RESULTS OF OPERATIONS

We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories which are distributed in over 140 countries and territories. The following is a comparative summary of operating results for the three and nine months ended March 31, 2009 and 2008, and reflects the basis of presentation described in Note 1 of Notes to Consolidated Financial Statements - Summary of Significant Accounting Policiesfor all periods presented. Sales of products and services that do not meet our definition of skin care, makeup, fragrance or hair care have been included in the "other" category.

                                                Three Months Ended       Nine Months Ended
                                                     March 31                March 31
                                                 2009        2008        2009        2008
                                                              (In millions)
NET SALES
By Region:
The Americas                                  $    804.4   $   880.9   $ 2,647.2   $ 2,808.0
Europe, the Middle East & Africa                   583.5       701.5     1,987.3     2,185.9
Asia/Pacific                                       308.6       297.4     1,006.5       904.8
                                              $  1,696.5   $ 1,879.8   $ 5,641.0   $ 5,898.7

By Product Category:
Skin Care                                     $    709.0   $   756.8   $ 2,198.2   $ 2,207.5
Makeup                                             694.5       755.7     2,165.7     2,246.1
Fragrance                                          187.7       259.1       930.5     1,092.6
Hair Care                                           90.6        98.2       297.9       311.2
Other                                               14.7        10.0        48.7        41.3
                                              $  1,696.5   $ 1,879.8   $ 5,641.0   $ 5,898.7

OPERATING INCOME (LOSS)
By Region:
The Americas                                  $     13.3   $    50.4   $   124.2   $   193.8
Europe, the Middle East & Africa                    28.0        77.3       165.2       293.3
Asia/Pacific                                        35.2        32.8       150.3       122.0
Restructuring and other special charges (1)         (6.2 )       0.7        (6.6 )       0.5
                                              $     70.3   $   161.2   $   433.1   $   609.6

By Product Category:
Skin Care                                     $     61.2   $    96.0   $   241.6   $   298.3
Makeup                                              63.7        93.2       226.3       283.7
Fragrance                                          (45.0 )     (28.2 )     (37.0 )      15.0
Hair Care                                           (3.3 )      (0.8 )      10.1        12.9
Other                                               (0.1 )       0.3        (1.3 )      (0.8 )
Restructuring and other special charges (1)         (6.2 )       0.7        (6.6 )       0.5
                                              $     70.3   $   161.2   $   433.1   $   609.6

                        THE ESTÉE LAUDER COMPANIES INC.



The following table presents certain consolidated earnings data as a percentage
of net sales:



                                             Three Months Ended      Nine Months Ended
                                                  March 31                March 31
                                             2009         2008        2009        2008

Net sales                                      100.0 %      100.0 %    100.0 %     100.0 %
Cost of sales                                   26.3         25.1       25.8        25.5
Gross profit                                    73.7         74.9       74.2        74.5
Operating expenses:
Selling, general and administrative             68.3         66.3       66.1        64.1
Restructuring and other special charges          0.4         (0.0 )      0.1        (0.0 )
Other intangible asset impairments               0.9            -        0.3           -
                                                69.6         66.3       66.5        64.1

Operating income                                 4.1          8.6        7.7        10.4
Interest expense, net                            1.2          0.9        1.0         0.9

Earnings before income taxes and
minority interest                                2.9          7.7        6.7         9.5
Provision for income taxes                       1.2          2.8        2.5         3.4
Minority interest, net of tax                   (0.1 )       (0.1 )     (0.0 )      (0.1 )

Net earnings                                     1.6 %        4.8 %      4.2 %       6.0 %

In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers. The economics of developing, producing, launching and supporting products influence our sales and operating performance each period. The introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

Overview

The recent economic challenges and uncertainties in a number of countries where we do business, including the United States, have had a significant impact on our business during the current-quarter and current-year periods. This financial crisis is global in scale and has negatively affected consumer demand, which is having an adverse impact on our customers that are retailers as well as on our own retail stores. These events have led to significant retailer destocking and changes in their ordering patterns for the products that we sell, which has contributed to volatility in our results of operations during these periods.

In the Americas region, the U.S. department store channel experienced a very soft retail environment, which deteriorated beyond our expectations. While our business continues to suffer from lower store traffic and destocking, we believe that we gained share in the beauty business at U.S. department stores with the help of positive consumer response to new product offerings and gift sets, particularly in the skin care category. Net sales results in alternative channels were generally mixed. Trends at our freestanding retail stores followed those in department stores while sales of our products online and via direct response television continued to grow.

Global economic uncertainty has also impacted our business in Europe, the Middle East & Africa. Net sales in many of our key markets declined during the current-quarter and current-year periods. Our business was also impacted by retailer destocking and tighter working capital management. Sales and profits in our travel retail business fell sharply due to a slowdown in passenger traffic, retailer destocking and the impact of weaker currencies.

At this time, our business in the Asia/Pacific region has been least affected by the global financial crisis, with net sales rising double digits in several countries, although growth in the region has slowed overall, including Japan, our largest market there. Net sales in China grew at a faster pace than the other markets in the region as we continue our expansion in this emerging market. In Korea, the weakness of the Korean won has put pressure on our reported sales in that country. Despite the overall net sales increase in this region, growth has been tempered by a softening retail environment, which we believe will continue and may worsen.

In addition to the ongoing global financial crisis, our business has been negatively impacted by changes in foreign currency exchange rates caused by the dramatic strengthening of the U.S. dollar during the current-quarter and current-year periods. If the current exchange rates persist or the U.S. dollar continues to strengthen, there will be a continuing adverse impact on our results for the full fiscal year.

We are reviewing our plans and taking actions to mitigate the impact of these conditions. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. Skin care, which is our most profitable category, is a priority for our strategic, innovative and support spending. While our business strategies are designed to strengthen the Company over the long-term, we believe the uncertainty about future market conditions, consumer spending patterns and the financial strength of some of our retail customers, coupled with retailer destocking, will continue to negatively affect our net sales and operating results. Therefore, our cost-containment plans that we implemented throughout the Company during the first fiscal quarter will continue for the remainder of the fiscal year.

In February 2009, we announced the implementation of a multi-faceted cost savings program (the "Program") to position the Company to achieve long-term profitable growth. We anticipate the Program will result in related restructuring and other special charges over the next few fiscal years totaling between $350 million and $450 million before taxes. The Program includes organizational resizing and regional realignments which principally reflects the reduction of the workforce by approximately 2,000 employees. When the Program is fully implemented and when combined with certain other on-going cost savings efforts, we expect to realize savings of between $450 million and $550 million.

During fiscal 2009, we approved cost savings initiatives to resize the organization, reorganize certain functions, exit unprofitable operations and outsource certain services. For the three and nine months ended March 31, 2009, aggregate expenses of $7.0 million and $10.3 million, respectively, were recorded as Restructuring and other special charges related to the Program in our consolidated statements of earnings. These charges primarily reflected employee-related costs, asset write-offs, contract terminations and other special charges.

The following tables present the restructuring charges incurred for the three and nine months ended March 31, 2009 under the Program. Substantially all of these charges are expected to result in cash expenditures funded from cash provided by operations, with a majority of the cash payments expected to be made through fiscal 2010.

                               Three Months Ended     Nine Months Ended
                                 March 31, 2009        March 31, 2009
                                            (In millions)

Employee-related costs        $                4.3   $               5.5
Asset write-offs                               0.1                   0.1
Contract terminations                          0.1                   0.1
Other exit costs                               0.1                   0.1
Total restructuring charges   $                4.6   $               5.8

The total amount of restructuring charges expected to be incurred in connection with these initiatives, plus other initiatives approved through April 16, 2009, include approximately $28 million for employee-related costs, approximately $4 million in asset write-offs and approximately $5 million of contract terminations and other exit costs.

The related liability balances and activity for these restructuring charges are shown below.

                             Employee-
                              Related        Asset         Contract
                               Costs       Write-offs    Terminations    Other    Total
                                                   (In millions)

Charges                     $       5.5   $        0.1   $         0.1   $  0.1   $  5.8
Cash payments                      (1.3 )            -            (0.1 )   (0.1 )   (1.5 )
Non-cash write-offs                   -           (0.1 )             -        -     (0.1 )
Adjustments                           -              -               -        -        -
Balance at March 31, 2009   $       4.2   $          -   $           -   $    -   $  4.2

In addition to the charges included in the above tables, we incurred other special charges in connection with the Program for the three and nine months ended March 31, 2009 of $2.4 million and $4.5 million, respectively, related to consulting, other professional services, and accelerated depreciation. The total amount of other special charges expected to be incurred to implement these initiatives, plus other initiatives approved through April 16, 2009, is approximately $36 million.

During the three and nine months ended March 31, 2009, we recorded gains of $0.8 million and $3.7 million, respectively, related to adjustments to accruals that were recorded as other special charges in prior periods.

Third Quarter Fiscal 2009 as Compared with Third Quarter Fiscal 2008

NET SALES

Net sales decreased 10%, or $183.3 million, to $1,696.5 million, reflecting declines in each of our major product categories. Geographically, net sales decreases in Europe, the Middle East & Africa and the Americas were partially offset by growth in Asia/Pacific. Excluding the $141.6 million impact of foreign currency translation, net sales decreased 2%.

Product Categories

Skin Care

Net sales of skin care products decreased 6%, or $47.8 million, to $709.0 million, primarily reflecting declines in net sales from our core brands. Despite the difficult economic environment and the unfavorable impact of foreign currency translation, we continued to enhance select product lines to address the needs of our consumers. The recent launches of Perfectionist [CP+] Wrinkle Lifting Serum and the new Time Zone line of moisturizing products from Estée Lauder and Youth Surge SPF 15 Age Decelerating Moisturizer and Superdefense SPF 25 Age Defense Moisturizer from Clinique contributed incremental sales of approximately $59 million, combined. While these new product launches contributed favorably to the category, they were partially offset by lower sales from other existing products in the Perfectionist line from Estée Lauder and the Superdefense line from Clinique. Net sales of most other product lines in this category also experienced declines, particularly in Europe, the Middle East & Africa and the Americas, partially offset by high single-digit growth in Asia/Pacific. Excluding the impact of foreign currency translation, skin care net sales increased 2%.

Makeup

Makeup net sales decreased 8%, or $61.2 million, to $694.5 million, primarily reflecting lower net sales from our core brands of approximately $53 million. Lower net sales in the makeup product category also reflected a net decrease from our makeup artist brands of approximately $4 million. These declines were mitigated in part by recent product launches of reformulated Superfit Makeup and Quick Blush from Clinique and TurboLash All Effects Motion Mascara from Estée Lauder of approximately $19 million, combined, as well as incremental net sales from new international points of distribution. Excluding the impact of foreign currency translation, makeup net sales decreased 1%.

Fragrance

Net sales of fragrance products decreased 28%, or $71.4 million, to $187.7 million. This decline was largely due to lower sales of designer fragrances, of which approximately $48 million was attributable to certain DKNY, Tommy Hilfiger and Sean John fragrances. Also contributing to the decrease were lower sales of certain Estée Lauder and Clinique fragrances of approximately $24 million, combined. The recent launches of the new DKNY Men fragrance and Estée Lauder Sensuous partially offset these declines by collectively contributing sales of approximately $15 million to the category. Excluding the impact of foreign currency translation, fragrance net sales decreased 18%.

Hair Care

Hair care net sales decreased 8%, or $7.6 million, to $90.6 million. Net sales declined primarily as a result of a softer salon retail environment in the United States, which included a reduction in points of distribution. These declines were partially offset by incremental sales from new products, such as Dry Remedy Shampoo and Conditioner from Aveda, and an increase in points of distribution outside of the United States, including the acquisition of an independent distributor in Australia. Excluding the impact of foreign currency translation, hair care net sales decreased 4%.

Geographic Regions

Net sales in the Americas decreased 9%, or $76.5 million, to $804.4 million. Lower net sales in the United States from our core brands and our makeup artist brands contributed approximately $50 million to the decrease. Net sales declines in Canada and Latin America of approximately $15 million, combined, added to the decrease and reflected the adverse impact of the strengthening of the U.S. dollar. Economic conditions in this region, particularly in the department store channel, have negatively impacted our businesses. Ongoing challenges faced by certain of our department store customers in the United States may continue to affect our net sales for the short and medium term. Excluding the impact of foreign currency translation, net sales in the Americas decreased 7%.

In Europe, the Middle East & Africa, net sales decreased 17%, or $118.0 million, to $583.5 million, reflecting the unfavorable impact of foreign currency translation. Net sales decreases of approximately $97 million were driven by our travel retail business, the United Kingdom, Spain, France and Italy. These performances reflected retailer destocking and tighter working capital management by certain key retailers. Net sales in our travel retail business also declined due to a significant slowdown in passenger traffic and the impact of weaker currencies in certain key markets. Excluding the impact of foreign currency translation, net sales in Europe, the Middle East & Africa decreased 3%.

Net sales in Asia/Pacific increased 4%, or $11.2 million, to $308.6 million, reflecting higher net sales of approximately $24 million in China, Japan and Hong Kong. Net sales growth in China and Hong Kong benefited from the launches of new skin care products while Japan's increase was generated from the strengthening of the Japanese yen. Partially offsetting these increases were lower net sales of approximately $9 million in Korea, Australia and New Zealand, reflecting the strengthening of the U.S. dollar against their respective local currencies. Despite the overall net sales increase in this region, growth has been tempered by a softening retail environment, which we believe will continue and may worsen. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 13%.

We believe the economic conditions that are currently having a negative impact on the global economy will likely have an adverse impact on our future financial performance. We cannot predict with certainty the magnitude or duration of the impact or how it will vary across each of our geographic regions.

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 increased to 26.3% as compared with 25.1% in the prior-year period. Approximately 100 basis points of this increase were related to excess overhead costs that will not be recovered based on lower current and future planned production levels. The change in cost of sales margin also reflected an increase in the level and timing of promotional activities of approximately 40 basis points, as well as the negative effect of exchange rates and an unfavorable change in the mix of our business of approximately 20 basis points, each. Partially offsetting these increases were favorable changes in other manufacturing variances and a decrease in obsolescence charges of approximately 30 basis points, each.

Since certain promotional activities are a component of sales or cost of sales and the timing and level of promotions vary with our promotional calendar, we have experienced, 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 new brands which have margin and product cost structures different from those of our existing brands.

OPERATING EXPENSES

Operating expenses increased to 69.6% of net sales as compared with 66.3% of net sales in the prior-year period. In light of the current economic conditions, we continued to apply various cost-containment measures to maintain expenses in line with our business needs and deferred certain spending to the latter part of the fiscal year. While the implementation of these initiatives helped reduce total operating expenses as compared with the prior-year period, the dramatic decline in net sales during the current-year quarter was the principal factor that negatively impacted our operating expense margin. In addition to the decline in net sales, operating expense margin increased by approximately 90 basis points due to other intangible asset impairment charges (see discussion in Critical Accounting Policies). The increase in operating expense margin also reflected higher costs of global information technology systems and infrastructure, charges resulting from the degradation of the businesses of certain of our retail customers, and net losses from foreign exchange transactions of approximately 60 basis points, each. Restructuring and other special charges added approximately 40 basis points to the increase.

Changes in advertising, merchandising and sampling spending result from the type, timing and level of activities related to product launches and rollouts, as well as the markets being emphasized.

OPERATING RESULTS

Operating income decreased 56%, or $90.9 million, to $70.3 million. Operating margin decreased to 4.1% of net sales as compared with 8.6% in the prior-year period, reflecting our lower gross margin and the increase in our operating expense margin as previously discussed. The following discussions of Operating Results by Product Categoriesand Geographic Regions exclude the impact of restructuring and other special charges of $6.2 million, or 0.4% of net sales. We believe the following analysis of operating results better reflects the manner in which we conduct and view our business.

Product Categories

Hair care operating results decreased over 100%, or $2.5 million, primarily reflecting lower net sales as previously discussed. Fragrance operating results decreased 60%, or $16.8 million, primarily reflecting lower net sales of designer fragrance products and certain fragrances from our core brands, partially offset by a reduction in selling, advertising, merchandising and sampling spending. Skin care operating income decreased 36%, or $34.8 million, to $61.2 million, primarily reflecting the decline in net sales and a charge for other intangible asset impairment (see discussion in Critical Accounting Policies). Makeup operating income decreased 32%, or $29.5 million, to $63.7 million, primarily reflecting the decline in net sales. The reduced operating results for the skin care and makeup categories also reflects the majority of the impact of the excess overhead charge, loss from foreign exchange transactions and certain other operating expenses as described above.

Geographic Regions

Operating income in the Americas decreased 74%, or $37.1 million, to $13.3 million. This decline reflected the majority of the impact of the excess overhead charge and the charge related to the degradation of a certain retail customer of approximately $22 million, combined. Also contributing to the decline were lower sales experienced by the majority of our businesses in the region due to current economic conditions, partially offset by cost containment and contingency plan efforts.

In Europe, the Middle East & Africa, operating income decreased 64%, or $49.3 million, to $28.0 million. This decrease reflected lower results of approximately $35 million in our travel retail business, the United Kingdom, Italy, Spain and Russia. Operating income growth in France and Germany partially offset these declines by approximately $9 million, combined. The decline in the region also reflected a charge for other intangible asset impairment (see Critical Accounting Policies).

In Asia/Pacific, operating income increased 7%, or $2.4 million, to $35.2 million, primarily reflecting improved results in Hong Kong, Taiwan and Korea of approximately $4 million, collectively. Partially offsetting these improvements were lower results in Japan and Malaysia of approximately $1 million, combined.

INTEREST EXPENSE, NET

Net interest expense was $20.6 million as compared with $16.1 million in the prior-year period. This increase primarily resulted from higher average debt balances, which include an additional $300.0 million of senior notes issued in November 2008, partially offset by lower average interest rates on borrowings.

PROVISION FOR INCOME TAXES

The provision for income taxes represents Federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax audit settlements and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

The effective rate for income taxes for the three months ended March 31, 2009 was 43.1% as compared with 37.0% in the prior-year period. The increase in the effective income tax rate of 610 basis points was primarily attributable to the non-deductibility of the Darphin trademark impairment charge recognized in the current quarter (see discussion in Critical Accounting Policies) as well as a net increase in the gross amount of unrecognized tax benefits and related . . .