Estee Lauder 2008 Annual Report Download - page 68

66 THE EST{E LAUDER COMPANIES INC.
The following discussions of Operating Results by
Product Categories and Geographic Regions exclude the
impact of special charges related to our cost savings
initiative of $1.1 million and $92.1 million for the fi scal
years ended June 30, 2007 and 2006, respectively.
We believe the following analysis of operating results
better refl ects the manner in which we conduct and view
our business. See Note 21 of Notes to Consolidated
Financial Statements.
Product Categories
Fragrance operating results increased over 100%, or $20.4
million, to $28.1 million, as profi ts from higher interna-
tional net sales and lower spending at certain of our core
brands in the United States more than offset spending
behind new and developing brands. Hair care operating
results grew 60%, or $16.0 million, to $42.5 million as the
increase in net sales outpaced increased spending in sup-
port of new distribution points and product launches.
Operating results increased 3%, or $9.9 million, to $339.3
million in makeup, primarily as a result of higher net sales
and profi ts from our makeup artist brands, which more
than offset challenges among certain core brands. Skin
care operating results decreased 1%, or $4.9 million, to
$341.5 million. The results in this product category were
negatively impacted in fi scal 2007 by charges related to
our pharmacy channel. We recorded approximately $30
million for organizational costs, costs to streamline the
distribution of goods, and the impairment of goodwill and
other intangible assets. In addition, improvements in inter-
national skin care results were partially offset by chal-
lenges in certain core brands in the United States.
Geographic Regions
Operating income in the Americas decreased 2%, or $7.7
million, to $336.4 million, refl ecting spending behind stra-
tegic initiatives at our core brands, retailer consolidation
and costs to develop new brands in the United States.
Operating income growth from our makeup artist brands,
hair care business and our internet distribution partially
offset these results.
In Europe, the Middle East & Africa, operating income
increased 8%, or $23.9 million, to $321.4 million primarily
due to higher results of approximately $49 million from
our travel retail business, the United Kingdom, Russia and
Germany. Lower results from France partially offset these
improvements by approximately $10 million. The fi scal
2007 operating results in France refl ected the rebalancing
of inventory levels at certain retailers as well as strategic
investment spending behind the fi eld sales force. During
fi scal 2007, the region was negatively impacted by the
charges discussed above related to our pharmacy channel,
of exchange rate translation of approximately 20 basis
points and a decrease in obsolescence charges of approx-
imately 10 basis points. Certain of these items refl ect
savings achieved during fi scal 2007 from our cost savings
initiative, which commenced during fi scal 2006.
Since certain promotional activities are a component
of sales or cost of sales and the timing and level of
promotions vary with our promotional calendar, we have
experienced, and expect to continue to experience, fl uc-
tuations 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 improved to 64.1% of net sales as
compared with 64.3% of net sales in fi scal 2006. During
fi scal 2006, we recorded a $92.1 million charge to operat-
ing expenses related to the implementation of our cost
savings initiative that negatively impacted our operating
expense margin by approximately 140 basis points.
Partially offsetting this improvement was an increase of
approximately 50 basis points in selling, general and
administrative expenses refl ecting higher demonstration,
fi eld selling and training costs in support of our business.
In fi scal 2007, our operating expense margin was nega-
tively impacted by approximately 40 basis points resulting
from expenses related to our pharmacy channel for orga-
nizational costs, costs to streamline the distribution of
goods, and the impairment of goodwill and other intan-
gible assets. An increase in costs incurred related to the
implementation of SMI and higher stock-based compen-
sation expenses lowered our operating expense margin
by approximately 20 additional basis points, combined.
Overall operating expenses refl ected savings achieved
during fi scal 2007 from our cost savings initiative, which
commenced during fi scal 2006.
Changes in advertising, merchandising and sampling
spending result from the type, timing and level of activities
related to product launches and rollouts, as well as the
markets being emphasized.
OPERATING RESULTS
Due to the growth in net sales and the decreases in our
cost of sales and operating expense margins as previously
discussed, operating income increased 21%, or $130.3
million, to $749.9 million as compared with fi scal 2006.
Operating margins were 10.7% of net sales as compared
with 9.6% in fi scal 2006, which was negatively impacted
by 1.4% of net sales as a result of the special charge
related to our cost savings initiative.