Estee Lauder 2010 Annual Report Download - page 96

THE EST{E LAUDER COMPANIES INC. 95
60 basis points and favorable manufacturing variances of
40 basis points. Also contributing to the improvement in
cost of sales margin were the favorable comparison to the
prior year when we recorded excess overhead costs that
were not expected to be recovered of approximately 30
basis points, and the favorable effect of exchange rates
and a decrease in the timing and level of promotional
activities of approximately 10 basis points, each.
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, fluctuations
in the cost of sales percentage. In addition, future cost of
sales mix may be impacted by the inclusion of potential
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 as a percentage of net sales
decreased to 66.4% as compared with 68.6% in the prior
year, and reflects the impact of the strong growth in net
sales during fiscal 2010. This improvement primarily
reflected lower selling, shipping, general and administra-
tive costs as a percentage of net sales of approximately
180 basis points due to various cost containment efforts
implemented as part of the Program and a strategically
focused approach to spending, lower charges associated
with restructuring activities of 30 basis points, the favor-
able comparison to the prior year related to other
intangible asset impairment charges of approximately 20
basis points and lower net losses from foreign exchange
transactions of approximately 10 basis points. Partially
offsetting these improvements were higher strategic
investment spending of approximately 10 basis points and
higher advertising, sampling and merchandising costs of
approximately 10 basis points.
Changes in advertising, sampling and merchandising
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 89%, or $371.5 million, to
$789.9 million. Operating margin improved to 10.1% of
net sales as compared with 5.7% in the prior year, reflect-
ing our strategy to drive out non-value-added costs and
increase financial discipline. This, along with relatively
strong net sales growth, resulted in a higher gross margin
and the decrease in our operating expense margin as
previously discussed. While operating results improved
comparison to the prior year due to an increase in global
airline passenger traffic, new points of distribution, select
customer restocking and benefits of programs designed
to enhance the consumer’s High-Touch experience.
Partially offsetting these increases were lower net sales of
approximately $13 million in the Balkans, primarily reflect-
ing the economic situation in Greece. We continue to
experience select customer destocking in continental
Europe. During the current year, we undertook an initia-
tive to identify certain underperforming SKUs for the
purposes of evaluating their relevance to our long-term
perfumery strategy. Based on this evaluation, we decided
to discontinue certain of these products in perfumeries
and recorded a charge of approximately $31 million to
reflect the anticipated returns of these products from par-
ticipating retailers, subject to our returns approval policy.
Excluding the impact of foreign currency translation, net
sales in Europe, the Middle East & Africa increased 8%.
Net sales in Asia/Pacific increased 16%, or $210.7
million, to $1,510.1 million, reflecting growth from all
countries in the region and each product category. This
reflects our strategy to strengthen and expand our geo-
graphic presence in Asia, particularly in China. The region
also benefited from the favorable impact of foreign cur-
rency translation. Approximately $184 million of this
increase was generated in China, Korea, Hong Kong,
Australia and Taiwan primarily reflecting strong sales of
skin care products. Australia and Korea also benefited sig-
nificantly from foreign currency translation. Our business
in Japan continued to be challenged due to difficult eco-
nomic conditions, as reported net sales increases were
generated from the strengthening of the Japanese yen.
Excluding the impact of foreign currency translation, Asia/
Pacific net sales increased 10%.
Although our financial performance reflected improved
economic conditions in certain geographies, we expect
the global economic uncertainties to continue to impact
our business. We cannot predict with certainty the magni-
tude 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 decreased
to 23.5% as compared with 25.7% in the prior year. This
improvement primarily reflected our efforts in connection
with the Program, including favorable changes in the
mix of our business of approximately 70 basis points,
a decrease in obsolescence charges of approximately