Estee Lauder 2005 Annual Report Download - page 45

Fragrance Net sales of fragrance products increased 3%
or $39.5 million to $1,260.6 million. The increase was due
to approximately $188 million in sales generated by the fis-
cal 2005 launches of DKNY Be Delicious and DKNY Be
Delicious Men, True Star from Tommy Hilfiger, Lauder
Beyond Paradise Men from Estée Lauder, Happy To Be
from Clinique and Donald Trump The Fragrance. Partially
offsetting the new product sales were decreases in sales
of approximately $92 million of Estée Lauder Beyond
Paradise, Aramis Life and Clinique Simply, which were
launched in the prior year, as well as decreases in sales of
approximately $49 million of Tommy Jeans and Tommy
from Tommy Hilfiger, certain other Aramis products and
Lauder Intuition Men from Estée Lauder. Excluding the
impact of foreign currency translation, fragrance net sales
increased slightly. We expect the fragrance category to
remain challenging in fiscal 2006.
Hair Care Hair care net sales increased 10% to $273.9
million. This increase amounting to $24.5 million was due
to sales growth from Aveda and Bumble and bumble prod-
ucts. Aveda net sales increased as a result of sales of new
professional color products and the introductions of Pure
Abundance and Damage Remedy hair care products, while
Bumble and bumble benefited from recent launches in its
hair and scalp treatment line of products and the initial
shipments of Crème de Coco shampoos and conditioners.
Both of these brands also benefited from new points of
distribution. Excluding the impact of foreign currency trans-
lation, hair care net sales increased 9%.
Geographic Regions
Net sales in the Americas increased 7% or $233.4 million
to $3,382.2 million. This region experienced growth in all
major categories which was fueled by the diversification in
our product offerings as new products and brands miti-
gated challenges among certain core brands and success-
ful prior year launches. In the United States, our makeup
artist and hair care brands along with products from our
Aramis and Designer Fragrances Division contributed
approximately $147 million to the increase. In addition,
higher net sales in Canada and the inclusion of BeautyBank
products contributed approximately $78 million, collec-
tively. The Americas region may be adversely impacted by
the August 2005 merger of Federated Department Stores,
Inc. and The May Department Stores Company.
In Europe, the Middle East & Africa, net sales increased
13% or $248.4 million to $2,118.6 million primarily due to
higher net sales in the United Kingdom, our travel retail
business, Spain, Portugal, South Africa and Greece of
approximately $181 million, collectively. The increase in
net sales included benefits from the effect of the weaker
THE EST{E LAUDER COMPANIES INC.
U.S. dollar as compared to various European currencies.
Excluding the impact of foreign currency translation, net
sales in Europe, the Middle East & Africa increased 7%.
Net sales in Asia/Pacific increased 8% or $64.1 million
to $835.5 million. This increase reflected higher net sales of
approximately $51 million in China, Hong Kong, Australia
and Taiwan, partially offset by lower sales in Japan of
approximately $3 million. Excluding the impact of foreign
currency translation, Asia/Pacific net sales increased 4%.
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 25.5%
and remained unchanged compared with the prior year.
Favorable net changes in production and supply chain
efforts of approximately 30 basis points, primarily driven
by favorable material sourcing, were offset by the net
change in the mix of our business within our geographic
regions and product categories, as discussed above,
which includes the impact of the BeautyBank brands.
Changes in exchange rates compared with the prior year
had a de minimis net impact on our cost of sales margin.
The higher price of oil is beginning to impact our cost of
raw materials and componentry, however, we believe this
will not have a material adverse effect on our cost of sales
margin in the near future.
Since certain promotional activities are a component of
sales or cost of sales and the timing and level of promo-
tions vary with our promotional calendar, we have experi-
enced, and expect to continue to experience, fluctuations
in the cost of sales percentage. In addition, future cost of
sales mix may be impacted by the inclusion of new brands
which have margin and product cost structures different
from those of our existing brands.
OPERATING EXPENSES
Operating expenses as a percentage of net sales improved
to 63.1% from 63.4% in the prior fiscal year. Our planned
increase in advertising, merchandising and sampling over
the prior year of approximately 50 basis points was offset in
full by our ongoing cost containment efforts to maintain
expenses in line with our business needs. We also realized
a benefit of approximately 30 basis points from the elimi-
nation of royalty payments previously made to Mrs. Estée
Lauder. In fiscal 2006, we will experience an increase in
operating expenses due to the recognition of costs related
to employee stock-based compensation as a result of
the adoption of SFAS No. 123(R), “Share-Based Payment”
(see “Recently Issued Accounting Standards”).
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