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THE EST{E LAUDER COMPANIES INC.
DEFINING
prestige
BEAUTY
2013 ANNUAL REPORT

Table of contents

  • Page 1
    THE EST{E LAUDER COMPANIES INC. D E F ININ G prestige BEAUTY 2013 ANNUAL REPORT

  • Page 2

  • Page 3
    ... Chairman President and Chief Executive Officer Defining Prestige Beauty The Power of Our Brands Our Commitment to Quality Evolving High-Touch Service Telling Our Story The Diversity of Our Distribution Driving Growth Through Innovation Bringing Prestige Beauty to Consumers Worldwide Traveling...

  • Page 4
    2

  • Page 5
    ... Lauder Companies had another record year in fiscal 2013, reaching $10 billion in net sales and achieving a 15 percent operating margin. Nearly half a billion consumers around the world placed their trust in the quality of our products and our people, and we expect that number to grow in the future...

  • Page 6
    ... future. In October 2012, we released our fourth Corporate Responsibility report. We have made meaningful strides in improving the energy efficiency of our operations and switching to renewable energy when economically feasible. Between fiscal 2008 and fiscal 2013, we increased the recycling rate...

  • Page 7
    ... by my mother, Mrs. Evelyn H. Lauder, celebrated its 20th anniversary in 2012, recognizing total contributions of more than $37 million and awareness programs in more than 70 countries and territories worldwide. Our brands also play a powerful role in our Corporate Responsibility efforts, and the...

  • Page 8
    6

  • Page 9
    ... services through carefully selected, diverse distribution channels. Our innovative products and services, combined with impactful, locally relevant marketing and advertising, drew consumers across the world to our brand counters, freestanding stores, Travel Retail locations and fastgrowing digital...

  • Page 10
    ... in skin care and makeup, we trust we are ready to accelerate growth in fragrance. In fiscal 2013, our leading luxury fragrance brands, Jo Malone London, Tom Ford, as well as our new Ermenegildo Zegna brand, introduced exciting new products, contributing to their robust growth and our Company...

  • Page 11
    ... races and cultures. As afï¬,uence increases in emerging markets, we will attract new consumers worldwide, particularly those in China, the Middle East, Brazil and Africa. We will continue to follow the words of our Chairman Emeritus, Leonard A. Lauder, who says, "Quality always wins." As I reï¬,ect...

  • Page 12

  • Page 13
    ... Prestige Beauty is an experience - a chance to enjoy precious moments of "me time," the luxurious texture of a hydrating crème, the satisfying "snap" of a well-made compact as it closes, the elegance of a box tied with grosgrain ribbon. Estée Lauder The Metallics New Pure Color Collection. 11

  • Page 14
    ... sets our brands apart. SIMPLY PUT, PRESTIGE BEAUTY IS BRINGING THE BEST TO EVERYONE WE TOUCH AND BEING THE BEST AT EVERYTHING WE DO. BY DEFINING PRESTIGE BEAUTY, WE HAVE DEFINED OURSELVES. Today, we are a truly global company, serving the world's most discerning consumers with quality products...

  • Page 15

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    14

  • Page 17
    ...TO PRESTIGE BEAUTY RESULTED IN ANOTHER RECORD YEAR IN FISCAL 2013. FOR THE FIRST TIME IN OUR HISTORY, WE EXCEEDED $10 BILLION IN NET SALES. Once again, we achieved double-digit per share earnings growth. Our high-performing products and services, backed by our effective marketing and communications...

  • Page 18

  • Page 19
    ... the high-end consumer. Clinique's customized approach and quality products - all carefully tested and formulated with the latest science - attract individuals seeking allergytested, fragrance-free skin care rooted in dermatological heritage. M.A.C is a go-to brand for consumers and beauty industry...

  • Page 20
    Sales growth in the United Kingdom, China, Brazil and the Middle East underscored the global strength of our brands. M.A.C, Jo Malone London, La Mer and Tom Ford performed strongly around the world. As the spending power of women worldwide increases, our prestige brands help define a woman's ...

  • Page 21
    19

  • Page 22

  • Page 23
    ..., advertising and distribution, we aim for ï¬,awless execution at all points of the prestige journey, an achievement we believe is possible because of the high caliber and dedication of our people. Before launching the new Ermenegildo Zegna Essenze fragrance collection in fiscal 2013, we purchased...

  • Page 24
    ... HAS BEEN AT THE HEART OF OUR BRANDS, OUR COMPANY AND OUR DEFINITION OF PRESTIGE BEAUTY SINCE OUR FOUNDING IN 1946. We strongly believe that our high-quality products and experiences provide us with the foundation for sustainable profitable growth and allow us to consistently meet and exceed the...

  • Page 25
    23

  • Page 26

  • Page 27
    ..." can mean discovering the proper skin care regimen at a Clinique counter or experiencing a luxurious crème for the first time at a La Mer counter. It might include stopping by an Origins store for a complimentary mini-facial or creating a custom fragrance gift box with a Jo Malone London Stylist...

  • Page 28
    ...a Tom Ford Color Collection. To launch the fragrance Marni, counter displays featured glass bells over scented fabric. Lifting each bell allowed consumers to experience the individual scent notes that come together in the finished fragrance. CLINIQUE'S EXPERIENCE BAR, A MODERN EVOLUTION IN PRODUCT...

  • Page 29

  • Page 30

  • Page 31
    ... other fastgrowing digital and mobile platforms. Aveda's global network of beauty professionals uses social networking to build awareness around the brand's core mission to care for the environment. In April 2013, Aveda organized a Global Cut-A-Thon, with the aim to set a Guinness World Record for...

  • Page 32
    ... a non-traditional, creative way, Bobbi Brown launched a dedicated brand page on Pinterest, where many of the brand's fans spend time. The page launched with colorful photos - many taken by Bobbi herself - inspired by the brand's new Neons & Nudes color collection. Pinned photos included items that...

  • Page 33

  • Page 34
    © AERIN Beauty, DIST. INTRODUCING EFFORTLESS BEAUTY

  • Page 35
    ... resources to communicating what goes into our aspirational brands and products. Over the past three years, we have increased our ad spend by more than 50 percent. Every brand possesses a unique story, and we are master storytellers. AERIN Beauty draws on Aerin Lauderâ„¢s life, design point of view...

  • Page 36
    ... on how to achieve modern yet classic looks through the use of her products such as the AERIN ESSENTIALS COLLECTION, which launched in Fall 2012, is also communicated through a variety of platforms like Facebook, the brand website and at counter. THE ICONIC BEAUTIFUL FRAGRANCE BY EST{E LAUDER IS...

  • Page 37

  • Page 38
    Jewelry by Fred Leighton esteelauder.com © 2012 Estée Lauder Inc. The iconic Beautiful fragrance by Estée Lauder evokes romance, tenderness and memories.

  • Page 39

  • Page 40

  • Page 41
    ...were livestreamed on the brand's webpage. Bumble and bumble launched a mobile app that allows users to play games involving products and hairstyles, winning reward points to be used toward purchases on the brand's website. Katie Holmes is named the first celebrity spokesperson for Bobbi Brown. 39

  • Page 42
    ...its brand, products, promotions and services by offering information and linking back to the brand's website for deeper storytelling. The Estée Lauder brand is very proud to have been recognized in the L2 Genius Rankings for China and globally in Fall 2012, highlighting its sophisticated digital in...

  • Page 43

  • Page 44

  • Page 45
    ... is an important element in communicating the essence of our Prestige Beauty brands - and for motivating consumers to purchase our products. Thanks largely to the vision and boldness of our Chairman Emeritus, Leonard A. Lauder, we continue to pursue a selective distribution strategy that defines us...

  • Page 46
    ...brand retailers. Global powerhouse Sephora is a valuable partner for a number of our brands, including Estée Lauder, Clinique, Origins, Smashbox, Bumble and bumble and Bobbi Brown. The Aveda Experience Center in the Minneapolis-St. Paul International Airport connects consumers with holistic beauty...

  • Page 47

  • Page 48

  • Page 49
    ... in markets like Brazil, India and Africa, where there is currently a lack of established prestige distribution channels. Freestanding stores present a unique opportunity to bring a brand to life through their location, atmosphere, energy, music, merchandising and services. M.A.C stores, for...

  • Page 50
    ... sites in 20 countries. In fiscal 2013, our online business in the Americas grew double-digits. As a leader in online Prestige Beauty, we invest our resources to improve our brands' High-Touch services, marketing tools and technology across these platforms. The Bobbi Brown ï¬,agship store at the...

  • Page 51

  • Page 52

  • Page 53
    ... its highly successful BB cream with the introduction of Moisture Surge CC Cream, a color-correcting treatment that uses new technology to address a number of skin concerns. And true to its dermatological heritage, the brand launched A Different Nail Enamel for women with sensitive skin. Origins...

  • Page 54
    Clinique A Different Nail Enamel is formulated especially for sensitive skin.

  • Page 55

  • Page 56
    ... Moisturizing Soft Cream, which offers renewal results of the original crème in a supple new texture. This launch, the biggest in the brand's history, has brought a new generation of global consumers to the La Mer franchise. The product itself has received dozens of awards, including the 2013 Marie...

  • Page 57

  • Page 58

  • Page 59
    ...consumer-inspired. In fiscal 2013, the Estée Lauder brand introduced Advanced Night Repair Eye Serum Infusion formulated specifically for eyes, as a part of its highly successful Advanced Night Repair franchise. The brand also reformulated and re-launched its Advanced Time Zone line of gel and cr...

  • Page 60

  • Page 61
    ...and unexpected products and experiences. Jo Malone London exemplified this with its debut of Sugar & Spice, a limited-edition collection of fragrances inspired by English desserts, such as Lemon Tart and Redcurrant & Cream. Smashbox launched the world's first social-media integrated photo booth in...

  • Page 62
    ..."skin solutions." Using terminology that speaks to the core consumer has contributed to the success of Lab Series' best-selling Oil Control line of products. Similarly, La Mer responded to its consumers' desire to achieve a sun-kissed look. In Spring 2013, the brand launched Soleil de La Mer, adding...

  • Page 63

  • Page 64

  • Page 65
    ... some of the world's top fashion designers and brands include Tom Ford, Donna Karan New York, Michael Kors, Coach, Ermenegildo Zegna and Marni. To tap into a modern British luxury aesthetic, Jo Malone London invited fashion editor Charlotte Stockdale to serve as the brand's style editor. As one of...

  • Page 66
    ... more than 150 countries and territories, and in fiscal 2013 international markets accounted for more than 60 percent of our business. We continue to refine our global strategy, focusing on the most promising categories and regions for growth, and introducing products and services that are relevant...

  • Page 67

  • Page 68

  • Page 69
    ...The Estée Lauder brand continues to be the number one Prestige Beauty brand in its distribution in China. Clinique was among the fastest-growing brands at retail in key markets around the globe. La Mer also achieved notable results by focusing on skin care products and service rituals that resonate...

  • Page 70
    Shades for Africa. Guaranteed. Even Better Makeup SPF 15 Makeup that virtually erases the need for makeup.

  • Page 71
    ...the full capabilities of our Asia Skin Care Institute in Shanghai, we launched Osiao in fiscal 2013, a skin care line specifically designed for Asian consumers. Osiao represents a natural evolution of our business in China from a company that offers brands created and manufactured in North America...

  • Page 72
    ... of local markets. Bobbi Brown recognized that its highly successful Creamy Concealer Kit, an iconic hero product in the United States, could address under-eye circles in Asian markets and launched it there in fiscal 2013. And Jo Malone London Saffron Cologne, developed for the Middle East consumer...

  • Page 73
    esteelauder.com © 2012 Estée Lauder Inc. Introducing

  • Page 74
    ... set the bar for beauty retailing excellence in airports around the world and continue to see robust growth in the Travel Retail channel, where we continue to gain share. We currently hold number one global positions in prestige skin care and makeup, a testament to the relevance of our brands among...

  • Page 75

  • Page 76

  • Page 77
    ... purchases when they are traveling. Travel Retail sales continued to be strong in Asia/Pacific, driven largely by rapid growth in China. Our strength in skin care and makeup positions us well to take advantage of this growth. As incomes in China rise and the middle class expands, growing numbers...

  • Page 78
    esteelauder.com © 2012 Estée Lauder Inc. Estée Lauder introduced the new Advanced Night Repair Eye Serum Infusion to the successful Advanced Night Repair line.

  • Page 79
    ... para sus ojos. Nuevo. Advanced Night Repair Suero Restaurador Contorno de Ojos Los hechos: Cada día la polución puede dañar la delicada zona del contorno de ojos y acelerar el envejecimiento visible. Ahora, descubra este nuevo suero súper eficaz con tecnología anti-polución que ayuda signi...

  • Page 80
    Our sales of skin care and makeup in the Travel Retail channel were strong in fiscal 2013. The Estée Lauder brand's Advanced Night Repair and Nutritious lines did particularly well, while La Mer products and our upscale fragrances were strong performers. In fiscal 2013, we enriched our marketing ...

  • Page 81

  • Page 82

  • Page 83
    ... initiatives. WE TAKE PRIDE IN CREATING A WORK ENVIRONMENT THAT ENCOURAGES DIALOGUE AND NURTURES THE TALENT AND INSIGHTS OF OUR EMPLOYEES AT ALL LEVELS. In October 2012, under the leadership of our Executive Chairman, William P. Lauder, we published our fourth Corporate Responsibility report...

  • Page 84
    ... the communities in which we operate; in fiscal 2013, we advanced in our priority areas - women's health, women's empowerment, education, health and human services, and emergency disaster relief. Our largest corporate-wide philanthropic initiative to date is The Estée Lauder Companies' Breast...

  • Page 85

  • Page 86

  • Page 87
    ... employees, salons and consumers work together to raise money for organizations that support clean water initiatives around the world. Since 1999, Aveda has raised more than $26 million, nearly $9 million in 2011 and 2012 combined. Aveda donated 100 percent of the suggested retail price from sales...

  • Page 88
    ... Midler's New York Restoration Project, a nonprofit organization dedicated to transforming open space in underserved communities. Further information on our Corporate Responsibility activities can be found in our Corporate Responsibility report at www.elcompanies.com. Aveda Invati™s breakthrough...

  • Page 89
    87

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    88

  • Page 91
    ... strategy to target the best opportunities for profitable growth, emphasizing the most promising products and categories and examining different markets and channels that will help us achieve our goals. We will continue our strong focus on emerging-market consumers, high-growth distribution channels...

  • Page 92
    ...it currently represents only 30 percent of the global beauty market. This means we have an enormous opportunity to convert millions of new consumers from mass channels and brands. Thanks to our outstanding new products, effective advertising and High-Touch services, we once again posted sales growth...

  • Page 93

  • Page 94

  • Page 95
    ...we continue to focus on the most dynamic distribution channels, including department stores, freestanding stores, specialty multi-brand retailers and Travel Retail, which helps build and reinforce the equity of our brands. Consistent with our strategy, we intend to support our business with targeted...

  • Page 96
    ...sophistication, glamour and superior quality. Estée Lauder has produced some of the most iconic skin care, makeup and fragrance products, including Advanced Night Repair Synchronized Recovery Complex II, Idealist Even Skintone Illuminator, Perfectionist CP+R, Double Wear, Pure Color, and has two of...

  • Page 97
    ...in 1979, featuring custom color for women. Select Prescriptives makeup and skin care products are available for sale at www.prescriptives.com. Lab Series Skincare for Men was introduced by Aramis in 1987. It is sold in more than 35 countries and territories worldwide. The brand's team of scientists...

  • Page 98
    ...as the first department store wellness brand. Sold in nearly 30 countries and territories, Origins products are manufactured using a combination of renewable resources, wind energy and earth-friendly practices. The mission at Origins is to create high-performance natural skin care products that are...

  • Page 99
    ... best-selling Crème de la Mer has expanded into a complete range of skin care that continues to capture a devoted following. Makeup artist Bobbi Brown revolutionized the beauty industry in 1991 with the launch of 10 brown-based lipsticks and a simple philosophy that "makeup is a way for a woman...

  • Page 100
    ..., skin, body and makeup products, and a comprehensive menu of ritual-based treatments. Guided by its Mission, Aveda has been a beauty leader in environmental responsibility since its founding in 1978. Jo Malone London celebrates British style with unexpected fragrances and the elegant art of gift...

  • Page 101
    ... House of Bumble, home to an additional salon and Bumble and bumble University, which provides both business and design education to its network of salons. Bb.Stylists support more than 70 fashion shows each fashion season in New York, London, Milan and Paris. Bb.Products are coveted by beauty and...

  • Page 102
    ... Instant Deep Wrinkle Filler and Eyliplex-2 Eye Lift + Circle Reducer, the brand sells its products in retailers globally, including Douglas Germany and Sephora China. Since its introduction in 2007, GoodSkin Labs is now sold in more than 16 countries worldwide and is available exclusively in the...

  • Page 103
    ... Collection of luxury artisanal fragrances. In 2011, the brand expanded with a complete wardrobe of luxurious, sensual color cosmetics and high-performance skin care. Today Tom Ford Beauty continues to redefine luxury and taste for global Prestige Beauty. Coach, Inc., a leading brand of modern...

  • Page 104
    ... Trivero, in the Biella Alps, by the young entrepreneur Ermenegildo Zegna, our Company acquired the exclusive worldwide license for the global luxury brand's fragrance and grooming business in 2011. Ermenegildo Zegna fragrances are sold in markets across North America, Europe and Asia, as well as in...

  • Page 105
    Launched in late 2012, AERIN Beauty consists of edited makeup collections personally curated by its founder, Aerin Lauder, to make choosing makeup effortless with both essential and seasonal color collections. It embodies the stylish, feminine and modern aesthetic of her new lifestyle brand, AERIN. ...

  • Page 106
    ...BRAVO, CBE 2, 4 Retail and Marketing Consultant JANE LAUDER Global President, General Manager, Origins, Ojon and Darphin PAUL J. FRIBOURG1, 2, 4 Chairman, Chief Executive Officer, Continental Grain Company FABRIZIO FREDA President and Chief Executive Officer, The Estée Lauder Companies Inc. BARRY...

  • Page 107
    ... Officer, E.L. Rothschild Ltd. WEI SUN CHRISTIANSON3 Co-CEO of Asia Pacific and CEO of China, Morgan Stanley LEONARD A. LAUDER Chairman Emeritus, The Estée Lauder Companies Inc. CHARLENE BARSHEFSKY 3 Senior International Partner, WilmerHale RICHARD F. ZANNINO 1 Managing Director, CCMP Capital...

  • Page 108
    ... President AMY DIGESO Executive Vice President, Global Human Resources (until September 30, 2013) FABRIZIO FREDA President and Chief Executive Officer CARL HANEY Executive Vice President, Global Research and Development, Corporate Product Innovation, Package Development LEONARD A. LAUDER Chairman...

  • Page 109
    ... $9,713.6 1,311.7 856.9 2.16 6,593.0 2,733.2 5% 16% 19% 20% 8% 20% Global Net Sales 59% International $4.30 Billion 41% 63% International $6.42 Billion U.S. $3.02 Billion 37% U.S. $3.76 Billion 2009: $7.32 Billion * Attributable to The Estée Lauder Companies Inc. 2013: $10.18 Billion 107

  • Page 110
    ... Net Sales Growth 1953 1972 $100 million 1985 $1 billion 2003 $5 billion 2013 $10.2 billion Net Sales (In billions) 7.32 7.80 8.81 9.71 10.18 $10.18 2009 2010 2011 2012 2013 Operating Income (In millions) 418.4 789.9 1,089.4 1,311.7 1,526.0 $1,526.0 2009 2010 2011 2012 2013 108

  • Page 111
    ...74 2.16 2.58 $2.58 2009 2010 2011 2012 2013 Operating Working Capital• Accounts Receivable Plus Inventory Less Accounts Payable (As a percentage of net sales) 18.0 14.7 17.0 16.0 17.7 17.7% 2009 2010 2011 2012 2013 * Attributable to The Estée Lauder Companies Inc. • Does not represent...

  • Page 112
    ....3 $765.3 2009 2010 2011 2012 2013 2013 Net Sales By Distribution Channel North American 25% Department Stores 27% International Department Stores Other 8% 14% Perfumeries Salons/Spas 4% Travel Retail 12% 10% Retail Stores • Does not represent a measure of the Company's operating results as...

  • Page 113
    FINANCIAL section 111

  • Page 114
    ... Statements Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Stockholder Information 183 184 112 THE EST{E LAUDER COMPANIES...

  • Page 115
    ...-rata write-off of unamortized terminated interest rate swap, issuance costs and debt discount, and tender offer costs associated with both series of notes. (c) In December 2012, we amended the agreement related to the August 2007 sale of Rodan + Fields (a brand then owned by us) to receive a fixed...

  • Page 116
    ...at the time the product is shipped to the customer and in the Europe, the 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...

  • Page 117
    ...ranges, an increase or decrease in the assumptions or economic events outside our control could have a direct impact on reported net earnings. The discount rate for each plan used for determining future net periodic benefit cost is based on a review of highly rated long-term bonds. For fiscal 2013...

  • Page 118
    ...). The fiscal 2013 compound annual growth rate of sales for the first five to eight years of our projections, as considered appropriate for the individual reporting units, ranged between 5% and 22% with the higher growth rates in certain of the Company's 116 THE EST{E LAUDER COMPANIES INC.

  • Page 119
    ... product growth. The weighted-average cost of capital used to discount future cash ï¬,ows ranged from 8% to 15% in fiscal 2013 as compared with 8% to 16% in fiscal 2012. The range of market multiples used in our fiscal 2013 impairment testing was from 1.5 to 3.5 times trailing-twelve-month sales...

  • Page 120
    ...2 - Summary of Signifi cant Accounting Policies and Note 19 - Segment Data and Related Information" of Notes to Consolidated Financial Statements for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the...

  • Page 121
    ... JUNE 30 (In millions) 2013 2012 2011 NET SALES By Region: The Americas Europe, the Middle East & Africa Asia/Pacific Returns associated with restructuring activities Net Sales By Product Category: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities Net...

  • Page 122
    ... as China, the Middle East, Eastern Europe and Brazil and focus on consumers who purchase in the travel retail channel, in stores at their travel destinations or when they return to their home market. We also continue to expand our digital presence which has resulted in growth in the net sales of...

  • Page 123
    ...our savings in activities that will support our future growth. Looking ahead to fiscal 2014, we plan to continue building on our strengths and our heritage of innovation to bring unique and high-performance products with long-term appeal and enduring quality to our consumers. We expect our strategy...

  • Page 124
    ..., primarily as a result of better-than-expected sales of products prior to the exit of the operations, as well as lower employee-related and store closure costs than originally estimated. • Outsourcing - In order to balance the growing need for information technology support with our efforts to...

  • Page 125
    ... charges associated with restructuring and other activities related to the Program: THE EST{E LAUDER COMPANIES INC. YEAR ENDED JUNE 30 (In millions) 2013 2012 2011 Sales returns (included in Net Sales) Cost of sales Restructuring charges Other charges Total charges associated with restructuring...

  • Page 126
    ... our business. Product Categories Skin Care Net sales of skin care products increased 6%, or $240.1 million, to $4,465.3 million. The recent launches of Perfectionist CP+R, Advanced Time Zone, Advanced Night Repair Eye Serum Infusion and the Optimizer line of products from Estée Lauder contributed...

  • Page 127
    ... in China, we are cautious that a slowing of the future growth trend of the Chinese economy may temper our retail sales growth, including that of our travel retail business. Higher sales in Hong Kong were primarily driven by launches from our heritage brands and higherend prestige skin care products...

  • Page 128
    ... mix, partially offset by the timing and level of strategic investment spending in the current year. In Europe, the Middle East & Africa, operating income increased 9%, or $67.1 million, to $813.4 million. Higher results from our travel retail business, the Middle East and the United Kingdom totaled...

  • Page 129
    ... Global Anti-Aging Creme from Estée Lauder contributed incremental sales of approximately $78 million, combined. Higher sales of Idealist Even Skintone Illuminator, Advanced Night Repair Synchronized Recovery Complex and Idealist Cooling Eye Illuminator from Estée Lauder and various products...

  • Page 130
    ... due to new product offerings from our heritage and makeup artist brands, as well as an increase in sales of our higher-end prestige skin care products. These increases reï¬,ect, in part, our ongoing efforts to work with retailers in the U.S. department store channel on strengthening the "High-Touch...

  • Page 131
    ... these improvements was the level of strategic investment spending in fiscal 2012. In Europe, the Middle East & Africa, operating income increased 14%, or $94.4 million, to $746.3 million. Higher results from our travel retail business and the Middle East 129 THE EST{E LAUDER COMPANIES INC.

  • Page 132
    ... adjustments, the ultimate disposition of deferred tax assets relating to stockbased compensation and the interaction of various global tax strategies. The effective income tax rate for fiscal 2012 was 31.8% as compared with 31.4% in fiscal 2011. The increase in the effective income tax rate of 40...

  • Page 133
    ... million of issuance costs and debt discount. We used the remaining net proceeds of the offering for general corporate purposes. We have a commercial paper program under which we may issue commercial paper in the United States. In the second quarter of fiscal 2013, we increased the limit of this...

  • Page 134
    ... 2011 primarily reï¬,ected an increase in treasury stock purchases, lower net proceeds from employee stock transactions and an increase in the payment of dividends during fiscal 2012 as a result of an increase in the annual dividend rate. The repayment of the 2012 Senior Notes during fiscal 2012...

  • Page 135
    ... On August 14, 2013, a dividend was declared in the amount of $.18 per share on our Class A and Class B Common Stock. The dividend is payable in cash on September 16, 2013 to stockholders of record at the close of business on August 30, 2013. Pension and Post-retirement Plan Funding Several factors...

  • Page 136
    ... other post-retirement benefit obligations, commitments pursuant to executive compensation arrangements, obligations related to our cost savings initiatives and acquisitions. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the...

  • Page 137
    ... measured value-at-risk during fiscal 2013 related to our foreign exchange contracts is as follows: YEAR ENDED JUNE 30, 2013 (In millions) Foreign exchange contracts High $24.5 Low $19.1 Average $21.9 The model estimates were made assuming normal market conditions and a 95 percent confidence...

  • Page 138
    ...: (1) increased competitive activity from companies in 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...

  • Page 139
    ...number of retail locations at which we sell our products and the costs associated with our other facilities; (13) changes in product mix to products which are less profitable; (14) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely...

  • Page 140
    ... on debt extinguishment Other income Earnings before Income Taxes Provision for income taxes Net Earnings Net earnings attributable to noncontrolling interests Net Earnings Attributable to The Estée Lauder Companies Inc. Net earnings attributable to The Estée Lauder Companies Inc. per common share...

  • Page 141
    ...(loss) Comprehensive income (loss) Comprehensive (income) loss attributable to noncontrolling interests: Net earnings Translation adjustments Comprehensive income (loss) attributable to The Estée Lauder Companies Inc. See notes to consolidated financial statements. THE EST{E LAUDER COMPANIES INC...

  • Page 142
    ... Current debt Accounts payable Accrued income taxes Other accrued liabilities Total current liabilities Noncurrent Liabilities Long-term debt Accrued income taxes Other noncurrent liabilities Total noncurrent liabilities Commitments and Contingencies Equity Common stock, $.01 par value; Class...

  • Page 143
    ... attributable to noncontrolling interests Distributions to noncontrolling interest holders Purchase of noncontrolling interest Other comprehensive income (loss) Noncontrolling interests, end of year Total equity See notes to consolidated financial statements. THE EST{E LAUDER COMPANIES INC. 141

  • Page 144
    ...acquire treasury stock Dividends paid to stockholders Payments to noncontrolling interest holders for dividends Net cash ï¬,ows used for financing activities Effect of Exchange Rate Changes on Cash and Cash Equivalents Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning...

  • Page 145
    ... C, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, Flirt!, GoodSkin Labs, Ojon and Smashbox. Certain subsidiaries of The Estée Lauder Companies Inc. are also the global licensee of the Tommy Hilfiger, Kiton, Donna Karan, Michael Kors, Tom Ford, Coach and Ermenegildo Zegna brand...

  • Page 146
    ... 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 147
    ...by discounting future cash ï¬,ows. Concentration of Credit 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...

  • Page 148
    ...in which net sales are recognized while advertising and promotional expenses are accrued at the time these costs are incurred. Stock-Based Compensation The Company records stock-based compensation, measured at the fair value of the award, as an expense in the consolidated financial statements. Upon...

  • Page 149
    Income Taxes The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its consolidated financial statements or tax returns. The net...

  • Page 150
    ... a significant impact on the Company's consolidated financial statements. In March 2013, the FASB issued authoritative guidance to resolve the diversity in practice concerning the release of the cumulative translation adjustment ("CTA") into net income (i) when a parent sells a part or all of its...

  • Page 151
    ... fiscal 2013, 2012 and 2011, respectively. Depreciation and amortization related to the Company's manufacturing process is included in Cost of sales and all other depreciation and amortization is included in Selling, general and administrative expenses in the accompanying consolidated statements of...

  • Page 152
    ...The Company assigns goodwill of a reporting unit to the product category in which that reporting unit predominantly operates at the time of acquisition. The following table presents goodwill by product category and the related change in the carrying amount: Skin Care (In millions) Makeup Fragrance...

  • Page 153
    ..., the Company recognized an impairment charge of $8.1 million for the remaining carrying value of the related trademark. These impairment charges were reï¬,ected in the skin care product category and in the Europe, the Middle East & Africa region. Impairment Testing During Fiscal 2012 During the...

  • Page 154
    ...a result of better-than-expected sales of products prior to the exit of the operations, as well as lower employee-related and store closure costs than originally estimated. • Outsourcing - In order to balance the growing need for information technology support with the Company's efforts to provide...

  • Page 155
    ...Employee-Related Costs (In millions) Asset Write-offs $ 4.2 11.0 2.4 1.7 2.1 $21.4 Contract Terminations $ 3.4 2.3 3.0 12.6 1.5 $22.8 Other Exit Costs $ 1.8 6.2 1.1 2.2 3.3 $14.6 Total $ 70.3 48.8 41.1 53.6 14.6 $228.4 Fiscal 2009 Fiscal 2010 Fiscal 2011 Fiscal 2012 Fiscal 2013 Charges recorded...

  • Page 156
    ...operations. During fiscal 2011, the Company recorded $4.6 million reflecting sales returns (less related cost of sales of $1.2 million) and a write-off of inventory of $7.0 million associated with turnaround operations, primarily related to the reformulation of Ojon brand products. Other charges in...

  • Page 157
    ...of the Company's deferred income tax assets and liabilities were as follows: JUNE 30 (In millions) 2013 2012 Deferred tax assets: Compensation related expenses Inventory obsolescence and other inventory related reserves Retirement benefit obligations Various accruals not currently deductible Net...

  • Page 158
    ...fiscal 2012, the National Appellate Court notified the Company that the appeal was denied. The Company has been assessed corporate income tax and interest of $3.7 million, net of tax, at current exchange rates. In response, the Company filed an appeal with the Spain Supreme 156 THE EST{E LAUDER...

  • Page 159
    ... 30 (In millions) 2013 2012 Advertising, merchandising and sampling Employee compensation Payroll and other taxes Restructuring Other $ 338.4 433.3 135.7 23.2 422.7 $1,353.3 $ 318.6 431.4 133.0 34.8 398.0 $1,315.8 NOTE 9 - DEBT The Company's current and long-term debt and available financing...

  • Page 160
    ... costs incurred related to these agreements. The outstanding balance at June 30, 2013 was 14.1 million Turkish lira ($7.4 million at the exchange rate at June 30, 2013) and is classified as current debt on the Company's consolidated balance sheet. As of June 30, 2013, the Company had a fixed rate...

  • Page 161
    ...subsidiaries in Europe. The interest rate on borrowings under this agreement is at an all-in fixed rate determined by the lender and agreed to by the Company at the date of each borrowing. At June 30, 2013, no borrowings were outstanding under this agreement. Debt issuance costs incurred related to...

  • Page 162
    ...in Earnings on Derivatives Amount of Gain or (Loss) Recognized in Earnings on Derivatives June 30 2013 (In millions) 2012 Derivatives Not Designated as Hedging Instruments: Foreign currency forward contracts Selling, general and administrative $(2.1) $(0.3) 160 THE EST{E LAUDER COMPANIES INC.

  • Page 163
    ... consolidated statements of cash flows. Hedge accounting treatment was discontinued prospectively and the fair value adjustment to the carrying amount of the related debt is being amortized against interest expense over the remaining life of the debt. Credit Risk As a matter of policy, the Company...

  • Page 164
    ... MEASUREMENTS The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between...

  • Page 165
    ... growth rate of 3% was applied to future cash ï¬,ows, and was used in conjunction with a 1.5% royalty rate discounted to present value at a 17% rate. To determine fair value of the Ojon trademark and customer list at April 1, 2012, the Company assessed the future performance of the related reporting...

  • Page 166
    ... 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 contributions at a rate that provides for future plan bene...

  • Page 167
    ... Plans U.S. 2013 (In millions) Other than Pension Plans International Post-retirement 2013 2012 2012 2013 2012 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 168
    ... future net periodic benefit cost is based on a review of highly rated long-term bonds. The discount rate for the Company's Domestic Plans is based on a bond portfolio that includes only long-term bonds with an Aa rating, or equivalent, from a major rating agency. As of June 30, 2013, the Company...

  • Page 169
    ... and fair value of plan assets for the Company's pension plans at June 30 are as follows: Pension Plans Retirement Growth Account 2013 (In millions) Restoration 2013 $110.3 $ 86.1 $ - 2012 $111.6 $ 86.3 $ - International 2013 $508.6 $445.5 $438.6 2012 $483.4 $426.5 $415.3 2012 $594.5 $522.1 $645...

  • Page 170
    ... reflect the closing price reported on a major market where the individual securities are traded. These investments are classified within Level 1 of the valuation hierarchy. Debt instruments - The fair values are based on a compilation of primarily observable market information or a broker quote in...

  • Page 171
    ... return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the year Transfers in (out) Purchases, sales, issuances and settlements, net Foreign exchange impact Balance as of June 30, 2013 $37.7 0.2 4.8 - (5.2) (0.9) $36.6 THE EST{E LAUDER COMPANIES...

  • Page 172
    ... compensation arrangements, obligations related to the Company's cost savings initiatives and acquisitions. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for the term that was in effect at June 30, 2013, without consideration for...

  • Page 173
    ... less than the Paris Commercial Court's award. Other Income During the fiscal 2013 second quarter, the Company amended the agreement related to the August 2007 sale of Rodan + Fields (a brand then owned by the Company) to receive a fixed amount in lieu of future contingent consideration and other...

  • Page 174
    ...18 per share on the Company's Class A and Class B Common Stock. The dividend is payable in cash on September 16, 2013 to stockholders of record at the close of business on August 30, 2013. NOTE 15-STOCK PROGRAMS As of June 30, 2013, the Company has two active equity compensation plans which include...

  • Page 175
    ...pricing model with the following assumptions: YEAR ENDED JUNE 30 Weighted-average expected stock-price volatility Weighted-average expected option life Average risk-free interest rate Average dividend yield 2013 34% 8 years 1.2% 1.0% 2012 35% 8 years 1.7% 1.0% 2011 31% 8 years 2.2% 1.1% The Company...

  • Page 176
    ... the current market value of the Company's Class A Common Stock. The Company recorded $3.0 million, $0.8 million and $4.9 million as compensation expense to reï¬,ect additional deferrals and the change in the market value for fiscal 2013, 2012 and 2011, respectively. THE EST{E LAUDER COMPANIES INC...

  • Page 177
    ...and 0.7 million, respectively, of PSUs have been excluded from the calculation of diluted EPS because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company, as discussed in Note 15 - Stock Programs. THE EST{E LAUDER COMPANIES INC. 175

  • Page 178
    ... other comprehensive income (loss) Of the $18.3 million, net of tax, derivative instrument gain recorded in AOCI at June 30, 2013, $10.9 million in gains, net of tax, related to foreign currency forward contracts, which the Company will reclassify to earnings through March 2015. Also included...

  • Page 179
    .... The "other" segment includes the sales and related results of ancillary products and services that do not fit the definition of skin care, makeup, fragrance and hair care. Product category performance is measured based upon net sales before returns associated with restructuring activities, and...

  • Page 180
    ...) 2013 2012 2011 PRODUCT CATEGORY DATA Net Sales: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities Depreciation and Amortization: Skin Care Makeup Fragrance Hair Care Other Goodwill and Other Intangible Asset Impairments: Skin Care Makeup Fragrance Hair...

  • Page 181
    ... on the location of the customer. The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region. The Company is domiciled in the United States. Net sales in the United States in fiscal 2013, 2012 and 2011 were $3,756.1 million, $3,582.1 million...

  • Page 182
    ...$(.02) per diluted common share. (5) As a result of the Company's SAP rollout, approximately $94 million and $30 million of accelerated orders were recorded as net sales (approximately $78 million and $23 million of operating income) in the fiscal 2013 and fiscal 2012 second quarters, respectively...

  • Page 183
    ... the heading "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting." Fabrizio Freda President and Chief Executive Officer August 23, 2013 Tracey T. Travis Executive Vice President and Chief Financial Officer THE EST{E LAUDER COMPANIES INC. 181

  • Page 184
    ... reporting as of June 30, 2013, based on criteria established in Internal Control - Integrated Framework issued by the COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Estée Lauder...

  • Page 185
    ... Inc.: We have audited the accompanying consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries ("the Company") as of June 30, 2013 and 2012, and the related consolidated statements of earnings, equity, comprehensive income (loss), and cash ï¬,ows for each of the years...

  • Page 186
    ...Securities and Exchange Commission website at www.sec.gov. Common Stock Information The Class A Common Stock of The Estée Lauder Companies Inc. is listed on the New York Stock Exchange with the symbol EL. Quarterly Per Share Market Prices and Cash Dividends on Common Stock Fiscal 2013 Quarter Ended...

  • Page 187
    ... the cumulative five-year total stockholder return (stock price appreciation plus dividends) on the Company's Class A Common Stock with the cumulative total return of the S&P 500 Index and a market weighted index of a publicly traded peer group. The returns are calculated by assuming an investment...

  • Page 188
    ...Better Eyes, Clinique Moisture Surge, Crème de la Mer, Damage Remedy, Darphin, Estée Lauder, Estée Lauder Advanced Night Repair, Estée Lauder Advanced Time Zone, Estée Lauder Beautiful, Estée Lauder Double Wear, Estée Lauder Nutritious, Fashion Sets, Flirt!, Flirt! Have a Ball!, GoodSkin Labs...

  • Page 189
    THE EST{E LAUDER COMPANIES INC. 2013 ANNUAL REPORT ENVIRONMENTAL FIGURES The Estée Lauder Companies Inc. 2013 Annual Report is printed on paper that is made with certified renewable electricity and is Forest Stewardship Council' (FSC®) Certified, ensuring all papers come from ...

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    THE EST{E L AUDE R COMPAN I ES I N C. 767 Fifth Avenue New York, New York 10153