Estee Lauder 2013 Annual Report Download - page 128

126 THE EST{E LAUDER COMPANIES INC.
of total returns and charges associated with restructuring
activities of $17.8 million, or 0.2% of net sales, in fiscal
2013 and $63.2 million, or 0.7% of net sales, in fiscal 2012.
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 increased 11%, or $83.4 mil-
lion, to $830.1 million, primarily reflecting improved
results from higher-margin product launches from Estée
Lauder and La Mer, partially offset by goodwill and other
intangible asset impairment charges of $17.7 million.
Makeup operating income increased 8%, or $42.4 mil-
lion, to $580.4 million, primarily reflecting improved
results from our M.A.C brand, partially offset by certain of
our heritage brands and an increase in investment spend-
ing in line with our strategy. Fragrance operating income
increased 20%, or $20.2 million, to $120.3 million,
primarily reflecting increased profitability from certain
Jo Malone, Estée Lauder and Clinique products, partially
offset by lower results from certain of our designer
fragrances. Hair care operating results increased over
100%, or $14.5 million, to $26.7 million, due to a favor-
able comparison to the prior year which was impacted by
other intangible asset impairment charges of $21.7 mil-
lion, partially offset by lower sales of Bumble and bumble
brand products and higher investment spending by Aveda
to support the Invati line of products.
Geographic Regions
Operating income in the Americas increased 47%, or
$134.8 million, to $423.2 million, primarily reflecting
improved results from our makeup artist and luxury
brands and certain of our hair care and heritage brands,
driven by improved category 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 approximately $77 million,
combined. Partially offsetting these improvements were
lower results in Germany and Spain of approximately $5
million, combined, as well as goodwill and other intangi-
ble asset impairment charges of $17.7 million.
In Asia/Pacific, operating income decreased 10%, or
$33.0 million, to $307.2 million. Higher results from China
and Thailand totaled approximately $22 million, com-
bined. These higher results were more than offset by
lower operating results of approximately $51 million in
Korea, Hong Kong and Japan, combined. The lower
COST OF SALES
Cost of sales as a percentage of total net sales decreased
to 19.9% as compared with 20.5% in the prior year. This
improvement reflected changes in the mix of our business
and pricing of approximately 40 basis points, favorable
manufacturing variances of approximately 20 basis points
and the favorable effect of exchange rates of approxi-
mately 10 basis points. These improvements were partially
offset by a provision for foreign transactional taxes of
approximately 10 basis points.
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 that 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 65.1% as compared with 66.0% in the prior
year. This improvement reflected a decrease in general
and administrative costs as a percentage of net sales of
approximately 50 basis points, a decrease in charges asso-
ciated with restructuring activities of approximately 40
basis points and lower selling and shipping costs as a per-
centage of net sales of 10 basis points. Also included in
this improvement was a favorable change in foreign
exchange transactions of approximately 10 basis points
and lower charges associated with other intangible asset
impairments of approximately 10 basis points. Partially
offsetting these improvements were higher costs related
to stock-based compensation of approximately 20 basis
points and increased spending on advertising, merchan-
dising and sampling in line with our strategy of approxi-
mately 10 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 16%, or $214.3 million, to
$1,526.0 million. Operating margin increased to 15.0%
of net sales as compared with 13.5% in the prior year,
reflecting our higher gross margin and the decrease in our
operating expense margin, as previously discussed. The
following discussions of Operating Results by Product
Categories and Geographic Regions exclude the impact