-
chandising and sampling spending, operating expense
margin increased by approximately 60 basis points driven
by the decline in consumer demand in the economic
environment. Changes in advertising, merchandising and
sampling spending result from the type, timing and level
of activities related to product launches and rollouts, as
well as the markets being emphasized.
Other factors that contributed to the increase in
operating expense margin were higher costs of global