Estee Lauder 2008 Annual Report Download - page 61

THE EST{E LAUDER COMPANIES INC. 59
While we believe that the estimates that we have made
are proper and the related results of operations for the
period are presented fairly in all material respects, other
assumptions could reasonably be justifi ed that would
change the amount of reported net sales, cost of sales,
operating expenses or our provision for income taxes as
they relate to the provisions for anticipated sales returns,
allowance for doubtful accounts, inventory obsolescence
reserve and income taxes. For fi scal 2008, had these esti-
mates been changed simultaneously by 2.5% in either
direction, our reported gross profi t would have increased
or decreased by approximately $5.2 million, operating
expenses would have changed by approximately $0.7 mil-
lion and the provision for income taxes would have
increased or decreased by approximately $1.7 million.
The collective impact of these changes on operating
income, net earnings and net earnings per diluted com-
mon share would be an increase or decrease of approxi-
mately $5.9 million, $7.6 million and $.04, respectively.
RESULTS OF OPERATIONS
OVERVIEW
We manufacture, market and sell skin care, makeup, fra-
grance and hair care products which are distributed in
over 140 countries and territories. We believe that the
best way to increase stockholder value is to provide our
customers and consumers with the products and services
that they have come to expect from us in the most effi -
cient and profi table manner. With this goal in mind, we
have developed a long-term strategy based on the follow-
ing fi ve imperatives:
1. Optimize brand portfolio
2. Strengthen product categories
3. Strengthen and expand geographic presence
4. Diversify and strengthen distribution channels
5. Achieve operational and cost excellence
In fi scal 2008, we continued to fi nd ways to strengthen
our core brands and product categories, maximize high-
growth brands, and incubate and develop next generation
brands. Net sales from Estée Lauder and Clinique grew on
a global basis, fueled by strong demand outside of the
United States where these brands generated approxi-
mately two-thirds of their net sales. We took measures to
improve our business at the point of sale by investing in
new modular display and tester units for the Estée Lauder
brand at all North American department store locations
and increased our focus to improve the service provided
by Estée Lauder Beauty Advisors. Our Clinique brand
sponsored a program to improve the consumer experi-
ence at U.S. and international department stores.
not more-likely-than-not that a tax benefi t will be sus-
tained, no tax benefi t has been recognized in the fi nancial
statements. Where applicable, associated interest and
penalties have also been recognized. Although the out-
come relating to these exposures is uncertain, in manage-
ment’s opinion adequate provisions for income taxes have
been made for estimable potential liabilities emanating
from these exposures. In certain circumstances, the ulti-
mate outcome of exposures and risks involves signifi cant
uncertainties which render them inestimable. If actual
outcomes differ materially from these estimates, including
those that cannot be quantifi ed, they could have a mate-
rial impact on our results of operations, as we experienced
in the fourth quarter of fiscal 2006 (see “Results of
Operations, Fiscal 2007 as Compared with Fiscal 2006 —
Provision for Income Taxes”).
DERIVATIVES
We account for derivative fi nancial instruments in accor-
dance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, which
establishes accounting and reporting standards for deriva-
tive instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities.
This statement also requires the recognition of all deriva-
tive instruments as either assets or liabilities on the bal-
ance sheet and that they be measured at fair value.
We currently use derivative fi nancial instruments to
hedge certain anticipated transactions and interest rates,
as well as receivables and payables denominated in for-
eign currencies. We do not utilize derivatives for trading
or speculative purposes. Hedge effectiveness is docu-
mented, assessed and monitored by employees who are
qualified to make such assessments and monitor the
instruments. Variables that are external to us such as
social, political and economic risks may have an impact
on our hedging program and the results thereof. For a
discussion on the quantitative impact of market risks
related to our derivative fi nancial instruments, refer to
“Liquidity and Capital Resources — Market Risk.”
QUANTITATIVE ANALYSIS
During the three-year period ended June 30, 2008 there
have not been material changes in the assumptions under-
lying these critical accounting policies, nor to the related
signifi cant estimates. With the exception of our tax settle-
ment with the Internal Revenue Service in the fourth quar-
ter of fi scal 2006, which fi nalized the ultimate liability for
exposures which were previously inestimable, the results
of our business underlying these assumptions have not
differed signifi cantly from our expectations.