Estee Lauder 2002 Annual Report Download - page 44

THEEST{E LAUDER COMPANIES INC.
Hair Care Hair care net sales increased 19% or $35.1
million to $215.8 million. This increase was primarily the
result of growth from Aveda, which benefited from
recently launched texture lotion products and Color
Conserve Shampoo and an increase in the number of
Company-owned Aveda Environmental Lifestyle Stores.
Sales of Bumble and bumble products increased due to
an expanded product line and an increase in the number
of points of sale. The results were partially offset by lower
sales from Clinique’s Simple Hair Care System when
compared with the prior-year launch.
The introduction of new products may have some
cannibalizing effect on sales of existing products, which
we take into account in our business planning.
Geographic Regions
Net sales in the Americas increased 1% or $20.4 million
to $2.88 billion. The increase is primarily due to the suc-
cess of most newer brands, partially offset by economic
weakness and uncertainty in the United States during
most of the fiscal year. We expect uncertain economic
conditions to persist into fiscal 2003 and we are planning
accordingly. In Europe,the Middle East & Africa, net sales
increased 3% or $39.3 million to $1.26 billion. This
increase was primarily the result of higher net sales in the
United Kingdom, Spain and Greece, where in fiscal 2002
we formed a joint venture in which we own a controlling
majority interest with our former distributor. The increase
was partially offset by lower net sales in our travel retail
business, which has been adversely affected by a
decrease in worldwide travel. Excluding the impact of our
travel retail business, net sales in Europe, the Middle East
& Africa increased 8% or $77.8 million. Net sales in
Asia/Pacific increased 2% or $14.5 million to $610.6 mil-
lion primarily due to higher net sales in Korea and Thai-
land, as well as in Australia where we benefited from a
change in retailer arrangements. The increased sales were
partially offset by lower net sales in Japan. Japan continues
to remain a difficult market due to local economic condi-
tions and increasing competition. The challenges were
made more difficult by the weakness of the Japanese yen
during fiscal 2002 as compared with the U.S. dollar.
Excluding the impact of foreign currency translation,
Asia/Pacific net sales increased 9%.
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 was 26.8%
as compared with 26.3% in the prior year. The lower
margin can be attributed in part to production volume
decreases resulting in under-absorption of overhead, as
well as lower than planned raw material purchases that
reduced anticipated savings from sourcing initiatives.
Partially offsetting these negative factors were lower
sales volumes of products with a higher cost of goods,
particularly in travel retail and fragrance. Due to variations
in our launch calendar and the timing of promotions, we
anticipate greater fluctuations in our gross margins and
operating expenses on a period-by-period basis.
OPERATING EXPENSES
Operating Expenses
Operating expenses increased to 66.0% of net sales as
compared with 63.1% of net sales in the prior year. The
increase in operating expenses primarily related to
restructuring expenses, continued advertising and pro-
motional spending and the cost to expand and operate
our retail stores. The increase in operating expenses as a
percentage of net sales reflects a slower growth rate in
sales than operating expenses, primarily due to economic
conditions in the United States as discussed above. As
part of our long-term strategies, we continued to empha-
size the building of “brand equities” through advertising
and promotional spending and retail store expansion
despite difficult economic times. Changes in advertising
and promotional spending result from the type, timing
and level of advertising and promotional activities related
to product launches and rollouts, as well as the markets
being emphasized. Excluding the impact of restructuring
and other non-recurring expenses, operating expenses
were 63.5% and 61.9% of net sales for the fiscal years
ended 2002 and 2001, respectively.
Restructuring and Other Non-Recurring Expenses
During the fourth quarter of fiscal 2002, we recorded spe-
cial charges for a restructuring related to repositioning
certain businesses as part of our ongoing efforts to drive
long-term growth and increase profitability. The restruc-
turing focused on cost reduction opportunities related to
the Internet, our supply chain, globalization of the organ-
ization and distribution channel refinements. We have
committed to a defined plan of action, which resulted in
an aggregate pre-tax charge of $117.4 million, of which
$59.4 million is cash related. On an after-tax basis, the
aggregate charge was $76.9 million, equal to $.32 per
diluted share. As these initiatives are fully implemented,
we expect to generate annual ongoing savings of about
$46 million, of which a portion will be reinvested.
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