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THE EST{E LAUDER COMPANIES INC.
2009 ANNUAL REPORT

Table of contents

  • Page 1
    THE EST{E LAUDER COMPANIES INC. 2009 ANNUAL REPORT

  • Page 2
    ... Report 90 Financial Section 155 Management's Report on Internal Control over Financial Reporting 156 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 157 Report of Independent Registered Public Accounting Firm 158 Stockholder Information

  • Page 3
    Mrs. Estée Lauder at Sakowitz Brothers department store in Houston, Texas in the early 1950's. 2

  • Page 4
    ...our stores around the world and how we delight our consumer and continue to meet her desire for the ultimate product efficacy and prestige experience. Simply put, High-Touch is bringing the best to everything we do and one of the ways we will achieve our Company's vision to be the global leader in...

  • Page 5
    ... a global economic downturn. Under the strong leadership of our Executive Chairman, William P. Lauder, and our President and Chief Executive Officer, Fabrizio Freda, we quickly took action to respond to the external environment. The following report will provide detail on our new corporate...

  • Page 6
    ...cer, I want to thank William Lauder for the outstanding accomplishments our Company achieved while he was Chief Executive Officer. Thanks to his knowledge and keen insights, we expanded our international reach, increased our presence in new channels of distribution - particularly the fast-growing...

  • Page 7
    ... work, ï¬,exibility and skill. The worldwide recession impacted sales in all regions and brands to varying degrees, which is reï¬,ected in our lower sales and earnings. Retail sales of consumer goods, including beauty products, fell sharply, due to the decline in consumer spending. In the face of...

  • Page 8
    ... scope, distribution channels and product offerings and have a strong financial foundation and clear path for future growth. We possess all these attributes, and many more, including decades of brand-building and commercial expertise, a portfolio of world-class brands and a long history of...

  • Page 9
    ...'s new four-year strategy. I am particularly proud of how our talented people successfully managed the business against this challenging backdrop. Despite reduced consumer spending, we were able to gain share in many important countries and channels, thanks to our employees' hard work and creative...

  • Page 10
    ... throughout our regions. We will use even more consumer understanding and market intelligence to stimulate our creative process across product development, innovation, distribution, packaging and our personalized service model. Another critical component of our strategy is to better leverage our...

  • Page 11
    ... our brands, and innovating high-quality products and services, we are positioning The Estée Lauder Companies to be a profitable global leader in prestige beauty. Importantly, this will continue to be a workplace where people can aspire to greater levels of personal development and achievement and...

  • Page 12
    2009 FINANCIAL HIGHLIGHTS 11

  • Page 13
    ...2008 2009 2005 2006 2007 2008 2009 * Refer to Selected Financial Data and related footnotes on page 91. †In April 2006, we completed the sale of certain assets and operations of the reporting unit that marketed and sold Stila brand products. As a result, statements of earnings information...

  • Page 14
    ... International U.S. NET SALES BY DISTRIBUTION CHANNEL 7% 5% 7% 7% 14% 23% Other (including distributors) Salons / Spas Travel Retail Retail Stores Perfumeries International Department Stores 8% 4% 7% 9% 15% 27% 37% North American Department Stores 2005 30% 2009 HISTORICAL NET SALES GROWTH...

  • Page 15
    14

  • Page 16
    WHAT OUR BES T, BRIGHTES T AND MOS T CREATIVE PEOPLE CAN ACHIEVE. 15

  • Page 17
    M.A. C Hello Kitty collection. 16

  • Page 18
    ... outreach, our extraordinary portfolio of brands touched half a billion consumers globally in fiscal 2009. In this difficult economic environment, our consumers' definition of value is rapidly changing. We responded with exciting point-of-service solutions and new ways of utilizing social media...

  • Page 19
    ... emphasis on product quality, performance, average cost over time and the personal service provided by our highly trained beauty advisors and makeup artists. Two brands that evolved their High-Touch service models and communicated value to consumers in fiscal 2009 were Bobbi Brown and Origins. At...

  • Page 20
    L A MER RAISED OVER $250,000 THIS Y EAR FOR OCEANA, THE WO R LD'S L ARGEST INTERNATIONAL OCEAN ADVOCACY GROUP. World Ocean Day edition Crème de la Mer. Bobbi Brown demonstrates her 10-Step Beauty routine for editors in Dublin. 19

  • Page 21
    ... our brands to meet consumers' changing tastes and needs. At Clinique's new Dermatological Concern display towers, for example, products are grouped together according to one of four common skin care concerns. These "grab and go" kits allow the consumer to decide the level of service she would...

  • Page 22
    ..., global marketing campaign to launch its reformulated Advanced Night Repair Synchronized Recovery Complex (ANR). The brand ADVANCED NIGHT REPAIR WAS UPDATED IN 2009 TO PROVIDE CONTINUOUS, NIGHTTIME REPAIR WITH REVOLUTIONARY TECHNOLOGY. Estée Lauder Advanced Night Repair Synchronized Recovery...

  • Page 23
    ... of this iconic product. This message appealed to the consumer with both science and emotion with the headline, "DNA Damage . Is it aging your skin too fast? Our scientists definitely think so. New. Advanced Night Repair. The revolutionary new formula beautiful skin can't live without." The newest...

  • Page 24
    ... to women about beauty and self image, launched a Twitter profile (@AskBobbiBrown) which allows the brand's makeup artists around the world to answer questions and communicate with consumers directly. In addition to providing a new way to evolve our signature High-Touch personal service, Twitter...

  • Page 25
    ... be another important channel of distribution for a number of our brands, not only in the U.S., but in many countries around the world. After consumers see our brands demonstrated on television by our spokespersons, there is often a noticeable increase in department store sales. Beyond computer and...

  • Page 26
    ... of our services. These efforts are helping us meet our collective goal to bring traffic back into department stores. To better adapt our products and marketing to satisfy the desires of our regional consumers, we started to make a more focused effort to leverage research and development, along...

  • Page 27

  • Page 28
    T H E CO L L E C T I V E E F F O R T S O F O U R E M P LOY E E S W I L L ENA BLE US TO BE A TRULY GLOBAL COMPANY.

  • Page 29
    ... Jasmine White Moss advertising campaign. In line with our new four-year strategy, we are increasing our focus on internal integration. Our first step was to restructure the business to best leverage our global strengths across brands, regions and functions. We placed our senior executives in the...

  • Page 30
    ... long-term strategic priorities, achieving annual goals and addressing critical global business issues and opportunities. • The Program Management Team (PMT) is a subcommittee of the ELT and oversees approximately two dozen initiatives that fall into five categories: sales growth, cost of goods...

  • Page 31
    Natural ingredients displayed at an Origins editor event. Under the guidance of these leadership teams, our employees are working even more collaboratively and productively. This is leading to improved productivity and a greater ability to deliver sustainable, profitable growth for the Company. ...

  • Page 32
    ... BRANDS Estée Lauder, M.A. C, Bobbi Brown, Prescriptives, La Mer, Jo Malone, Tom Ford Beauty PRESTIGE SKIN CARE AND ALTERNATIVE CHANNELS Clinique, Origins, Ojon FRAGRANCE LICENSING AND CREATIVE INCUBATOR Aramis and Designer Fragrances, BeautyBank SALON AND PHARMACY CHANNEL Aveda, Bumble and bumble...

  • Page 33
    JEWELRY BY FRED LEIGHTON MICHAEL KORS BEAUTY THE N EW FRAGRANCE FOR WOM EN GET RED CARPET READY AT VERYHOLLYWOOD.COM Very Hollywood Michael Kors advertisement. 32

  • Page 34
    ... women's greatest skin care concern is whiteness, while many Chinese women are more concerned with dryness. This focused approach to understanding what consumers desire and then creating products to address their specific concerns led to a 17 percent local currency sales increase in our skin care...

  • Page 35
    Clinique Dramatically Different Moisturizing Gel being manufactured in Melville, N.Y. 34

  • Page 36
    ... INTEGRATION EFFORTS, WE ACHIEVED A 16 PERCENT SKU REDUCTION IN FISCAL 2009. Adding to the effectiveness in this area is the improved management and integration of our supply chain across the Company. Our supply chain team is enhancing its involvement at each stage of the product life cycle, from...

  • Page 37

  • Page 38
    WE CONTINUE TO SURPRISE AND DELIGHT O UR CONSUMERS.

  • Page 39
    ...Our employees are at the crux of this creativity and over the past year we have developed an innovation strategy that will help us focus on fewer, bigger ideas in high-priority areas, source the best ideas from An advertisment for Aveda's Dry Remedy Hair Care collection. Bumble and bumble Bandball...

  • Page 40
    A Research and Development chemist works on a new Clinique foundation formula. 39

  • Page 41
    ... regional teams will work closely with the existing Research and Development laboratories to create regionally relevant products and packaging to meet the demanding expectations of consumers in these markets. BELOV ED WON A FIFI F R AGRANCE OF THE YEAR AWARD. American Beauty's Beloved fragrance...

  • Page 42
    An advertisement for Estée Lauder Time Zone Line and Wrinkle Reducing Creme SPF 15. Additionally, we are enhancing our capabilities in consumer research and continuing to infuse consumer insights into our creativity and product development. This will provide an important catalyst to our evolving ...

  • Page 43
    ... to boost skin's natural youthful function. Following a strong consumer response to this moisturizer, the brand expanded the line by introducing Time Zone Anti-Line/Wrinkle Eye Creme. To address the issue of skin redness, Clinique introduced Redness Solutions Instant Relief Mineral Powder, a unique...

  • Page 44
    Clinique Redness Solutions Instant Relief Mineral Powder works as a makeup and skin care product. 43

  • Page 45
    ...helps restore firmness and elasticity and repair the appearance of lines and wrinkles. So what you see and feel is a tighter, tauter complexion that appears significantly younger. Growing older will just have to wait. An advertisement for Origins Youthtopia Age-correcting serum with Rhodiola. 44

  • Page 46
    ... the power of natural ingredients. The result was Grassroots Research Labs' Vitamin C Power Brightening Cream SPF 25, a hydrating cream that brightens the skin and evens out skin tone. It was launched at Kohl's Department Stores, where it ranked among the top five skin care products at the retailer...

  • Page 47
    ... product lines. When Bumble and bumble, our stylist-driven hair care brand, wanted to develop technologically advanced gels, the brand mined both professional hair stylist and consumer insights and set out to create products that were true to its edgy personality and would surpass anything offered...

  • Page 48
    ... the tools that will position The Estée Lauder Companies to achieve our objectives of sustainable, profitable growth over the long term. Our commitment to building, growing and nurturing our brands will forever remain at the core of our business. In 2009 we began taking the steps that will allow...

  • Page 49
    48

  • Page 50
    PORTFOLIO OF BRANDS The four clusters of The Estée Lauder Companies' brands are organized according to channel and consumer segmentation, allowing for better leverage of scale and strategic integration, according to market segments and growth potential. 49

  • Page 51
    ... color cosmetics, skin care, professional makeup brushes and tools, accessories and fragrance. Select products: Luminous Moisturizing Foundation, Creamy Concealer Kit, Shimmer Brick Compact, Long-Wear Gel Eyeliner, Long-Wear Cream Shadow, Lip Color, Hydrating Eye Cream, Extra line of skin care...

  • Page 52
    ...La Mer has expanded from the original, best-selling Crème de la Mer into a complete range of facial skin care and body products. Select products: Crème de la Mer, The Eye Concentrate, The Lifting Face Serum and The Hydrating Infusion. Jo Malone joined The Estée Lauder Companies' family of brands...

  • Page 53
    ... 15, High Impact Mascara, Almost Lipstick, Superbalanced Makeup, Clinique Happy and Skin Supplies for Men. Origins was founded by The Estée Lauder Companies in 1990 as the first department store wellness brand. The mission at Origins is to create high-performance natural skin care products that...

  • Page 54
    ... needs to develop products with proven results specifically targeting men's skin care concerns. Select products: Daily Moisture Defense Lotion SPF 15, Maximum Comfort Shave Cream, Active Hand Cream and Active Body Wash. Tommy Hilfiger joined The Estée Lauder Companies' family of brands when the...

  • Page 55
    ...Department Stores and online at kohls.com. Select products: Beloved perfume spray, Perfect Mineral Powder Makeup, Beauty Boost Overnight Radiance Cream and Ultimate Diamond Restorative Anti-Aging Cream. One of the original BeautyBank launches, FLIRT! was established in 2004. FLIRT! is a makeup line...

  • Page 56
    ... Treatment, Microcrystal Skin Refinisher and All Firm Moisture Cream. Sean John joined The Estée Lauder Companies' family of brands when the exclusive global license agreement was signed in 2005. It is sold in more than 35 countries and territories. Sean John's first fragrance, Unforgivable, was...

  • Page 57
    ... In 2008, Grassroots Research Labs debuted across Europe at Sephora. Grassroots Research Labs' products are available exclusively in the United States at Kohl's Department Stores and online at kohls.com. Select products: Pomegranate Super Anti-Oxidant Cream & Serum, Blue Algae Enriched Firming Cream...

  • Page 58
    SALON AND PHARMACY CHANNEL Aveda joined The Estée Lauder Companies' family of brands in 1997 and is sold in approximately 30 countries and territories. Aveda produces premium professional and consumer hair care, styling, skin, body, spa, aroma, makeup and lifestyle products, as well as ...

  • Page 59
    ..., LLC IRVINE O. HOCKADAY, JR.1 Retired President and Chief Executive Officer Hallmark Cards, Inc. AERIN LAUDER Senior Vice President Creative Director Estée Lauder JANE LAUDER Senior Vice President General Manager Origins LEONARD A. LAUDER Chairman Emeritus The Estée Lauder Companies Inc. 58

  • Page 60
    WILLIAM P. LAUDER3 Executive Chairman The Estée Lauder Companies Inc. RICHARD D. PARSONS2,3 Chairman Citigroup, Inc. LYNN FORESTER DE ROTHSCHILD3 Chief Executive E L Rothschild LLC BARRY S. STERNLICHT2,4 Chairman and Chief Executive Officer Starwood Capital Group 1. Member of Audit Committee ...

  • Page 61
    ...GEDEON Executive Vice President Global Research and Development Corporate Product Innovation Package Development RICHARD W. KUNES Executive Vice President Chief Financial Officer EVELYN H. LAUDER Senior Corporate Vice President LEONARD A. LAUDER Chairman Emeritus RONALD S. LAUDER Chairman Clinique...

  • Page 62
    ..., we have focused on describing our efforts in the following areas: Our Employees, Global Philanthropy, Sustainable Packaging, Science and Safety, Environmental Stewardship and Supply Chain. This summary serves as a precursor to our CSR report, which will be available online in fiscal 2010. 61

  • Page 63
    62

  • Page 64
    ... at ELC headquarters in NYC, previewing the 2009 BCA Campaign Pink Products. William P. Lauder in Denver, CO at the groundbreaking for an organic garden at an elementary school in support of the Grand Opening of Origins at Cherry Creek North, September, 2008. Jane Lauder at Origins Benefit Event at...

  • Page 65
    ... belief that every woman can be beautiful. Part of her legacy lies in the products and brands she created and the other part is reï¬,ected in the culture of values, quality, style and unsurpassed service that has made The Estée Lauder Companies a global leader in prestige beauty. She had a personal...

  • Page 66
    TH E SEVEN AVEDA PR ODUCTS ACHIEVING G OL D LEVEL C2C CERT IFICATION. In 1991, we formally established an environmental sustainability program and in 2007 we published our first CSR report providing insight into our larger commitment to all of our stakeholders. Since our CSR report was published, ...

  • Page 67
    ... to our business. We will continue to learn from the best practices of our brands and employees to unite and strengthen our efforts across brands, regions and functions as we strive to: • Provide consumers with innovative cosmetic products of the highest quality • Deliver outstanding service by...

  • Page 68
    ... recycling of ELC products SUSTAINABLE PACKAGING RESEARCH AND DEVELOPMENT ENVIRONMENTAL STEWARDSHIP Achieve additional certifications regarding biodiversity, environmental and climate impacts of raw materials Reduce global energy consumption by 30 percent by fiscal 2010 from a 1999 normalized...

  • Page 69
    ...a work environment in which individuals of different races, genders and gender identities, sexual orientation, ethnicities, religions and backgrounds can excel. For the past four years we have received a perfect score on the Corporate Equality Index, sponsored by the Human Rights Campaign Foundation...

  • Page 70
    ... for our various green teams by hosting quarterly meetings to share best practices and event information and brainstorm ideas. These six teams are currently active in our New York offices and facilities; however, we expect that green teams and committees will be formed globally throughout the next...

  • Page 71
    .... Originated in the late 1980's by Mr. Leonard A. Lauder, Think Smart was developed to encourage our employees to submit ideas on how we can work smarter and more cost effectively. The program, which was re-launched four years ago, has received thousands of ideas resulting in many cost-saving and...

  • Page 72
    ...our facilities. GLOBAL PHILANTHROPY Our commitment to philanthropy and community outreach originated with the many examples from the Lauder family. Our employees are a powerful engine for good and represent our concern for the betterment of health and human services, the environment, education, the...

  • Page 73
    Buildings illuminated in pink as part of The Estée Lauder Companies' Breast Cancer Awareness Campaign: Tokyo Tower, Japan; Congreso de la Nación, Argentina; the "largest" human Pink Ribbon in Dubai, October 2008. 72

  • Page 74
    ... the appointment of World Pink Ribbon Ambassadors. The BCA Campaign is supported by 14 of The Estée Lauder Companies' brands: Aveda, Bobbi Brown, Bumble and bumble, Clinique, Darphin, Donna Karan, Estée Lauder, Jo Malone, La Mer, Lab Series Skincare For Men, Ojon®, Origins, Prescriptives and Sean...

  • Page 75
    ..., our employees continue to raise funds for breast cancer research worldwide. In fiscal 2010, The BCA Campaign was selected as one of five finalists for the U.S. Chamber of Commerce Business Civic Leadership Center (BCLC) 2009 Corporate Citizenship Awards in the "Partnership Award" category...

  • Page 76
    ... sold worldwide, and through the annual Kids Helping Kids Card Program, M.A. C, together with its retailers, has provided over $148 million to date for the M.A. C AIDS Fund. The M.A.C AIDS Fund is organizing its first brand-wide volunteer day for World AIDS Day on December 1, 2009. M.A.C employees...

  • Page 77
    ... on carton Origins launches "Return to Origins" Recycling Program Corporate Package Development implements sustainable packaging rules with all brands Aveda launches "Recycle Caps with Aveda" program and produces first product, "Clove Shampoo," with the collected resin Aveda receives Cradle...

  • Page 78
    ... packaging. SCIENCE AND SAFETY The Estée Lauder Companies has eight Research and Development facilities around the world. We take great care to meet our own exceedingly high standards and to comply with applicable regulations for land, air and water in every country in which our products are sold...

  • Page 79
    ... details concerning product composition to our corporate sustainability efforts to complete full Cradle to Cradle assessments. Employees and supporters at an Aveda "Walk for Water" event, a new global initiative that acknowledges the daily struggle of over one billion people around the world who do...

  • Page 80
    ... Estée Lauder Companies to seek the complete elimination of animal testing on cosmetic products and ingredients worldwide. ENVIRONMENTAL STEWARDSHIP In 1991, long before environmental sustainability planning became an expected business practice, a small group of innovative senior executives at ELC...

  • Page 81
    ... EST{E LAUDER COMPANIES HAS PROACTIVELY MANAGED ENVIRONMENTAL AND SAFET Y ISSUES SINCE 1991 Aveda Distribution 2008 Green Power Partnership Installs Solar Panels Supplier Auditing First VPP Aveda MNSTAR First CSR Report published 2007 Installed Solar Panels at Oakland Facility Purchased renewable...

  • Page 82
    ... economically feasible • The purchase of carbon offsets for our electricity use where we cannot reduce or create our own clean energy. The combined global renewable energy credits purchases yielded an annual renewable electricity purchase of more than 77,745 MWh for the Company in fiscal 2008...

  • Page 83
    ... Accounting and Reporting Standard and the U.S. EPA Climate Leaders Design Principles Guidance and included emissions from our globally owned and leased manufacturing, warehouse, distribution, office and retail spaces, along with emissions from business travel and the direct use of our products...

  • Page 84
    .... We are currently developing a comprehensive plan to further minimize our water footprint. RECYCLING We strive to design our products in a way that minimizes manufacturing waste and emphasizes recycling as the best option for managing any waste generated. In fiscal 2008, our manufacturing...

  • Page 85
    ... communities and individuals around the world. Aveda is considered one of the original environmental brands. As one of its many contributions to innovation, it was among the first prestige beauty brands to develop sustainable packaging. Aveda uses 96 percent PCR plastic in its new Aveda Men Pure...

  • Page 86
    ... who have lost their families, to help create an unforgettable holiday for the children of the program. Clinique has been developing sustainable packaging for its products using 80 percent recycled aluminum in its skin care jar caps and reducing the size of its promotional cartons by 15 percent...

  • Page 87
    ... BCA Campaign in 1993. In fiscal 2009, the Estée Lauder brand donated $500,000 from its Pink Ribbon Product sales in the U.S. and $100,000 (Canadian dollars) from its Pink Ribbon Product sales in Canada. An additional $280,000 was raised by the Estée Lauder field force through special community...

  • Page 88
    ...employees giving their time, energy and talent to help those affected by HIV/AIDS worldwide. www.maccosmetics.com The Ojon brand is committed to defining "wildcrafted beauty" and becoming the archetype for business relationships with indigenous communities. Wildcrafted materials are picked by hand...

  • Page 89
    ... division set up a website on the Company's intranet to keep employees updated on the newest green tips and services relating to travel and daily life. Travel Retailing issues a monthly newsletter which highlights employee events and its employees in New York participate in activities with New York...

  • Page 90
    ... online report will address the development of specific and reasonable steps that will enable us to more consistently guide and manage our commitments and responsibilities. We are proud of our tradition of personal and professional accountability and look forward to continuing "Bringing the Best...

  • Page 91
    ... Consolidated Financial Statements 155 Management's Report on Internal Control over Financial Reporting 156 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 157 Report of Independent Registered Public Accounting Firm 158 Stockholder Information 90

  • Page 92
    ... long-term commercial paper, which was used to fund our accelerated stock repurchase program, and to pay transaction fees and expenses related to this offering. (e) In April 2006, we completed the sale of certain assets and operations of the reporting unit that marketed and sold Stila brand products...

  • Page 93
    ... passage of title to the customer and transfer of the risk of loss related to those goods. In the Americas region, sales are generally recognized at the time the product is shipped to the customer and in the Europe, Middle East & Africa and Asia/Pacific regions sales are generally recognized based...

  • Page 94
    ...or economic events outside our control could have a direct impact on reported net earnings. The discount rate for each plan used for determining future net periodic benefit cost is based on a review of highly rated long-term bonds. For fiscal 2009, we used a discount rate for our Domestic Plans of...

  • Page 95
    ...-average cost of capital would still result in a fair value calculation exceeding our book value for each of our reporting units. Changes in the valuation assumptions from those used in the prior year primarily reï¬,ect the impact of the current economic environment on THE EST{E LAUDER COMPANIES INC...

  • Page 96
    ... tax asset will result in a reduction of net earnings at that time. THE EST{E LAUDER COMPANIES INC. We provide tax reserves for Federal, state, local and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues...

  • Page 97
    ... in department stores while sales of our products online and via direct response television ("DRTV") continued to grow. Global economic uncertainty has also impacted our business in Europe, the Middle East & Africa. Net sales in many of our key markets declined during fiscal 2009. Our business was...

  • Page 98
    .... Internationally, we plan to achieve profitable growth in European perfumeries and pharmacies and in department stores in Asia, while accentuating our makeup and skin care initiatives to boost our travel retail business. In addition, we will continue our efforts to grow our business online and...

  • Page 99
    .... In line with our strategic plan, we will continue to seek ways to contain costs and reduce our inventory levels. We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories which are distributed in over 140 countries and territories...

  • Page 100
    ... ENDED JUNE 30 (In millions) 2009 2008 2007 NET SALES By Region: The Americas Europe, the Middle East & Africa Asia/Pacific Returns associated with restructuring activities By Product Category: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities OPERATING...

  • Page 101
    ... product lines in this category also experienced declines, particularly in Europe, the Middle East & Africa and the Americas, partially offset by double-digit growth in Asia/Pacific. Excluding the impact of foreign currency translation, skin care net sales increased 2%. 100 Makeup Makeup net sales...

  • Page 102
    ... sales in these markets reï¬,ected the adverse impact of the strengthening of the U.S. dollar. Economic conditions in the Americas region, particularly in the department store channel, have negatively impacted our businesses. Ongoing challenges faced by certain of our department store customers in...

  • Page 103
    ...to the Notes to the Consolidated Financial Statements. Despite a reduction in actual selling, advertising, merchandising and sampling spending, operating expense margin increased by approximately 60 basis points driven by the decline in consumer demand in the current economic environment. Changes in...

  • Page 104
    ... Eye Concentrate and The Moisturizing Gel Cream from La Mer. Collectively, these new products resulted in incremental sales of approximately $215 million. Net sales increases from Re-Nutriv and Resilience Lift Extreme Ultra Firming products from Estée Lauder, products in Clinique's 3-Step Skin Care...

  • Page 105
    ... 3%. All countries in Europe, the Middle East & Africa experienced net sales growth, which contributed to the increase in net sales of 21%, or $513.3 million, to $3,006.7 million, although net sales growth rates slowed in certain key countries. This growth was led by our travel retail business and...

  • Page 106
    ... brands and net sales growth from La Mer products and Tri-Aktilineâ„¢ Instant Deep Wrinkle Filler from Good Skinâ„¢. In addition, the fiscal 2007 results in this category reï¬,ected organizational costs of approximately $30 million, primarily related to our pharmacy channel in Europe. Makeup...

  • Page 107
    ... commercial paper balances upon their maturity. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support currently planned business operations, information...

  • Page 108
    ...{E LAUDER COMPANIES INC. with a yield of 7.767%. Interest payments are required to be made semi-annually on May 1 and November 1, commencing May 1, 2009. The net proceeds of this offering were used to repay then-outstanding commercial paper balances upon their maturity. The purchase price related...

  • Page 109
    ... to sell and distribute Ojon products worldwide, and to a lesser extent, the acquisition of an Aveda distributor. Capital expenditures also increased from fiscal 2007 to fiscal 2008 reï¬,ecting incremental spending for counters and the higher costs of technology related to our continuing company...

  • Page 110
    ... of pension and other post-retirement benefit obligations, commitments pursuant to executive compensation arrangements and obligations related to our cost savings initiatives. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales for...

  • Page 111
    ... forward and option contracts, not designated as hedging instruments, to mitigate the change in fair value of specific assets and liabilities on the balance sheet. We do not utilize derivative financial instruments for trading or speculative purposes. Costs associated with entering into these...

  • Page 112
    ... financial instruments using a model with historical volatilities and correlations calculated over the past 250-day period. The high, low and average measured value-at-risk for the twelve months ended June 30, 2009 and 2008 related to our foreign exchange and interest rate contracts are as follows...

  • Page 113
    ...assumptions developed based on the best information available in the circumstances (unobservable inputs). In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair...

  • Page 114
    ...2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," principally to require publicly traded THE EST{E LAUDER COMPANIES INC. companies to provide disclosures about fair value of financial instruments in interim financial information...

  • Page 115
    ... collaborators should be presented in the income statement based on the nature of the arrangement, the nature of the company's business and whether the payments are within the scope of other accounting literature. Other detailed information related to the collaborative arrangement is also required...

  • Page 116
    ... the types of products and services we sell; THE EST{E LAUDER COMPANIES INC. (7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of...

  • Page 117
    ... for improved efficiency, such as publicly-announced restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom; (16) consequences attributable to the events that are currently taking place in the Middle East, including terrorist attacks, retaliation...

  • Page 118
    ...00 2.20 2.16 .00 2.16 204.3 207.8 .50 Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Restructuring and other special charges Goodwill impairment Impairment of intangible and other long-lived assets Operating Income Interest expense, net Earnings before...

  • Page 119
    ... cost or market value Goodwill Other intangible assets, net Other assets Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt Accounts payable Accrued income taxes Other accrued liabilities Total current liabilities Noncurrent Liabilities Long-term...

  • Page 120
    ...2009 2008 2007 STOCKHOLDERS' EQUITY Common stock, beginning of year Stock-based compensation programs Common stock, end of year Paid-in capital, beginning of year Stock-based compensation programs Settlement of accelerated share... financial statements. THE EST{E LAUDER COMPANIES INC. ...

  • Page 121
    ...net Net settlement of interest rate derivatives Repayments and redemptions of long-term debt Net proceeds from stock-based compensation transactions Excess tax benefits from stock-based compensation arrangements Payments to acquire treasury stock Dividends paid to stockholders Distributions made to...

  • Page 122
    ... skin care, makeup, fragrance and hair care products around the world. Products are marketed under the following brand names: Estée Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, M.A. C, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, American Beauty, Flirt!, Good...

  • Page 123
    ... periods of abnormally low production levels are recognized as cost of sales in the period in which they are incurred. Promotional merchandise is charged to expense at the time the merchandise is shipped to the Company's customers. Included in inventory and promotional merchandise is an inventory...

  • Page 124
    ... of title to the customer and transfer of the risk of loss related to those goods. In the Americas region, sales are generally recognized at the time the product is shipped to the customer and in the Europe, the Middle East & Africa and Asia/ Pacific regions sales are generally recognized based...

  • Page 125
    ... sales, returns were 4.4%, 4.4% and 4.2% in fiscal 2009, 2008 and 2007, respectively. Payments to Customers The Company records revenues generated from purchase with purchase promotions as sales and the costs of its purchase with purchase and gift with purchase promotions as cost of sales. Certain...

  • Page 126
    ... Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," the Company elected to record a one-time cumulative effect adjustment of $24.2 million to opening retained earnings to correct errors in certain balance sheet accounts that arose in previous years. Recently...

  • Page 127
    ...assumptions developed based on the best information available in the circumstances (unobservable inputs). In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair...

  • Page 128
    ... annual periods ending after June 15, 2009. The adoption of this standard did not have an impact on the Company's consolidated financial statements as its financial assets are currently valued in active markets. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial...

  • Page 129
    ... how the initial carrying value of an equity method investment should be determined, how to account for any subsequent purchases and sales of additional ownership interests, and whether the investor must separately assess its underlying share of the investee's indefinite-lived intangible assets for...

  • Page 130
    ... the impact of the current economic environment on their projected future results of operations indicated that the carrying value of the related long-lived assets were not recoverable. These asset impairment charges primarily related to the Company's skin care and makeup businesses in the Americas...

  • Page 131
    ..., recorded a goodwill impairment charge related to the Darphin reporting unit of $12.5 million at the exchange rate in effect at that time, primarily in the skin JUNE 30, 2009 Gross Carrying Value (In millions) care product category and in the Europe, the Middle East & Africa region. Due to...

  • Page 132
    ... that the carrying value of the Darphin trademark exceeded its estimated fair value and, as a result, recognized an impairment charge of $12.3 million at the exchange rate in effect at that time. This charge was reï¬,ected in the skin care product category and in the Europe, the Middle East & Africa...

  • Page 133
    ... of the Company's brands and regions, the Company has selectively exited certain channels of distribution, categories and markets. In doing so, the Company incurred costs to reduce workforce, terminate contracts, write off fixed assets and discontinue certain product lines and stock-keeping units...

  • Page 134
    ...In millions) 2009 2008 2007 Current: Federal ...rate The $19.2 million benefit recognized in fiscal 2009, net of tax, resulted from reaching a formal settlement...highly complex tax laws in the countries involved, particularly in the United States, and is based on the tax profile of the Company...

  • Page 135
    ... of gross unrecognized tax benefits at June 30, 2009 are $72.6 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, THE EST{E LAUDER COMPANIES INC.

  • Page 136
    ...and international jurisdictions. These matters are in various stages of completion and involve complex multi-jurisdictional issues common among multinational enterprises, including transfer pricing, that may require an extended period of time for resolution. During the fourth quarter of fiscal 2008...

  • Page 137
    ... United States State of California State of Minnesota State of New York Open Fiscal Years 2005-2009 2001-2009 2006-2009 1999-2009 2006-2009 2004-2009 1999-2002, 2005-2009 2006-2009 2008-2009 2002-2009 2002-2009 2001-2009 2007-2009 The Company is also subject to income tax examinations in numerous...

  • Page 138
    ... interest rates based on six-month LIBOR. As of June 30, 2009, the Company had outstanding $299.8 million of 2013 Senior Notes consisting of $300.0 THE EST{E LAUDER COMPANIES INC. million principal and an unamortized debt discount of $0.2 million. The 2013 Senior Notes, when issued in November 2008...

  • Page 139
    ... no debt issuance costs incurred related to this agreement. The outstanding balance at June 30, 2009 ($12.5 million at the exchange rate at June 30, 2009) is classified as short-term debt on the Company's consolidated balance sheet. As of June 30, 2009, the Company had a fixed rate promissory note...

  • Page 140
    ...offset by changes in the fair value of the underlying long-term debt. The amounts of the gains and losses related to the Company's derivative financial instruments not designated as hedging instruments for the year ended June 30, 2009 are presented as follows: Location of Gain or (Loss) Recognized...

  • Page 141
    ... long-term debt. As of June 30, 2009, these fair-value hedges were highly effective in all material respects. Information regarding the Company's interest rate swap agreements is presented in the following table: YEAR ENDED OR AT JUNE 30, 2008 Notional Amount $250.0 Weighted Average Pay Rate...

  • Page 142
    ... funds and are valued using quoted market prices on an active exchange. Available-for-sale securities are included in investments in the accompanying consolidated balance sheets. Foreign Currency Forward and Option Contracts - The fair values of the Company's foreign currency forward and option...

  • Page 143
    ... other comprehensive income. Retirement Growth Account Plan (U.S.) The Retirement Growth Account Plan is a trust-based, noncontributory qualified defined benefit pension plan. The Company's funding policy consists of an annual contribution at a rate that provides for future plan benefits and...

  • Page 144
    ... Plans U.S. 2009 (In millions) Other than Pension Plans International Post-retirement 2009 2008 2008 2009 2008 Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participant contributions Actuarial loss (gain) Foreign currency exchange rate...

  • Page 145
    ...care cost trend rates for fiscal 2009 would have had the following effects: One-Percentage-Point Increase (In millions) One-Percentage-Point Decrease $(1.1) $(8.4) Effect on total service and interest costs Effect on post-retirement benefit obligations $1.2 $8.8 144 THE EST{E LAUDER COMPANIES...

  • Page 146
    ...scal 2010 are as follows: Pension Plans U.S. (In millions) Other than Pension Plans Post-retirement $ - $0.6 International $2.4 $1.8 Prior service cost Net actuarial loss $0.7 $4.1 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Company...

  • Page 147
    ... U.S. (In millions) Other than Pension Plans International Post-retirement Expected Cash Flows: Expected employer contributions for year ending June 30, 2010 Expected benefit payments for year ending June 30, 2010 2011 2012 2013 2014 Years 2015-2019 Plan Assets: Target asset allocation at June...

  • Page 148
    ... pension and other postretirement benefit obligations, commitments pursuant to executive compensation arrangements and obligations related to the Company's cost savings initiatives. Future earn-out payments and future royalty and advertising commitments were estimated based on planned future sales...

  • Page 149
    ...nancial counterparty. These shares were accounted for as treasury stock, carried at cost, and reï¬,ected as a reduction to stockholders' equity. In August 2007, the financial counterparty informed the Company that it had completed its obligations under the agreement. The per-share price paid by the...

  • Page 150
    ...scal 2010, subject to the approval of the Stock Plan Subcommittee of the Company's Board of Directors. In September 2008, 78,400 shares of the Company's Class A Common Stock were issued and related accrued dividends were paid, relative to the target goals set at the time of issuance, in settlement...

  • Page 151
    ...ï¬,ect the current market value of the Company's Class A Common Stock. The Company recorded $0.3 million as compensation income and $0.5 million and $0.8 million as compensation expense to reï¬,ect additional deferrals and the change in the market value for fiscal 2009, 2008 and 2007, respectively...

  • Page 152
    ..., end of year Net pension and post-retirement adjustments, beginning of year Adjustment to initially apply new accounting standard Changes in plan assets and benefit obligations: Net actuarial gains (losses) recognized Net prior service credit (cost) recognized Translation adjustments Amortization...

  • Page 153
    ..., marketing and distribution processes for all of the Company's products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Chief Executive. Although the Company operates in one business segment, beauty...

  • Page 154
    ...2009 2008 2007 PRODUCT CATEGORY DATA Net Sales: Skin Care Makeup Fragrance Hair Care Other Returns associated with restructuring activities Depreciation and Amortization: Skin Care Makeup Fragrance Hair Care Other Goodwill, Intangible Asset and Other Long-Lived Asset Impairments: Skin Care Makeup...

  • Page 155
    ... is domiciled in the United States. Net sales in the United States in fiscal 2009, 2008 and 2007 were $3,020.4 million, $3,276.2 million and $3,224.5 million, respectively. The Company's long-lived assets in the United States at June 30, 2009, 2008 and 2007 were $612.3 million, $597.8 million...

  • Page 156
    ...'s management has concluded that, as of June 30, 2009, the Company's internal control over financial reporting was effective. Fabrizio Freda President and Chief Executive Officer August 19, 2009 Richard W. Kunes Executive Vice President and Chief Financial Officer THE EST{E LAUDER COMPANIES...

  • Page 157
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of earnings, stockholders' equity and comprehensive income...

  • Page 158
    ... of Directors and Stockholders The Estée Lauder Companies Inc.: We have audited the accompanying consolidated balance sheets of The Estée Lauder Companies Inc. and subsidiaries (the Company) as of June 30, 2009 and 2008, and the related consolidated statements of earnings, stockholders' equity and...

  • Page 159
    ... Company Manual. Common Stock Information The Class A Common Stock of The Estée Lauder Companies Inc. is listed on the New York Stock Exchange with the symbol EL. Quarterly Per Share Market Prices Fiscal 2009 Quarter Ended September 30 December 31 March 31 June 30 Market Price of Common Stock High...

  • Page 160
    ... five- and fourteen-year total stockholder return (stock price appreciation plus dividends) on the Company's Class A Common Stock with the cumulative total return of the S&P 500 Index and a market weighted index of a publicly traded peer group. The returns are calculated by assuming an investment...

  • Page 161
    ... trademarks. Those appearing in the text in this report include: 3-Step Skin Care System, 8 Flower Nectar Aromatic Care, A Perfect World, Advanced Night Repair, Age Rescue, Air Control, All Firm, All Skins, Almost Lipstick, Almost Powder, American Beauty, AnyWear, Aramis, Aramis Classic, Aramis...

  • Page 162
    ...LAUDER COMPANIES INC. 2009 ANNUAL REPORT ENVIRONMENTAL FIGURES The Estée Lauder Companies Inc. 2009 Annual Report text and financial is printed on recycled paper that contains 100% post-consumer (PCW) fiber. This recycled paper is made from fiber sourced from well-managed... of wood saved. 38,592...

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