Estee Lauder 2003 Annual Report Download - page 47

THEEST{E LAUDER COMPANIES INC.
Product Categories
Operating income more than doubled to $32.1 million in
fragrance due primarily to improved results from our
travel retail business. Operating income increased 10%
to $273.2 million in skin care and 8% to $198.0 million
in makeup reflecting higher net sales, partially offset
by strategic spending on advertising, sampling and
merchandising, particularly in the earlier portion of the
current year. Operating income increased $1.1 million or
8% to $14.8 million in hair care, reflecting improvements
in Aveda and Bumble and bumble, as well as higher
profits in the latter portion of the year outside the
United States.
Geographic Regions
Operating income in the Americas increased 11% or
$23.8 million to $246.7 million due to sales growth, the
benefits of our prior restructurings and continued cost
containment efforts. Operating income also benefited
from the results of strategic efforts related to product sup-
port spending in the earlier part of the year that led to
increased net sales during the year. In Europe, the Middle
East & Africa, operating income increased 27% or $47.8
million to $227.7 million primarily due to the improved
operating results in the United Kingdom as well as
increased results generated from our travel retail business.
As described elsewhere, profitability in the region has
been and will continue to be affected by current interna-
tional uncertainties. In Asia/Pacific, operating income
decreased 24% or $13.3 million to $42.7 million. This
decrease reflects improved results in Korea and Thailand,
which were more than offset by a decrease in Australia,
which derived a benefit in the prior-year period from a
change in our retailer arrangements.
INTEREST EXPENSE, NET
Net interest expense was $8.1 million as compared with
$9.8 million in the prior year. The decrease in net interest
expense was primarily due to lower outstanding net bor-
rowings and higher interest income generated by higher
invested cash balances. This improvement was partially
offset by a higher effective interest rate, which resulted
from the increased proportion of fixed rate debt as com-
pared with variable rate debt in the same period last year.
In May 2003, we executed a fixed-to floating interest rate
swap on our $250.0 million 6% Senior Notes due 2012.
See “Liquidity and Capital Resources” for further details.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, for-
eign, state and local income taxes. The effective rate for
income taxes for the fiscal year was 33.0% as compared
with 34.5% in the prior-year period. These rates differ
from statutoryrates,reflecting the effect of state and local
taxes, tax rates in foreign jurisdictions and certain non-
deductible expenses. The decrease in the effective tax
rate was principallyattributable to ongoing tax planning
initiatives, including the favorable settlement of certain tax
negotiations and the reduction of the overall tax rate relat-
ing to the Company’s foreign operations. In addition, the
tax effect of the charge related to the pending settlement
of a legal proceeding in late fiscal 2003 contributed to an
effective tax rate slightly lower than previously expected.
FISCAL 2002 AS COMPARED WITH FISCAL 2001
NET SALES
Net sales increased 2% or $76.0 million to $4.74 billion
reflecting growth in the makeup, skin care and hair care
categories, partially offset by a decline in fragrance net
sales. Excluding the impact of foreign currency translation,
net sales increased 3%. The unusual events that occurred
during fiscal 2002 and their effect on the economy,
particularly in the United States, adversely impacted our
business. In addition, the decline in worldwide travel
during most of fiscal 2002 led to a 13% reduction in our
travel retail sales. Sales growth from certain newer
brands and recently launched products partially offset
these decreases.
The following discussions of Net Sales by Product
Categories and Geographic Regions exclude the impact
of the restructurings in fiscal 2002 and fiscal 2001.
Neither restructuring was material to our net sales, and we
believe the following analysis of net sales better reflects
the manner in which we conduct and view our business.
For a discussion of the restructurings, see “Operating
Expenses—Restructuring and Special Charges” in this
section. The tables on page 43 reconcile these results to
operating income as reported in the consolidated state-
ment of earnings.
Product Categories
Skin Care Net sales of skin care products increased 3%
or $42.6 million to $1.70 billion. The net sales increase is
primarilyattributable to recently launched products such
as Total Turnaround Visible Skin Renewer, Advanced
Night Repair Eye Recovery Complex, Moisture Surge
Extra Thirsty Skin Relief and Moisture Surge Eye Gel,
APerfect World line of products, LightSource Trans-
forming Moisture Lotion and Cream, and Re-Nutriv
Ultimate Lifting Creme. Partially offsetting these increases
were lower net sales of certain existing products such as
46