Estee Lauder 2015 Annual Report Download - page 75

72 THE EST{E LAUDER COMPANIES INC.
approximately $7 million, combined, driven by the weak-
ening of their respective currencies. 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. 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 par-
tially offset by lower net sales in Japan and Australia of
approximately $17 million, combined. The declines in
Japan and Australia were driven by the weakening of their
respective currencies, which more than offset an improve-
ment in their local retail environments 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 fiscal 2013. Cost of
sales as a percentage of total net sales reflected strategic
changes in pricing and the mix of our business of approx-
imately 30 basis points and favorable manufacturing
variances of approximately 10 basis points. Partially offset-
ting these changes were an increase in obsolescence
charges and the unfavorable effect of exchange rates of
approximately 10 basis points, each.
OPERATING EXPENSES
Operating expenses as a percentage of net sales
decreased to 63.6% as compared with 65.1% in fiscal
2013. 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
favorable comparison to fiscal 2013, which reflected
restructuring, goodwill and other impairment charges of
approximately 40 basis points, combined. These improve-
ments were partially offset by a charge in fiscal 2014 to
remeasure net monetary assets in Venezuela of approxi-
mately 30 basis points and unfavorable changes in foreign
exchange transactions of approximately 10 basis points.
Adjusting for the impact of the accelerated orders in fiscal
2014, 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 fiscal 2013, which
primarily reflected our lower operating expense margin
and, to a lesser extent, our higher gross margin. The over-
all operating results were also impacted by approximately
$127 million related to the accelerated orders in fiscal
2014, as discussed above, which created a favorable com-
parison to fiscal 2013, partially offset by the fiscal 2014
remeasurement of net monetary assets in Venezuela of
$38.3 million. 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 fiscal
2014 and charges (adjustments) associated with restruc-
turing activities, operating income would have increased
10% and operating margin would have increased 50
basis points.
Product Categories
The overall change in operating results in each product
category benefited from the accelerated orders during
fiscal 2014, as discussed above, as follows: skin care,
approximately $72 million; makeup, approximately $41
million; fragrance, approximately $14 million; and the
impact on hair care was de minimis.
Skin care operating income increased 18%, or $145.7
million, to $975.8 million, primarily reflecting higher
results driven by fiscal 2014 product launches from Estée
Lauder and Clinique and higher sales of luxury skin care
products. Makeup operating income increased 23%, or
$135.5 million, to $715.9 million, primarily reflecting
improved results from our makeup artist brands and cer-
tain of our heritage brands, attributable to growth in net
sales. We reallocated our investment spending among