Estee Lauder 2010 Annual Report Download - page 99

98 THE EST{E LAUDER COMPANIES INC.
million were driven by the United Kingdom, our travel
retail business, Spain, France and Italy. These perfor-
mances reflected retailer destocking and tighter working
capital management by certain key retailers. Net sales in
our travel retail business also declined due to a significant
slowdown in global airline passenger traffic and the
impact of weaker currencies in certain key markets. Par-
tially offsetting these decreases were higher net sales of
approximately $11 million 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/Pacific increased 9%, or $106.8 mil-
lion, to $1,299.4 million, reflecting higher net sales of
approximately $109 million in China, Japan and Hong
Kong. Net sales growth in China and Hong Kong bene-
fited 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, reflecting 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/
Pacific net sales increased 14%.
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 fiscal 2008. This
change reflected 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 reflected the fiscal
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 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 new brands
incremental sales to the category of approximately $82
million, combined. Excluding the impact of foreign cur-
rency translation, makeup net sales decreased 1%.
Fragrance Net sales of fragrance products decreased
20%, or $281.1 million, to $1,150.9 million. This decline
was largely due to lower sales of designer fragrances, of
which approximately $181 million was attributable to cer-
tain DKNY, Tommy Hilfiger and Sean John fragrances.
Also contributing to the decrease were lower sales of cer-
tain Estée Lauder and Clinique fragrances of approxi-
mately $132 million, combined. The fiscal 2009 launches
of Estée Lauder Sensuous, Hilfiger Men, the new DKNY
Men fragrance and I Am King Sean John partially offset
these declines by collectively contributing sales of approx-
imately $88 million to the category. Excluding the impact
of foreign currency translation, fragrance net sales
decreased 14%.
Hair Care Hair care net sales decreased 6%, or $24.7
million, to $402.4 million, primarily reflecting a soft salon
retail environment and a reduction in points of distribu-
tion in the United States. Net sales were also negatively
impacted as a result of the conclusion of a hotel amenities
program in the third quarter of fiscal 2008. These declines
were partially offset by incremental sales of approximately
$13 million from new products, such as Dry Remedy
Shampoo and Conditioner and the Sun Care line of prod-
ucts from Aveda. The category also benefited from
improved sales of hair color products, as well as an
increase in points of distribution outside of the United
States, including the acquisition of an independent
distributor in Australia. Excluding the impact of foreign
currency translation, hair care net sales decreased 3%.
Geographic Regions
Net sales in the Americas decreased 8%, or $290.3 mil-
lion, to $3,421.2 million. Lower net sales in the United
States from our heritage and makeup artist brands as well
as our hair care businesses contributed approximately
$275 million to the decrease. Net sales declines in Canada
of approximately $36 million were partially offset by
growth in Latin America of approximately $3 million. Net
sales in these markets reflected 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. Exclud-
ing 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
reflecting the unfavorable impact of foreign currency
translation. Net sales decreases of approximately $323