Estee Lauder 2012 Annual Report Download - page 109

THE EST{E LAUDER COMPANIES INC. 107
enhancing gross margin and supporting efficiencies in
select operating expenses, while increasing our strategic
investment spending.
Looking ahead to fiscal 2013, we plan to continue build-
ing on our strengths. We have a strong, diverse and highly
valuable brand portfolio with global reach and potential,
as well as a track record of outstanding creativity, innova-
tion, entrepreneurship and healthy growth. We plan on
continuing to bring highly innovative products to consum-
ers and elevating our personalized “High-Touch” service
model. We are dedicated to investing in select areas to
improve our capabilities. Our main focuses are digital, as
it is becoming an integral part of our everyday business,
research and development, product innovation, consumer
insight and local relevance. While our overall business is
performing well, we continue to see increased weakness
due to ongoing global economic uncertainties and vola-
tility in financial markets, particularly in certain Western
European countries, Korea and Australia. We believe we
have and will continue to offset to some extent the impact
of these events as a result of our strategy to mitigate
weaknesses we find in certain areas with strengths in
others. However, if adverse economic conditions or the
degree of uncertainty or volatility worsen or are further
prolonged, then we expect there to be a negative effect
on ongoing consumer confidence, demand and spending
and, as a result, our business. We will continue to monitor
these and other risks that may affect our business.
RETURNS AND CHARGES ASSOCIATED WITH
RESTRUCTURING ACTIVITIES
In an effort to drive down costs and achieve synergies
within our organization, in February 2009, we announced
the implementation of a multi-faceted cost savings pro-
gram (the “Program”) to position the Company to achieve
long-term profitable growth. We anticipate the Program
will result in related restructuring and other charges, inclu-
sive of cumulative charges recorded to date and through
the remainder of the Program, totaling between $350 mil-
lion and $450 million before taxes. While we will continue
to seek cost savings opportunities, our current plans are
to identify and approve specific initiatives under the Pro-
gram through calendar 2012 and execute those initiatives
through fiscal 2013. The total amount of charges (pre-tax)
associated with the Program recorded, plus other initia-
tives approved through June 30, 2012, is approximately
$361 million to $366 million, of which approximately
$251 million to $253 million relates to restructuring
charges, approximately $50 million of other costs to
implement the initiatives, approximately $42 million to
$45 million in sales returns and approximately $18 million
in inventory write-offs. The restructuring charges are
comprised of approximately $188 million to $190 million
of employee-related costs, approximately $40 million of
other exit costs and contract terminations (substantially all
of which have resulted in or will result in cash expendi-
tures), and approximately $23 million in non-cash asset
write-offs. The total amount of cumulative charges (pre-
tax) associated with the Program recorded from inception
through June 30, 2012 was $302.6 million.
We expect that the implementation of this Program,
combined with other on-going cost savings efforts, will
result in savings of approximately $760 million to $785 mil-
lion (Program inception through the end of fiscal 2012 is
approximately $710 million) including the reduction of cer-
tain costs relative to an assumed normalized spending pat-
tern. Our long-range forecast for operating margin reflects
these anticipated savings, net of strategic reinvestments.
The Program focuses on a redesign of our organizational
structure in order to integrate the Company in a more cohe-
sive way and operate more globally across brands and func-
tions. The principal aspect of the Program was the reduction
of the workforce by approximately 2,000 employees.
Specific actions taken since Program inception included:
•฀฀Resize and Reorganize the Organization—We continued
the realignment and optimization of our organization to
better leverage scale, improve productivity, reduce com-
plexity and achieve cost savings in each region and
across various functions. This included reduction of the
workforce which occurred through the consolidation of
certain functions, which we achieved through a combi-
nation of normal attrition and job eliminations, and the
closure and consolidation of certain distribution and
office facilities.
•฀฀ Turnaround or Exit Unprofitable Operations—To improve
the profitability in certain of our brands and regions, we
have selectively exited certain channels of distribution,
categories and markets, and have made changes to turn-
around others. This included the exit from the global
wholesale distribution of our Prescriptives brand, the
reformulation of Ojon brand products and the exit from
the global distribution of Sean John products. In con-
nection with these activities, we incurred charges for
product returns, inventory write-offs, reduction of work-
force and termination of contracts.
•฀฀Outsourcing— In order to balance the growing need for
information technology support with our efforts to
provide the most efficient and cost effective solutions,
we continued the outsourcing of certain information
technology processes. We incurred costs to transition
services to outsource providers and employee-related
termination costs.