Estee Lauder 2009 Annual Report Download - page 102

THE EST{E LAUDER COMPANIES INC. 101
change refl ected an increase in obsolescence charges of
approximately 40 basis points, excess overhead costs that
were not recovered due to lower production levels of
approximately 30 basis points and the negative effect
of exchange rates of approximately 20 basis points. The
increase in cost of sales margin also refl ected the fi scal
2009 impact of charges associated with restructuring
activities and an increase in the level and timing of pro-
motional activities of approximately 10 basis points, each.
Partially offsetting these increases were favorable changes
in the mix of our business and from other manufacturing
variances of approximately 50 basis points and 10 basis
points, respectively.
Since certain promotional activities are a component
of sales or cost of sales and the timing and level of pro-
motions 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 or channels of distribution which have margin and
product cost structures different from those of our current
mix of business.
OPERATING EXPENSES
Operating expenses increased to 68.6% of net sales as
compared with 64.5% of net sales in the prior year. In light
of the current economic conditions, we continued to
apply various cost-containment measures to maintain
expenses in line with our business needs. While the imple-
mentation of these initiatives helped reduce total operat-
ing expenses as compared with the prior year, the
dramatic decline in net sales during fi scal 2009 was the
principal factor that negatively impacted our operating
expense margin. In addition to the decline in net sales,
operating expense margin increased by approximately
110 basis points due to charges associated with restructur-
ing activities, as previously discussed.
During fi scal 2009, we evaluated our goodwill, intan-
gible assets and other long-lived assets based upon certain
triggering events as well as our annual impairment test of
goodwill and other indefi nite-lived intangible assets. Inclu-
sive of the impairment charges incurred during the third
quarter of fi scal 2009, we recorded impairment charges
of approximately $14 million related to goodwill, approxi-
mately $23 million related to trademarks with indefi nite
lives, approximately $17 million related to other amortiz-
able intangible assets and approximately $9 million related
to property, plant and equipment for the fi scal year ended
June 30, 2009. The principal factors that contributed to
these impairment charges were lower than expected
operating cash fl ow performance relative to the reporting
growth in Latin America of approximately $3 million. Net
sales in these markets refl 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. Ongo-
ing challenges faced by certain of our department store
customers in the United States may continue to affect our
net sales for the short and medium term. Excluding the
impact of foreign currency translation, net sales in the
Americas decreased 7%.
In Europe, the Middle East & Africa, net sales decreased
13%, or $395.4 million, to $2,611.3 million, primarily
refl ecting the unfavorable impact of foreign currency
translation. Net sales decreases of approximately $323
million were driven by the United Kingdom, our travel
retail business, Spain, France and Italy. These perfor-
mances refl ected retailer destocking and tighter working
capital management by certain key retailers. Net sales in
our travel retail business also declined due to a signifi cant
slowdown in passenger traffi c and the impact of weaker
currencies in certain key markets. Partially offsetting these
decreases were higher net sales of approximately $11 mil-
lion in the Middle East and Israel. Excluding the impact of
foreign currency translation, net sales in Europe, the
Middle East & Africa decreased 4%.
Net sales in Asia/Pacifi c increased 9%, or $106.8 mil-
lion, to $1,299.4 million, refl ecting higher net sales of
approximately $109 million in China, Japan and Hong
Kong. Net sales growth in China and Hong Kong bene-
fi ted from the launches of new skin care products while
Japan’s increase was generated from the strengthening of
the Japanese yen. Partially offsetting these increases were
lower net sales of approximately $13 million in Australia,
New Zealand and Korea, refl ecting the strengthening of
the U.S. dollar against their respective local currencies.
Despite the overall net sales increase in this region,
growth has been tempered by a softer retail environment.
Excluding the impact of foreign currency translation, Asia/
Pacifi c net sales increased 14%.
We believe the unfavorable global economic condi-
tions will continue to adversely impact our fi nancial per-
formance. We cannot predict with certainty the magnitude
or duration of the impact or how it will vary across each of
our geographic regions.
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 increased
to 25.7% as compared with 25.2% in the prior year. This