Estee Lauder 2009 Annual Report Download - page 97

96 THE EST{E LAUDER COMPANIES INC.
common share would be an increase or decrease of approx-
imately $6.0 million, $8.9 million and $.04, respectively.
RESULTS OF OPERATIONS
OVERVIEW
Global economic challenges and uncertainties have had a
signifi cant impact on our business during fi scal 2009.
These challenges and uncertainties have negatively
affected consumer demand, which is having an adverse
impact on our customers that are retailers as well as on
our own retail stores. These events have led to signifi cant
retailer destocking and changes in their ordering patterns
for the products that we sell, which has contributed to
the overall decline in our results of operations during
this year.
In the Americas region, the U.S. department store
channel experienced a very soft retail environment, which
deteriorated beyond our expectations. While our business
continues to suffer from lower store traffi c and destock-
ing, we believe that we gained share in the skin care
category at U.S. department stores with the help of
positive consumer response to new product offerings and
gift sets. Net sales results in alternative channels were
generally mixed. Trends at our freestanding retail stores
followed those 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 fi scal 2009. Our
business was also impacted by retailer destocking and
tighter working capital management. Sales and profi ts in
our travel retail business fell sharply due to a slowdown in
passenger traffi c, retailer destocking and the impact of
weaker currencies.
At this time, our business in the Asia/Pacifi c region has
been least affected by the global fi nancial crisis, with net
sales rising double digits in several countries, although
growth in the region has slowed overall including in Japan,
our largest market there. Net sales in China grew at a
faster pace than in the other countries in the region as we
continue our expansion in this emerging market. Strong
constant currency net sales increases in Korea were offset
by the weakness of the Korean won. Despite the overall
net sales increase in this region, growth has been tem-
pered by a softer retail environment.
In addition to the ongoing global fi nancial crisis, our
business has been negatively impacted by changes in for-
eign currency exchange rates caused by the dramatic
strengthening of the U.S. dollar during fi scal 2009. If the
unrecognized firm commitment (“fair-value” hedge),
(ii) designated as a hedge of a forecasted transaction or of
the variability of cash fl ows to be received or paid related
to a recognized asset or liability (“foreign currency cash-
flow” hedge), or (iii) not designated as a hedging
instrument. Changes in the fair value of a derivative that is
designated and qualifi es as a fair-value hedge that is highly
effective are recorded in current-period earnings, along
with the loss or gain on the hedged asset or liability that is
attributable to the hedged risk (including losses or gains
on fi rm commitments). Changes in the fair value of a
derivative that is designated and qualifi es as a foreign cur-
rency cash-fl ow hedge of a foreign-currency-denominated
forecasted transaction that is highly effective are recorded
in other comprehensive income (loss) (“OCI”). Gains and
losses deferred in OCI are then recognized in current-
period earnings when earnings are affected by the
variability of cash fl ows of the hedged foreign-currency-
denominated forecasted transaction (e.g., when periodic
settlements on a variable-rate asset or liability are recorded
in earnings). Changes in the fair value of derivative instru-
ments not designated as hedging instruments are reported
in current-period earnings.
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, 2009 there
have not been material changes in the assumptions under-
lying these critical accounting policies, nor to the related
signifi cant estimates. The results of our business underly-
ing these assumptions have not differed signifi cantly from
our expectations.
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 2009, 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 $5.0 million, operating
expenses would have changed by approximately $1.0 mil-
lion and the provision for income taxes would have
increased or decreased by approximately $2.9 million.
The collective impact of these changes on operating
income, net earnings and net earnings per diluted