Estee Lauder 2011 Annual Report Download - page 106

104 THE EST{E LAUDER COMPANIES INC.
Since certain promotional activities are a component
of sales or cost of sales and the timing and level of promo-
tions vary with our promotional calendar, we have experi-
enced, and expect to continue to experience, fluctuations
in the cost of sales percentage. In addition, future cost of
sales mix may be impacted by the inclusion of potential
new brands or channels of distribution which have margin
and product cost structures different from those of our
current mix of business.
OPERATING EXPENSES
Operating expenses as a percentage of net sales
decreased to 65.6% as compared with 66.4% in the prior
year, and reflects the impact of the strong growth in net
sales during fiscal 2011. This improvement primarily
reflected lower selling and shipping costs as a percentage
of net sales of approximately 120 basis points due to
various cost containment efforts implemented as part of
the Program and a strategically focused approach to
spending. Also contributing to the improvement were
a decrease in general and administrative costs as a per-
centage of net sales of 40 basis points, lower charges
associated with restructuring activities of 20 basis points,
lower charges associated with intangible asset impair-
ments of 20 basis points and lower net losses from foreign
exchange transactions of 10 basis points. Partially offset-
ting these improvements were increased spending in
advertising, merchandising and sampling costs in line
with our strategy of 120 basis points and higher costs
related to stock-based compensation of approximately
30 basis points.
Changes in advertising, merchandising and sampling
spending result from the type, timing and level of activi-
ties related to product launches and rollouts, as well as the
markets being emphasized.
OPERATING RESULTS
Operating income increased 38%, or $299.5 million, to
$1,089.4 million. Operating margin improved to 12.4% of
net sales as compared with 10.1% in the prior year, reflect-
ing our higher gross margin and the decrease in our oper-
ating expense margin, as previously discussed. The
following discussions of Operating Results by Product
Categories and Geographic Regions exclude the impact of
total returns and charges associated with restructuring
activities of $59.4 million, or 0.7% of net sales, in fiscal
2011 and $84.7 million, or 1.1% of net sales, in fiscal 2010.
We believe the following analysis of operating results
better reflects the manner in which we conduct and view
our business.
Product Categories
All product categories benefited from initiatives we imple-
mented as part of the Program including a more strategi-
cally focused approach to spending. Skin care operating
income increased 37%, or $160.8 million, to $595.1 mil-
lion, primarily reflecting improved results from all of our
heritage brands driven by increased net sales from higher-
margin product launches. Makeup operating income
increased 18%, or $77.0 million, to $493.8 million, primar-
ily reflecting improved results from our makeup artist
brands and from our larger heritage brands. The higher
results also reflect the favorable comparison to the prior
year which included a charge to the category related to
our long-term perfumery strategy, as previously discussed,
of approximately $30 million. Fragrance operating income
increased over 100%, or $54.4 million, to $80.7 million,
primarily reflecting higher net sales from Estée Lauder and
designer fragrances driven by recent product launches,
improved cost of goods and a more strategically focused
approach to spending as part of our strategy to improve
profitability. Hair care operating results decreased 47%, or
$2.9 million, reflecting the reformulation and relaunch of
Ojon brand products in the fourth quarter of fiscal 2011.
This decrease was partially offset by higher results from
Aveda. The category also reflected goodwill and other
intangible asset impairment charges of $33 million as
compared with $36 million in the prior year.
Geographic Regions
Operating results in each of our geographic regions ben-
efited from the initiatives we implemented as part of the
Program and a more strategically focused approach to
spending, as well as significant improvement in cost of
sales from favorable product mix and enhanced inventory
management, resulting in significant improvements in
their operating income.
Operating income in the Americas increased 52%, or
$83.4 million, to $244.9 million, reflecting strong sales
from our heritage and makeup artist brands, partially off-
set by incremental spending in line with our strategy.
In Europe, the Middle East & Africa, operating income
increased 30%, or $151.1 million, to $651.9 million,
reflecting higher results from our travel retail business,
Russia, the United Kingdom and the Middle East of
approximately $94 million, combined. Partially offsetting
these improvements were lower results in the Balkans and
Spain of approximately $9 million, combined. The higher
results also reflected a favorable comparison to the prior
year which included a charge related to our long-term
perfumery strategy, as previously discussed, of approxi-
mately $34 million.