Estee Lauder 2014 Annual Report Download - page 59

THE EST{E LAUDER COMPANIES INC. 57
OPERATING EXPENSES
Operating expenses as a percentage of net sales
decreased to 63.6% as compared with 65.1% in the prior
year. As a percentage of net sales, this decrease primarily
reflected lower spending on advertising, merchandising
and sampling of approximately 110 basis points, lower
selling costs of approximately 50 basis points and a favor-
able comparison to the prior year, which reflected restruc-
turing, goodwill and other impairment charges of
approximately 40 basis points, combined. These improve-
ments were partially offset by a charge in the current year
to remeasure net monetary assets in Venezuela of approx-
imately 30 basis points and unfavorable changes in for-
eign exchange transactions of approximately 10 basis
points. Adjusting for the impact of the accelerated orders
in the current year, operating expenses as a percentage of
net sales would have decreased 50 basis points, primarily
reflecting lower spending on advertising, merchandising
and sampling, and lower selling costs.
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 and brands being emphasized.
OPERATING RESULTS
Operating income increased 20%, or $301.6 million, to
$1,827.6 million and operating margin increased to 16.7%
of net sales as compared with 15.0% in the prior year,
which primarily reflected our lower operating expense
margin and, to a lesser extent, our higher gross margin.
The overall operating results were also impacted by
approximately $127 million related to the accelerated
orders in the current year, as discussed above, which cre-
ated a favorable comparison to the prior year, partially
offset by the current year remeasurement of net monetary
assets in Venezuela of $38.3 million. While these addi-
tional orders benefited our fiscal 2014 operating results
comparison, we expect there to be a corresponding
adverse effect on our first quarter and full year fiscal 2015
operating results. The following discussions of Operating
Results by Product Categories and Geographic Regions
exclude the impact of total charges (adjustments) associ-
ated with restructuring activities of $(2.9) million, or less
than 1% of net sales, for fiscal 2014 and $17.8 million, or
less than 1% of net sales, for fiscal 2013. We believe the
following analysis of operating results better reflects the
manner in which we conduct and view our business.
Adjusting for the impact of the accelerated orders in the
current year and charges (adjustments) associated with
restructuring activities, operating income would have
their respective currencies. We are seeing continued soft-
ness in certain Southern European countries due to chal-
lenging economic environments. Excluding the impact of
foreign currency translation, Europe, the Middle East &
Africa net sales increased 9%. Adjusting for the impact of
the accelerated orders, reported net sales in Europe, the
Middle East & Africa would have increased 9%.
Net sales in Asia/Pacific increased 5%, or $111.1 mil-
lion, to $2,232.7 million, primarily reflecting higher sales
in China and Hong Kong of approximately $119 million,
combined. Higher sales in China were primarily driven by
expanded distribution. Despite the higher sales in China,
we are cautious of the lower growth rates we have been
experiencing during the current year. The net sales
increase in Hong Kong was primarily due to higher net
sales from certain of our heritage and luxury brands.
These increases were partially offset by lower net sales in
Japan and Australia of approximately $17 million, com-
bined. The declines in Japan and Australia were driven by
the weakening of their respective currencies, which more
than offset an improvement in their local retail environ-
ments and the impact of the accelerated orders in Japan.
Excluding the impact of foreign currency translation, Asia/
Pacific net sales increased 9%. Adjusting for the impact of
the accelerated orders, reported net sales in Asia/Pacific
would have increased 4%.
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 19.7% as compared with 19.9% in the prior year. Cost
of sales as a percentage of total net sales reflected strate-
gic changes in pricing and the mix of our business of
approximately 30 basis points and favorable manufactur-
ing variances of approximately 10 basis points. Partially
offsetting these changes were an increase in obsoles-
cence charges and the unfavorable effect of exchange
rates 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.