Estee Lauder 2005 Annual Report Download - page 48

THE EST{E LAUDER COMPANIES INC.
Geographic Regions
Net sales in the Americas increased 7% or $217.0 million
to $3,148.8 million, primarily reflecting growth from our
newer brands, the success of newly launched products and
increases from most of our freestanding retail stores, all of
which reflected the strengthening retail environment.
In Europe, the Middle East & Africa, net sales increased
24% or $363.8 million to $1,870.2 million. About $272
million was due to higher net sales from our travel retail
business, the United Kingdom, Spain, Greece and South
Africa, as well as the inclusion of a full year of net sales of
the Darphin line of products. The increase includes the
favorable effects of foreign currency exchange rates to
the U.S. dollar. Excluding the impact of foreign currency
translation, net sales in Europe, the Middle East & Africa
increased 14%.
Net sales in Asia/Pacific increased 17% or $113.6 mil-
lion to $771.4 million, primarily due to higher net sales of
approximately $83 million in Japan, Australia, Taiwan, China
and Thailand. Excluding the impact of foreign currency
translation, net sales in Asia/Pacific 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 improved to
25.5% from 26.0% reflecting production and supply chain
efficiencies of approximately 70 basis points and lower
costs from promotional activities of approximately 60 basis
points. Partially offsetting these improvements were
changes in exchange rates of approximately 40 basis points
and costs related to inventory obsolescence and recondi-
tioning and re-handling of goods of approximately 20 basis
points. Also offsetting these improvements were costs
associated with higher travel retail sales, which contributed
approximately 10 basis points. Travel retail has a higher cost
of goods sold percentage because of its higher mix of
fragrance sales coupled with its margin structure.
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
than our existing brands.
OPERATING EXPENSES
Our fiscal 2003 results, as reported in conformity with U.S.
generally accepted accounting principles (“GAAP”),
included an 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. The amount of the charge in
this case is significantly larger than similar charges we have
incurred individually or in the aggregate for legal proceed-
ings in any prior year, and, at that time, we did not expect
to take a charge of a similar magnitude for a single matter
like it in the near future. In the following discussions, we
include the results as reported and the non-GAAP results.
We have presented the non-GAAP results because of the
special nature of the charge, which affects comparability
from period to period. We believe that such measures pro-
vide investors with a view of our ongoing business trends
and results of continuing operations. This is consistent with
the approach used by management in its evaluation and
monitoring of such trends and results and provides
investors with a base for evaluating future periods. There
were no events or transactions subsequent to fiscal 2003
for which we believe such a discussion would be relevant.
In fiscal 2003, operating expenses and operating
income in accordance with GAAP were $3,267.9 million
or 64.1% of net sales and $503.7 million or 9.9% of net
sales, respectively. Before the charge (non-GAAP results)
operating expenses would have been $3,245.9 million or
63.7% of net sales and operating income would have been
$525.7 million or 10.3% of net sales.
While we consider the non-GAAP financial measures
useful in analyzing our results, it is not intended to replace,
or act as a substitute for, any presentation included in the
consolidated financial statements prepared in conformity
with GAAP.
Fiscal 2004 operating expenses decreased to 63.4% of
net sales as compared with 64.1% of net sales in fiscal
2003. Before considering the effect of the special charge,
operating expenses as a percentage of net sales decreased
30 basis points from 63.7% in fiscal 2003. Operating
expenses as a percentage of net sales decreased approxi-
mately 100 basis points primarily due to the higher growth
rate in net sales, particularly in the travel retail business, as
well as our ongoing cost containment efforts to maintain
expenses in line with our business needs, partially offset
by operating expenses related to BeautyBank, the higher
operating costs associated with newly acquired brands
and expenses related to compliance with new regulatory
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