Estee Lauder 2003 Annual Report Download

Download and view the complete annual report

Please find the complete 2003 Estee Lauder annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 87

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87

THE EST{E LAUDER COMPANIES INC. 2003 ANNUAL REPORT

Table of contents

  • Page 1
    T H E E S T { E L A U D E R C O M PA N I E S I N C . 2 0 0 3 A N N UA L R E P O R T

  • Page 2
    ...leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company's products are sold in over 130 countries and territories under well recognized brand names, including Estée Lauder, Aramis, Clinique, Prescriptives, Origins, M.A . C, La Mer, Bobbi Brown...

  • Page 3
    ... products: Perfectionist Correcting Serum for Lines/Wrinkles, Idealist Skin Refinisher, Re-Nutriv Ultimate Lifting Creme, So Ingenious Multi-Dimension Liquid Makeup SPF 8, MagnaScopic Maximum Volume Mascara, Estée Lauder pleasures intense, Pure Color Long Lasting Lipstick, Pure Color EyeShadow...

  • Page 4
    ...-selling Crème de la Mer into a complete range of facial skin care and body products. BOBBI BROWN Acquired in 1995 . Sold in more than 30 countries and territories . Select products: Foundation Stick, Creamy Concealer Kit, Lip Color, Lip Gloss, Shimmer Brick Compact, Bobbi Brown Extra, Long-Wear...

  • Page 5
    ...Cashmere Mist, Donna Karan Formula Cleanser, Donna Karan Tinted Moisturizer, DKNY The Fragrance for Women and DKNY The Fragrance for Men . Luxury fragrance, bath and body collections that reflect the quality, style and innovation identified with designer Donna Karan. AVEDA Acquired in 1997 . Sold in...

  • Page 6
    ... products: MICHAEL Eau de Parfum Spray and Leg Shine; Michael Kors SHEER Eau de Parfum Spray and Body Lotion; MICHAEL for Men Eau de Toilette Spray and After Shave Splash; KORS Michael Kors Eau de Parfum Spray and Opalescent Body Creme . Award-winning designer fragrances and bath and body products...

  • Page 7
    ... that have been issued since The Estée Lauder Companies went public in 1995. Each annual report is a chapter in the story of this thriving Company. This year, we've turned a significant page in the history of the Company as we've reached our highest level of sales ever. What is the glue that binds...

  • Page 8
    ... I remember a time when an employee came to Mrs. Estée Lauder and said that we could save money by using a lesser ingredient. She responded by saying, "A woman always remembers quality." It is the quality in our fragrance, skin care, makeup and hair care products that keeps the consumer coming back...

  • Page 9
    ... year's major launch of Clinique's revolutionary and patent-pending Repairwear, which optimizes the skin's natural repair processes while you sleep. We call the line's three products (Repairwear Intensive Night Cream, Repairwear Intensive Night Lotion and Repairwear Extra Help Serum) the "Dream Team...

  • Page 10
    ... our products are sold around the world. Both our packaging concepts and our technology in makeup and skin care reï¬,ect the inï¬,uence of global teams. In the MRS. EST{E L AUDER'S ORIGINAL VISION - OF WHO WE ARE AND WHAT WE STAND FOR - H A S P R OV E N TO B E RESILIENT AND TIMELESS. 09 last year...

  • Page 11
    ... grew in many important ways over the last 12 months. Our portfolio of brands grew from 16 to 18 with the acquisitions of Darphin and the Michael Kors fragrance license. Darphin is a Paris-based skin care line that deepens our penetration in skin care, builds our position in Europe and places us in...

  • Page 12
    ... launches of Estée Lauder's Perfectionist Correcting Serum for Lines/Wrinkles and Clinique's Repairwear Intensive Night Cream and Repairwear Intensive Night Lotion, our skin care sales were $1.89 billion, up 11% on a reported basis and 7% on a constant currency basis. • Makeup sales continued...

  • Page 13
    ...consumers fight the aging effects of sun, stress and pollution, Clinique rightfully captures the market for high-performance skin care. Communicating these propositions is critical, and it is a point of pride that we did not retreat from our advertising and promotion commit- I N T E N S E LY LOYAL...

  • Page 14
    ... this business. Our Research and Development team provides an important competitive asset. This year we launched more than 315 new products, many with groundbreaking results. In particular, we reinforced our strength in skin care, positioned ourselves as innovators in the highly competitive mascara...

  • Page 15
    ...The Company received Cosmetic Executive Women Best in Beauty awards for Estée Lauder, Clinique and Origins; a FiFi award for kate spade beauty, and the Prix Santé award for Clinique. Evelyn H. Lauder, Senior Corporate Vice President and Founder and Chairman of The Breast Cancer Research Foundation...

  • Page 16
    ... Aramis Life; Products from Darphin; M.A. C 's Berlin store; Michael Kors' fragrance line; Participants at Aveda's Congress; FiFi Bath & Body Star award for kate spade beauty; CEW Best in Beauty Awards for Estée Lauder, Clinique and Origins products; Hair Heroes by Michael Gordon; Leonard A. Lauder...

  • Page 17

  • Page 18
    ... 4% on a reported basis and were relatively unchanged when measured in constant currency. One of approximately every four bottles of fragrance sold in United States prestige department stores in which we sell carried an Estée Lauder Companies brand name. We also continued to develop our business in...

  • Page 19
    ... best-selling offerings of this kind in the industry - Beautiful Sheer and Clinique Happy Heart, refreshed well-established positioning and attracted new consumers. At the same time, Beautiful, Clinique Happy and Estée Lauder pleasures remained the top three prestige fragrances in department stores...

  • Page 20
    FiFi award-winning women's fragrance, MICHAEL for Men and KORS Michael Kors have a strong specialty store following. This new brand also complements existing licenses like Tommy Hilfiger, which successfully launched T Girl in fiscal 2003. Meanwhile, kate spade beauty has built a solid business in ...

  • Page 21

  • Page 22
    ...ï¬,irtier lashes, more lustrous lips, high-impact pigments in eye shadows and foundations that do more than cover and correct were among the year's key concepts. Our makeup sales increased 7% on a reported basis and 4% in constant currency. The Estée Lauder Companies gained momentum in mascara with...

  • Page 23
    ... as a best-seller. Pure Color by Estée Lauder continued to gain momentum around the world with its distinctive, stylish cube and eye-opening colors, earning it the award for Best New Cosmetic Product (Luxury Brands) at the New Woman Beauty Awards 2003 in the United Kingdom. Weightless lipstick that...

  • Page 24
    ..."makeup is a way for a woman to look and feel like herself, only prettier and more confident." Bobbi Brown Beauty Evolution, her third book, offers women of all ages insights and advice on finding inner and outer beauty. Shimmer Gloss Stick, the brand's most recent introduction in the lip category...

  • Page 25

  • Page 26
    ...in this area. As the art of cosmetic science becomes more advanced, research and development plays a larger role in creating products that deliver more clinically proven benefits to the skin. More than 400 Estée Lauder Companies scientists work in seven labs around the world to stay on the cutting...

  • Page 27
    ... launched Repairwear Intensive Night Cream, Intensive Night Lotion and Extra Help Serum globally as a new repair and anti-aging line. Estée Lauder Perfectionist Correcting Serum for Lines/Wrinkles won international 26 acclaim and is enjoying brisk sales, joining the highly successful Idealist Skin...

  • Page 28
    ... sales for existing products also helped sustain The Estée Lauder Companies' position as a global leader in skin care. Resilience Lift Overnight Face and Throat Creme, DayWear Protective Anti-Oxident Creme and Lotion SPF 15, Advanced Night Repair Eye Recovery Complex and Re-Nutriv Ultimate Lifting...

  • Page 29

  • Page 30
    ... an important priority for The Estée Lauder Companies, which enjoyed another year of growth in sales in this category. Our hair care business grew 6%. Domestic performance was particularly robust, thanks to new product offerings and our focus on increasing business with our existing salons. In the...

  • Page 31
    ...' and stylists' technical expertise and product knowledge with an eye toward growing business skills and overall productivity. This fall, Bumble and bumble will open a new training facility and corporate headquarters in New York City that will enable it to expand and enrich its offerings.

  • Page 32
    ... strong hair care line. Clinique's Simple Hair Care System maintained its ranking as the top department store hair care brand in the United States on the strength of products like Daily Shampoo, a lightweight formula that cleanses without stripping, and Healthy Shine Serum, which promotes shine...

  • Page 33
    ... for the Estée Lauder brand; Hollywood tie-ins such as Stila's exclusive makeup partnership with the film Legally Blonde 2: Red, White and Blonde, starring Reese Witherspoon; dynamic makeup collections like M.A . C's Aquadisiac, and in-store promotions like Bobbi Brown's "10 Minute Face Event".

  • Page 34
    ... the creation and distribution of an HIV/AIDS educational packet for high school students; donated $250,000 to the United Nations HIV/AIDS programs, and developed a widely-aired public service announcement aimed at teenagers. Aveda's Earth Month efforts raised more than $720,000 for grass-roots...

  • Page 35
    ... The Estée Lauder Companies Inc. RONALD S. LAUDER Chairman Clinique Laboratories, Inc. Private Investor 1 Member of Audit Committee 2 Member of Compensation Committee 3 Member of Nominating and Board Affairs Committee 4 Member of Stock Plan Subcommittee WILLIAM P. LAUDER Chief Operating Of...

  • Page 36
    ... President Global Human Resources RICHARD W. KUNES Senior Vice President Chief Financial Officer FRED H. LANGHAMMER President Chief Executive Officer EVELYN H. LAUDER Senior Corporate Vice President LEONARD A. LAUDER Chairman RONALD S. LAUDER Chairman Clinique Laboratories, Inc. WILLIAM P. LAUDER...

  • Page 37
    ...per diluted common share, related to the proposed settlement of a legal action. Fiscal 2002 information includes the effect of restructuring charges of $117.4 million ($76.9 million after-tax), or $.32 per common share, and is after the cumulative effect of adopting a new accounting principle in the...

  • Page 38
    ... for all periods presented. (b) Net earnings, net earnings attributable to common stock and net earnings per common share for the year ended June 30, 2003 included a special charge related to the proposed settlement of a legal action of $13.5 million, after-tax, or $.06 per diluted common share...

  • Page 39
    ...16 238.4 242.2 Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Restructuring Special charges Related party royalties Operating Income Interest expense, net Earnings before Income Taxes, Minority Interest and Accounting Change Provision for income taxes...

  • Page 40
    .... We believe FIFO most closely matches the ï¬,ow of our products from manufacture through sale. The reported net value of our inventory includes saleable products, promotional products, raw materials and componentry that will be sold or used in future periods. Inventory cost includes raw materials...

  • Page 41
    ...reported net earnings. The pre-retirement discount rate for each plan used for determining future pension obligations is based on a review of highly rated long-term bonds. At June 30, 2003, we used a pre-retirement discount rate for our U.S. Plan of 5.75% and varying rates on our international plans...

  • Page 42
    ...manufacture, market and sell skin care, makeup, fragrance and hair care products...Products and services that do not meet our definition of skin care, makeup, fragrance and hair care... and discussion for further information regarding these charges. 41 T H E E S T { E L AU DE R COM PA N I E S I N C.

  • Page 43
    ...fiscal 2003 results as reported and results prior to adjustment for a special pre-tax charge of $22.0 million, or $13.5 million after-tax, equal to $.06 per diluted common share, in connection with the proposed settlement of a class action lawsuit brought against us and a number of other defendants...

  • Page 44
    ... public offering in 1995. The particular restructuring and special charges relating to the plan are described in Note 5 to Notes to Consolidated Financial Statements. These costs, as well as those resulting from the adoption of new accounting standards, were not considered part of our core business...

  • Page 45
    ...was supported by strong sales of Comforting Cream Cleanser, Moisture Surge Extra Thirsty Skin Relief and Moisture Surge Eye Gel, and products in the 3-Step Skin Care System by Clinique, as well as by Re-Nutriv Ultimate Lifting Creme from Estée Lauder, and A Perfect World line of products by Origins...

  • Page 46
    ... 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 26.1% from 26.8%, reï¬,ecting production and supply chain efficiencies and lower costs from promotional activities...

  • Page 47
    ..., Advanced Night Repair Eye Recovery Complex, Moisture Surge Extra Thirsty Skin Relief and Moisture Surge Eye Gel, A Perfect World line of products, LightSource Transforming Moisture Lotion and Cream, and Re-Nutriv Ultimate Lifting Creme. Partially offsetting these increases were lower net sales of...

  • Page 48
    Turnaround Cream and Resilience Lift, as well as products in Clinique's 3-Step Skin Care System. Makeup Makeup net sales increased 4% or $68.9 million to $1.79 billion. Newer brands such as M.A . C, Bobbi Brown and Stila, which are primarily makeup products, contributed through growth at existing ...

  • Page 49
    ... 2002, we recorded charges for a restructuring related to repositioning certain businesses as part of our ongoing efforts to drive long-term growth and increase profitability. The restructuring focused on cost reduction opportunities related to the Internet, our supply chain, globalization of the...

  • Page 50
    ... in skin care, primarily due to lower than anticipated sales levels, coupled with continued advertising and promotional spending to promote new and recently launched products. Hair care operating income increased 5%, from a smaller base, to $13.7 million, primarily due to sales growth from Aveda and...

  • Page 51
    ... new products at higher selling prices or increase selling prices sufficiently to offset cost increases, which have been moderate. We believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support currently planned business...

  • Page 52
    ... related to dividend payments. Dividends The Board of Directors declared, and we paid on our Class A Common Stock and Class B Common Stock, an annual dividend of $.20 per share in fiscal 2003 and quarterly dividends at the rate of $.05 per share in each quarter of fiscal 2002 and 2001. The last...

  • Page 53
    ... depend on future net sales and earnings of the Darphin business. In May 2003, we entered into a license agreement to manufacture and sell fragrances and beauty products under the "Michael Kors" trademarks with Michael Kors L.L.C. At the same time, we purchased certain related rights and inventory...

  • Page 54
    ... included in the option contracts (notional value stated in U.S. dollars) are principally the Swiss franc ($21.9 million), Canadian dollar ($21.0 million) and Euro ($11.7 million). Interest Rate Risk Management We enter into interest rate derivative contracts to manage the exposure to fluctuations...

  • Page 55
    ... 250-day period. The measured value-at-risk, calculated as an average, for the twelve months ended June 30, 2003 related to our foreign exchange contracts was $7.6 million. As of June 30, 2003, the measured value-at-risk related to our interest rate contracts was $10.3 million. The model estimates...

  • Page 56
    ... to differ from expectations include, without limitation: (1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses, some of which have greater resources than we do; (2) our ability to develop, produce and market new products on which future...

  • Page 57
    ...) 2003 2002 ASSETS Current Assets Cash and cash equivalents Accounts receivable, net Inventory and promotional merchandise, net Prepaid expenses and other current assets Total current assets Property, Plant and Equipment, net Other Assets Investments, at cost or market value Deferred income taxes...

  • Page 58
    ...) 2003 2002 2001 STOCKHOLDERS' EQUIT Y Common stock, beginning of year Common stock, end of year Paid-in capital, beginning of year Stock compensation programs Paid-in capital, end of year Retained earnings, beginning of year Preferred stock dividends Common stock dividends Net earnings for the...

  • Page 59
    ...-term debt, net Proceeds from issuance of long-term debt, net Repayments of long-term debt Net proceeds from employee stock transactions Payments to acquire treasury stock Dividends paid Net cash ï¬,ows used for financing activities Effect of Exchange Rate Changes on Cash and Cash Equivalents Net...

  • Page 60
    ... OF BUSINESS The Estée Lauder Companies Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care products around the world. Products are marketed under the following brand names: Estée Lauder, Clinique, Aramis, Prescriptives, Origins, M.A. C, Bobbi Brown, La Mer, jane, Aveda...

  • Page 61
    ... but realistic, assumptions to model the Company's jane business, the Company determined that the carrying value of this unit was slightly greater than the derived fair value, indicating an impairment in the recorded goodwill. To 60 2003 2002 Inventory and promotional merchandise consists of: Raw...

  • Page 62
    ...been reported as the cumulative effect of a change in accounting principle, as of July 1, 2001, in the accompanying consolidated statements of earnings. On a product category basis, this write-down would have primarily impacted the Company's makeup category. During fiscal 2002, the Company recorded...

  • Page 63
    ...at June 30, 2003, $3.2 million, net of tax, related to foreign currency derivatives that the Company estimates will be classified to earnings as losses during the next twelve months assuming exchange rates at the time of settlement are equal to the forward rates as of June 30, 2003. Offsetting the...

  • Page 64
    ... and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date...

  • Page 65
    ...Average risk-free interest rate Average dividend yield Concentration of Credit Risk The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. Domestic and international sales are made primarily to department stores, specialty retailers...

  • Page 66
    ... to year-end, the Company acquired the Rodan & Fields skin care line (see Note 20). In May 2003, the Company entered into a license agreement for fragrances and beauty products under the "Michael Kors" trademarks with Michael Kors L.L.C. and purchased certain related rights and inventory from...

  • Page 67
    ... 2002, the Company recorded a restructuring charge related to repositioning certain businesses as part of its ongoing efforts to drive long-term growth and increase profitability. The restructuring focused on cost reduction opportunities related to the Internet, supply chain, globalization of the...

  • Page 68
    ... drive long-term growth and increase profitability. The restructuring and special charges focused on four areas: product fixtures for the jane brand; in-store "tommy's shops"; information systems and other assets; and global brand reorganization. The Company committed to a defined plan of action...

  • Page 69
    ...$476.6 million, $473.5 million and $476.4 million of undistributed earnings of international subsidiaries at June 30, 2003, 2002 and 2001, respectively. The Company intends to permanently reinvest these T H E E S T { E L AU DE R COM PA N I E S I N C. earnings in its foreign operations, except where...

  • Page 70
    ...266.2 195.9 46.5 195.4 $704.0 2002 $213.5 169.9 61.2 182.0 $626.6 Advertising and promotional accruals Employee compensation Restructuring and special charges Other NOTE 8 - DEBT The Company's short-term and long-term debt and available financing consist of the following: Available financing at...

  • Page 71
    ..., are recorded in accumulated other comprehensive income within equity. Furthermore, changes in the fair value of other derivative instruments are reported in current-period earnings. For each derivative contract entered into where the Company looks to obtain special hedge accounting treatment, the...

  • Page 72
    ... at a discount rate equal to rates available for debt with terms similar to the preferred stock. Foreign exchange and interest rate contracts: The fair value of forwards, swaps, options and treasury rate locks is the estimated amount the Company would receive or pay to terminate the agreements. 71...

  • Page 73
    ... with international employee transfers. Retirement Growth Account Plan (U.S.) The Retirement Growth Account Plan is a trust-based, noncontributory defined benefit pension plan. The Company's funding policy consists of an annual contribution at a rate that provides for future plan benefits...

  • Page 74
    ...return on plan assets Foreign currency exchange rate impact Employer contributions Plan participant contributions Settlements and curtailments Benefits paid from plan assets Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss (gain) Unrecognized prior service cost...

  • Page 75
    ... on total service and interest costs Effect on postretirement benefit obligations $0.7 $6.8 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Company's pension plans at June 30 are as follows: Pension Plans Retirement Growth Account 2003 (In...

  • Page 76
    ... TO RETIREES The Company provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. These benefits include health care coverage and severance benefits. Generally, the cost of providing...

  • Page 77
    ...stock options, stock appreciation rights and other stock awards to key employees and stock options, stock awards and stock units to nonemployee directors of the Company. As of June 30, 2003, 6,457,000 shares of Class A Common Stock were reserved and were available to be granted pursuant to the Plans...

  • Page 78
    ... exercise price. Subsequent to June 30, 2003, the Company granted options under the terms of the Plans described above to purchase an additional 2,211,200 of the Company's Class A Common Stock with an exercise price equal to fair market value on the date of grant. In addition, subsequent to June 30...

  • Page 79
    ... 2000 by an affiliate of Revlon, Inc. Revlon claimed, among other things, that five Estée Lauder products, two Origins foundations, a La Mer concealer and a jane foundation infringed its patent. Revlon sought, among other things, treble damages, punitive damages, equitable relief and attorneys...

  • Page 80
    .... Accordingly, net sales, depreciation and amortization, and operating income are available with respect to the manufacture and distribution of skin care, makeup, fragrance, hair care and other products. These product categories meet the Financial Accounting Standards Board's definition of operating...

  • Page 81
    ... and Amortization: Skin Care Makeup Fragrance Hair Care Other Operating Income: Skin Care Makeup Fragrance Hair Care Other Reconciliation: Restructuring and special charges Interest expense, net Earnings before Income Taxes, Minority Interest and Accounting Change GEOGRAPHIC DATA Net Sales: The...

  • Page 82
    ... 0.4 million shares of Class A Common Stock for $12.3 million bringing the cumulative total of acquired shares to 14.2 million under this program. Subsequent to June 30, 2003, the Company acquired the Rodan & Fields skin care line. The initial purchase price, paid at closing, was funded by cash...

  • Page 83
    ... Estée Lauder Companies Inc. and subsidiaries other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole. New York, New York August 8, 2003 T H E E S T { E L AU DE R COM...

  • Page 84
    ... Lauder Companies Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash ï¬,ows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States. New York, New York August...

  • Page 85
    ..., jane, Jo Malone, La Mer, Light Elements, Lucky Star, Lustre Lipstick, Lab Series for Men, M.A. C, ૺMagic by Prescriptives, MagnaScopic, MegaBites, Origins, Perfectionist, Pro Long Lash, Prescriptives, Re-Nutriv, Repairwear, Resilence Lift, Rich Rewards, Rosemary Mint Body Care, Sap Moss, Service...

  • Page 86
    BRINGING THE BEST TO EVERYONE WE TOUCH

  • Page 87
    T H E E S T { E L A U D E R C O M PA N I E S I N C . 767 F I F T H AV E N U E N E W YO R K , N E W YO R K 10 15 3