Estee Lauder 2002 Annual Report Download - page 47

THEEST{E LAUDER COMPANIES INC.
Product Categories
Skin Care Net sales of skin care products increased 5%
or $83.7 million to $1.66 billion. This increase was prima-
rily attributable to newer products such as Idealist Skin
Refinisher, Anti-Gravity Firming Lift Cream, Anti-Gravity
Firming Eye Lift Cream and Pro-Preferred Skincare prod-
ucts, the first skin care line for our M.A.C brand. By intro-
ducing new products into lines such as Re-Nutriv, the
Origins Ginger Bath and Body Collection and Acne
Solutions, we continued to attract consumers to the lines
and maintain sales momentum. White Light Brightening
System and Active White continued to be popular
whitening products particularly in the Asia/Pacific region.
Newlylaunched products such as Private Spa Collection,
Origins’ facial skin products and initial shipments of
LightSource contributed to increased sales. Partially off-
setting these increases were lower sales of certain existing
products such as Fruition Extra and Diminish.
Makeup Makeup net sales increased 7% or $118.1 mil-
lion to $1.72 billion. Significant contributors were recently
launched products such as High Impact Eye Shadow,
Moisture Surge Lipstick, Equalizer Smart Makeup, Lash
Doubling Mascara, Glossware, Pure Color Lip Gloss, Luxe
Makeup and Automatic Pencil Duo. In addition, estab-
lished products such as Pure Color Lipstick, Quickliner
For Lips, Quickliner For Eyes and Sheer Powder Blusher
added to increased sales. M.A.C products also con-
tributed to increased sales with the Eden Rocks, M.A.C
Paints and Heat product lines.
Fragrance Net sales of fragrance products decreased 3%
or $32.1 million to $1.09 billion, but increased 1% on a
comparable currency basis. The decrease in net sales was
attributable to a continued decline in sales of Tommy
Hilfiger licensed products, as well as to lower sales of
Estée Lauder pleasures, Clinique Happy and Clinique
Happy for Men. The continued softness of the fragrance
business in the United States in fiscal 2001 and difficult
comparisons to the prior year contributed to the decline
in this category. Contributing positively to the category
were new products, such as Intuition, Ginger Essence
and DKNY for Men, as well as the international rollout
of DKNY for Women.
Hair Care Hair care net sales increased 59% or $66.8 mil-
lion to $180.7 million. The increase in sales is attributable
to the inclusion of Bumble and bumble, in which we
acquired a controlling majority equity interest in June
2000, and the launch of Clinique’s Simple Hair Care
System. In addition, sales growth was generated by
Aveda shampoo and conditioner products, such as the
Sap Moss and Brilliant product groups, and an increase in
the number of Company-owned Aveda Environmental
Lifestyle Stores.
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
Sales in the Americas increased 5% or $143.8 million to
$2.86 billion. This increase was driven by sales growth in
the makeup, skin care,and hair care categories, particu-
larly with the success of new and recently launched prod-
ucts and the growth of our newer brands. The increase
was partially offset by a decline in fragrance sales due to
the softness in this category in the United States.
In Europe, the Middle East & Africa, net sales increased
7% or $79.6 million to $1.22 billion. The increase was
primarily the result of higher net sales in the United King-
dom, Spain and France and in our distributor and travel
retail businesses. This increase was partially offset by
decreased sales in Germany and South Africa. Net sales in
Asia/Pacific increased 2% or $12.0 million to $596.1 mil-
lion primarily due to higher net sales in Korea, Hong Kong,
Malaysia and Thailand, partially offset by lower sales in
Japan and Australia. Excluding the impact of foreign cur-
rencytranslation, sales grew in each country in Europe,
the Middle East & Africa and in Asia/Pacific, accounting
for growth of 17% and 10%, respectively.
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 improved
to 26.3% from 27.9%, reflecting the impact of our manu-
facturing and sourcing initiatives as well as changes in dis-
tribution and product mix. Changes in distribution include
the rollout of our own retail stores and the acquisition of
certain distributor operations, both of which contributed
to higher gross margins. In addition, the synergies
achieved by incorporating recently acquired businesses
into our existing manufacturing and sourcing infrastruc-
tures had a favorable impact on gross margins.
OPERATING EXPENSES
Operating Expenses
Operating expenses increased to 63.1% of net sales
as compared with 60.5% of net sales in the prior
year. Excluding the impact of restructuring and other
non-recurring expenses, operating expenses were 61.9%
of net sales. This change primarily related to the increased
cost of our retail store and Internet operations, which have
higher operating cost structures than our traditional
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