Estee Lauder 2012 Annual Report Download - page 113

THE EST{E LAUDER COMPANIES INC. 111
specifically for consumers there, in line with our strategy
to be locally relevant. These increases were partially offset
by lower net sales in Russia, Spain and the Balkans of
approximately $25 million, combined. The lower net sales
in Russia primarily reflected destocking associated with
ongoing challenges with a certain customer. Net sales in
Spain and the Balkans declined primarily due to difficult
economic environments. Excluding the impact of foreign
currency translation, net sales in Europe, the Middle East
& Africa increased 12%.
Net sales in Asia/Pacific increased 14%, or $250.7 mil-
lion, to $2,011.4 million, reflecting growth in each major
product category and from most countries in the region,
several of which had a significant favorable impact of for-
eign currency translation. Net sales of approximately $193
million were driven by China, Hong Kong and Thailand,
combined, primarily reflecting strong sales of skin care
and makeup products. While we gained share in the
prestige business in China, we are cautious that macro-
economic factors may temper the future growth trend of
the Chinese economy. Our businesses in Japan, Korea
and Australia continued to be challenged due to difficult
economic conditions, but we reported net sales gains of
approximately $37 million, combined, which for both
Japan and Australia were generated predominantly from
the strengthening of their respective currencies. Excluding
the impact of foreign currency translation, Asia/Pacific
net sales increased 11%.
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 20.5% as compared with 22.0% in the prior year. This
improvement primarily reflected our efforts in connection
with the Program, including strategic changes in the mix
of our business and pricing of approximately 140 basis
points, favorable manufacturing variances of approxi-
mately 10 basis points and the favorable effect of
exchange rates of approximately 10 basis points. These
improvements were partially offset by an increase in
obsolescence charges of approximately 10 basis points.
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 that 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
increased to 66.0% as compared with 65.6% in the prior
year. This change reflected increased spending in adver-
tising, merchandising and sampling costs in line with our
strategy of approximately 80 basis points, higher costs
related to stock-based compensation of approximately 20
basis points, an increase in general and administrative
costs of approximately 10 basis points and higher charges
associated with restructuring activities of approximately
10 basis points. Partially offsetting these changes were
lower selling and shipping costs as a percentage of net
sales of approximately 50 basis points, lower charges
associated with goodwill and other intangible asset
impairments of approximately 20 basis points and a favor-
able change in foreign exchange transactions of approxi-
mately 10 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. We anticipate higher invest-
ment spending on global advertising, merchandising and
sampling to support major launches and existing fran-
chises for fiscal 2013.
OPERATING RESULTS
Operating income increased 20%, or $222.3 million, to
$1,311.7 million. Operating margin increased to 13.5% of
net sales as compared with 12.4% in the prior year, reflect-
ing our higher gross margin, partially offset by the
increase in our operating expense margin, as previously
discussed. The following discussions of Operating Results
by Product Categories and Geographic Regions exclude
the impact of total returns and charges associated with
restructuring activities of $63.2 million, or 0.7% of net
sales, in fiscal 2012 and $59.4 million, or 0.7% of net sales,
in fiscal 2011. We believe the following analysis of operat-
ing results better reflects the manner in which we conduct
and view our business. In the fiscal 2012 third quarter, we
established a provision for then-anticipated returns of
approximately $16 million as a result of repositioning
certain products due to changes in regulations related to
sunscreen products in the United States. These regula-
tions were subsequently deferred and, accordingly, we
reversed this provision in the fiscal 2012 fourth quarter.
As the identified products are expected to be sold in the
ordinary course of business, we do not expect any signifi-
cant financial impact due to these regulations.