Estee Lauder 2009 Annual Report Download - page 105

104 THE EST{E LAUDER COMPANIES INC.
approximately 10 basis points. Offsetting these improve-
ments was an unfavorable change in the mix of our
business, an increase in obsolescence charges, and
employee-related charges designed to streamline certain
business activities and achieve future cost savings of
approximately 10 basis points, each.
Despite the rise in energy and raw material prices in
the current year, we were able to maintain our overall cost
of goods margin through other effi ciencies achieved from
ongoing savings initiatives.
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, fl uctuations
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 increased to 64.5% of net sales as
compared with 64.1% of net sales in the fi scal 2007. The
increase in operating expenses and operating expense
margin refl ected higher costs of global information tech-
nology systems and infrastructure of approximately 30
basis points. An additional 20 basis points resulted from
an increase in valuation reserves refl ecting the diminish-
ing likelihood of realizing value from a promissory note
and convertible preferred stock received in connection
with the divestiture of Stila in fiscal 2006. We also
recorded an increase in intangible asset amortization
resulting from recent strategic acquisitions, as well as
employee-related charges designed to streamline certain
business activities and achieve future cost savings, of
approximately 10 basis points each. Operating expense
margin in fi scal 2007 was adversely impacted by charges
related to our pharmacy channel of approximately 40
basis points.
Changes in advertising, merchandising and sampling
spending result from the type, timing and level of activi-
ties related to product launches and rollouts, as well as the
markets being emphasized.
OPERATING RESULTS
Operating income increased 8%, or $60.8 million, to
$810.7 million as compared with fi scal 2007. Operating
margin declined to 10.3% of net sales as compared with
10.7% in fi scal 2007, refl ecting our constant cost of sales
margin and the increase in our operating expense margin,
as previously discussed.
Geographic Regions
Net sales in the Americas increased 4%, or $150.6 million,
to $3,711.5 million, primarily refl ecting net sales growth in
Canada and Latin America, as well as the addition of the
Ojon brand, of approximately $98 million, combined.
Additional net sales increases of approximately $65 mil-
lion were attributable to our designer fragrances business
and our makeup artist and hair care brands in the United
States. Partially offsetting this growth was approximately
$37 million related to weaknesses in certain of our heri-
tage brands in the United States as a result of competitive
pressures and challenges in the department store channel.
We believe that economic uncertainty in the United States
has affected our business, particularly in the department
store channel. These challenges have been mitigated
through sales in alternative channels, such as freestanding
retail stores, Internet distribution, self-select distribution
and direct-response television. Excluding the impact of
foreign currency translation, net sales in the Americas
increased 3%.
All countries in Europe, the Middle East & Africa expe-
rienced 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 busi-
ness and the United Kingdom, as well as in Russia, which
benefi ted from our expansion in this market. The results in
this region were inclusive of an exchange rate benefi t due
to the weakening of the U.S. dollar of approximately $206
million. Excluding the impact of foreign currency transla-
tion, net sales in Europe, the Middle East & Africa
increased 12%.
Net sales in Asia/Pacifi c increased 21%, or $209.4
million, to $1,192.6 million, refl ecting growth from all
countries in the region. This increase refl ected higher net
sales of approximately $172 million in China, Japan, Hong
Kong, Australia and Korea. The results in this region
were inclusive of an exchange rate benefi t due to the
weakening of the U.S. dollar of approximately $66 million.
Excluding the impact of foreign currency translation,
Asia/Pacifi c net sales increased 15%.
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 was 25.2%,
which is the same as in fi scal 2007. Cost of sales as a
percentage of net sales refl ected a decrease in the level
and timing of promotional activities of approximately 20
basis points and a positive effect of exchange rates of