Estee Lauder 2015 Annual Report Download - page 70

THE EST{E LAUDER COMPANIES INC. 67
currencies in the region. Lower sales in Japan and
Hong Kong totaled approximately $94 million, combined.
The decrease in net sales in Japan primarily reflected the
impact of the accelerated orders and foreign currency
translation, partially offset by higher sales of certain of
our luxury and makeup artist brands. The lower sales in
Hong Kong were primarily due to the negative impact to
our business as a result of the social instability there.
These decreases were partially offset by higher net sales
in China, Australia and Korea of approximately $46 mil-
lion, combined. The higher net sales in China were pri-
marily driven by certain of our heritage and luxury brands,
and our makeup artist brands as a result of expanded dis-
tribution in department stores, freestanding stores and
online. For Australia and Korea, the higher net sales were
from certain of our makeup artist and luxury brands.
Excluding the impact of foreign currency translation and
the impact of the accelerated orders, net sales in Asia/
Pacific would have increased 4%. Excluding the impact
of foreign currency translation, Asia/Pacific net sales
increased 1%. Adjusting for the impact of the accelerated
orders, reported net sales in Asia/Pacific would have
been flat.
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 19.5% as compared with 19.7% in the prior year. This
improvement reflected favorable changes in foreign
exchange transactions of approximately 20 basis points,
partially offset by an increase in obsolescence charges of
approximately 10 basis points.
Since certain promotional activities are a component
of sales or cost of sales, and the timing and level of
promotions vary with our promotional calendar, we have
experienced, and expect to continue to experience, fluc-
tuations in the cost of sales percentage. In addition, future
cost of sales may be impacted by channels of distribution
and their relative growth.
OPERATING EXPENSES
Operating expenses as a percentage of net sales
increased to 65.6% as compared with 63.6% in the prior
year, and were impacted by the accelerated orders and
brand and channel mix as certain retail and media formats
carry different cost structures. As a percentage of net
sales, this increase primarily reflected an increase in
general and administrative expenses of approximately
100 basis points as a result of higher support spending
behind capability-building initiatives, such as information
technology, as well as for acquisition-related expenses.
This increase also reflected higher store operating
and selling costs of approximately 110 basis points, com-
bined, primarily driven by the expansion of M.A.C and
Jo Malone London freestanding retail stores. Also con-
tributing to this increase were higher costs associated
with stock-based compensation and higher spending on
advertising, merchandising and sampling as a percentage
of net sales of approximately 10 basis points, each.
Partially offsetting these increases were lower charges
related to the measurement of net monetary assets in
Venezuela of approximately 30 basis points and favorable
changes in foreign exchange transactions of approxi-
mately 10 basis points. Adjusting for the impact of the
accelerated orders into the fiscal 2014 fourth quarter,
operating expenses as a percentage of net sales would
have increased approximately 10 basis points, primarily
reflecting an increase in general and administrative
expenses and higher store operating costs, partially offset
by lower spending on advertising, merchandising and
sampling and lower charges related to the remeasure-
ment of net monetary assets in Venezuela.
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 and brands being emphasized.
OPERATING RESULTS
Operating income decreased 12%, or $221.3 million, to
$1,606.3 million, driven entirely by the negative impact
of the accelerated orders of approximately $254 million
and foreign currency translation of approximately $131
million. Operating margin decreased to 14.9% of net sales
as compared with 16.7% in the prior year, reflecting an
increase in our operating expense margin, partially offset
by our higher gross margin. Adjusting for the impact
of the accelerated orders, operating income would
have increased 2% and operating margin would have
remained flat.
Our skin care, makeup and fragrance results declined,
primarily reflecting the accelerated orders, as well as
certain challenges and difficult comparisons affecting
our net sales growth in certain markets and channels by our
heritage brands as previously discussed. These decreases
were partially offset by improved results from our makeup
artist, certain luxury, and our hair care brands. While
certain operating expenses have increased as a percent-
age of net sales during the current year, we have been
able to implement cost containment measures to mitigate
the impact.