Estee Lauder 2003 Annual Report Download - page 48

THEEST{E LAUDER COMPANIES INC.
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 doors and
increased distribution. In addition, strong sales of the Pure
Color Line of products, the worldwide launch of Gentle
Light Makeup and Illusionist Mascara contributed posi-
tively to net sales growth. Partially offsetting the increase
in net sales were lower sales of Two-in-One Eye Shadow,
Lucidity Makeup, and Long Last Soft Shine Lipstick.
Fragrance Net sales of fragrance products decreased 6%
or $67.8 million to $1.02 billion. This category was
impacted by the softness of the fragrance business in the
United States and the decline in our travel retail business,
which depends substantially on fragrance products. Lower
net sales of Beautiful, Estée Lauder pleasures, DKNY for
Women and certain existing Tommy Hilfiger products
were partially offset by the launch of T, a fragrance in the
Tommy Hilfiger line, and Intuition for Men, as well as
strong sales of Donna Karan Cashmere Mist.
Hair Care Hair care net sales increased 19% or $35.1 mil-
lion to $215.8 million. This increase was primarily the
result of growth from Aveda, which benefited from the
launch of texture lotion products and Color Conserve
Shampoo and an increase in the number of Company-
owned Aveda Experience Centers. 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 can-
nibalizing 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 was 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. 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 con-
trolling 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 contin-
ued to be 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 mar-
gin 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, particu-
larly in travel retail and fragrance.
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
emphasize 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 special charges, operating expenses
were 63.5% and 61.9% of net sales for the fiscal years
ended 2002 and 2001, respectively.
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