Estee Lauder 2013 Annual Report Download - page 131

THE EST{E LAUDER COMPANIES INC. 129
OPERATING RESULTS
Operating income increased 20%, or $222.3 million, to
$1,311.7 million. Operating margin increased to 13.5% of
net sales as compared with 12.4% in fiscal 2011, reflecting
our higher gross margin, partially offset by the increase in
our operating 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 $63.2 million, or 0.7% of net sales, in fiscal
2012 and $59.4 million, or 0.7% of net sales, in fiscal 2011.
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 25%, or $151.6 mil-
lion, to $746.7 million, primarily reflecting improved
results from higher-margin product launches from certain
of our heritage brands, as well as increased results from
higher-end prestige skin care products. Makeup operating
income increased 9%, or $44.2 million, to $538.0 million,
primarily reflecting improved results from our makeup art-
ist brands. Both our skin care and makeup categories
were impacted by higher investment spending on global
advertising, merchandising and sampling to support
major launches and existing franchises in line with our
strategy. Fragrance operating income increased 24%, or
$19.4 million, to $100.1 million, primarily reflecting
improved cost of goods and a more strategically focused
approach to spending from our heritage brands as part of
our strategy to improve profitability. Hair care operating
results increased over 100%, or $21.3 million, to $12.2
million, primarily reflecting expanded global distribution,
improved results driven by new product launches, as well
as a favorable comparison to fiscal 2011 which was
impacted by higher goodwill and other intangible asset
impairment charges of $15 million.
Geographic Regions
Operating income in the Americas increased 18%, or
$43.5 million, to $288.4 million, primarily reflecting
improved results from our heritage and makeup artist
brands that were driven by improved category mix, as
well as a favorable comparison to fiscal 2011 which was
impacted by higher goodwill and other intangible asset
impairment charges of $16 million. Partially offsetting
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
foreign currency translation. Net sales of approximately
$193 million were driven by China, Hong Kong and
Thailand, combined, primarily reflecting strong sales of
skin care and makeup products. Our businesses in Japan,
Korea and Australia continued to be challenged due to
difficult economic conditions, but we reported net sales
gains of approximately $37 million, combined, which for
both Japan and Australia were generated predominantly
from the strengthening of their respective currencies.
Excluding the impact of foreign currency translation, Asia/
Pacific net sales increased 11%.
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 decreased
to 20.5% as compared with 22.0% in fiscal 2011. This
improvement primarily reflected our efforts in connection
with the Program, including strategic changes in the mix
of our business and pricing of approximately 140 basis
points, favorable manufacturing variances of approxi-
mately 10 basis points and the favorable effect of
exchange rates of approximately 10 basis points. These
improvements were partially offset by an increase in obso-
lescence charges of approximately 10 basis points.
OPERATING EXPENSES
Operating expenses as a percentage of net sales
increased to 66.0% as compared with 65.6% in fiscal
2011. This change reflected increased spending in adver-
tising, merchandising and sampling costs in line with our
strategy of approximately 80 basis points, higher costs
related to stock-based compensation of approximately 20
basis points, an increase in general and administrative
costs of approximately 10 basis points and higher charges
associated with restructuring activities of approximately
10 basis points. Partially offsetting these changes were
lower selling and shipping costs as a percentage of net
sales of approximately 50 basis points, lower charges
associated with goodwill and other intangible asset
impairments of approximately 20 basis points and a
favorable change in foreign exchange transactions of
approximately 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.