Estee Lauder 2014 Annual Report Download - page 63

THE EST{E LAUDER COMPANIES INC. 61
offerings from our heritage and makeup artist brands. Net
sales in Canada increased approximately $13 million,
primarily reflecting increased sales from certain of our
heritage brands as a result of expanded distribution.
These increases also reflected the efforts of our expanded
pull/push activities, which included innovative advertising
that continued to draw new consumers to our brands and
our ongoing efforts to work with retailers in the United
States and Canada on strengthening the “High-Touch”
concepts used to help market our products. Net sales in
Latin America increased approximately $19 million, led by
Venezuela and Mexico. The impact of foreign currency
translation on net sales in the Americas was de minimis.
In Europe, the Middle East & Africa, net sales increased
4%, or $155.5 million, to $3,758.7 million, primarily
reflecting higher sales from our travel retail business and
in the United Kingdom and the Middle East of approxi-
mately $185 million, combined. The net sales increase in
our travel retail business primarily reflected a strong retail
environment for our products, new product launches and,
to a lesser extent, an increase in global airline passenger
traffic. Higher sales in the United Kingdom were primarily
driven by our makeup artist brands and new product
launches from certain of our heritage brands. In addition,
the United Kingdom benefited from increased sales of
certain of our luxury fragrance and skin care products.
Higher sales in the Middle East were primarily driven by
our makeup artist brands and sales of luxury fragrances.
These increases in the region were partially offset by
lower net sales in Spain, Russia, Switzerland and the
Balkans of approximately $45 million, combined. With
the exception of Russia, these lower net sales reflected the
challenging economic environments in certain countries
in Europe. The lower net sales in Russia primarily reflected
destocking associated with challenges with a certain cus-
tomer. The overall change in Europe, the Middle East &
Africa net sales was inclusive of unfavorable exchange
rates due to the strengthening of the U.S. dollar against
most currencies in this region of approximately $75
million. Excluding the impact of foreign currency transla-
tion, net sales in Europe, the Middle East & Africa
increased 6%.
Net sales in Asia/Pacific increased 5%, or $110.2 mil-
lion, to $2,121.6 million, primarily reflecting growth in our
sales of skin care products, in line with our strategy. We
increased sales by approximately $160 million in China
and Hong Kong. Net sales in China benefited from
expanded distribution. Higher sales in Hong Kong were
primarily driven by launches from our heritage brands and
higher-end prestige skin care products. These increases
were partially offset by lower net sales in Korea and Japan
of approximately $66 million, combined. The lower net
sales in Korea primarily reflected a challenging economic
environment and continued competitive pressures facing
prestige beauty in Korea. The decline in Japan was driven
by the weakening of the Japanese yen. Excluding the
impact of foreign currency translation, net sales in Asia/
Pacific increased 6%.
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 19.9% as compared with 20.5% in fiscal 2012. This
improvement reflected changes in the mix of our business
and pricing of approximately 40 basis points, favorable
manufacturing variances of approximately 20 basis points
and the favorable effect of exchange rates of approxi-
mately 10 basis points. These improvements were partially
offset by a provision for foreign transactional taxes of
approximately 10 basis points.
OPERATING EXPENSES
Operating expenses as a percentage of net sales
decreased to 65.1% as compared with 66.0% in fiscal
2012. This improvement reflected a decrease in general
and administrative costs as a percentage of net sales of
approximately 50 basis points, a decrease in charges asso-
ciated with restructuring activities of approximately 40
basis points and lower selling and shipping costs as a
percentage of net sales of 10 basis points. Also included
in this improvement was a favorable change in foreign
exchange transactions of approximately 10 basis points
and lower charges associated with other intangible asset
impairments of approximately 10 basis points. Partially
offsetting these improvements were higher costs related
to stock-based compensation of approximately 20 basis
points and increased spending on advertising, merchan-
dising and sampling in line with our strategy 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.
OPERATING RESULTS
Operating income increased 16%, or $214.3 million, to
$1,526.0 million. Operating margin increased to 15.0%
of net sales as compared with 13.5% in fiscal 2012, reflect-
ing our higher gross margin and the decrease in our
operating expense margin, as previously discussed. The