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 months ended September 30, 2009 and 2008, and reflects the basis of presentation described in Note 1 of Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies for 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
                                                              September 30
                                                            2009        2008
                                                             (In millions)
NET SALES
By Region:
The Americas                                             $    892.3   $   939.0
Europe, the Middle East & Africa                              601.9       641.5
Asia/Pacific                                                  357.7       323.0
Returns associated with restructuring activities              (18.5 )         -
                                                         $  1,833.4   $ 1,903.5

By Product Category:
Skin Care                                                $    730.3   $   716.8
Makeup                                                        717.9       742.9
Fragrance                                                     291.5       327.8
Hair Care                                                      97.9        98.8
Other                                                          14.3        17.2
Returns associated with restructuring activities              (18.5 )         -
                                                         $  1,833.4   $ 1,903.5
OPERATING INCOME (LOSS)
By Region:
The Americas                                             $    113.9   $    56.5
Europe, the Middle East & Africa                               93.3         7.6
Asia/Pacific                                                   55.5        28.5
Total charges associated with restructuring activities        (42.3 )      (0.1 )
                                                         $    220.4   $    92.5

By Product Category:
Skin Care                                                $    114.3   $    43.5
Makeup                                                        107.8        54.4
Fragrance                                                      28.2        (5.5 )
Hair Care                                                       9.6        (1.0 )
Other                                                           2.8         1.2
Total charges associated with restructuring activities        (42.3 )      (0.1 )
                                                         $    220.4   $    92.5

                        THE ESTÉE LAUDER COMPANIES INC.



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



                                                                  Three Months Ended
                                                                     September 30
                                                                  2009         2008

Net sales                                                           100.0 %      100.0 %
Cost of sales                                                        24.3         26.3
Gross profit                                                         75.7         73.7

Operating expenses:
Selling, general and administrative                                  62.7         68.9
Restructuring and other special charges                               1.0            -
                                                                     63.7         68.9

Operating income                                                     12.0          4.8
Interest expense, net                                                 1.1          0.8

Earnings before income taxes                                         10.9          4.0
Provision for income taxes                                            3.4          1.4

Net earnings                                                          7.5          2.6
Net loss attributable to noncontrolling interests                     0.2          0.1

Net earnings attributable to The Estée Lauder Companies Inc.          7.7 %        2.7 %

In order to meet the demands of consumers, we continually introduce new products, support new and established products through advertising, sampling and merchandising 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

Global economic challenges and uncertainties have had a significant impact on our business since our fiscal 2009 second quarter. These challenges and uncertainties have negatively affected consumer demand, which had 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 the overall decline in our net sales during the current-year period. Despite these conditions, some of which continue to exist today, our results for the current-year period exceeded our original net sales expectations and reflected lower spending levels in each of the Company's geographic regions. The higher than expected results, in part, stem from strong sell-in of new product launches, an improvement in our profitable travel retail business, improved foreign currency translation and cautionary spending from most brands in light of the uncertainty surrounding the global economic environment and the potential impact of the H1N1 virus.

In the Americas region, the U.S. department store channel was negatively impacted by a soft retail environment. As a result of the economic downturn, the spending patterns of consumers has changed, which has resulted in lower net sales of many of our higher-end prestige products. We are taking action to recapture sales of these products, as well as our other product offerings, by emphasizing value, quality and innovation. While our business continued to suffer from lower store traffic and destocking, we gained share in the skin care and makeup categories at U.S. department stores during the current-year period. Our net sales also benefited from new product offerings. 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 ("DRTV") grew moderately.

Global economic uncertainty has also impacted our business in Europe, the Middle East & Africa. Net sales in many markets declined during the current-year period as retailer destocking and tighter working capital management activities by the retailer continued. Sales and profits in our travel retail business have exceeded our expectations as a result of successful product launches, select trade re-stocking and new points of distribution. While passenger traffic remains at lower levels from the prior-year period, the current trends appear to be improving.

At this time, our business in the Asia/Pacific region has been least affected by the global financial crisis, with net sales growing in substantially all countries in the region. Net sales in China grew at a faster pace than in the other countries in the region as we continue our expansion in this emerging market. Strong constant currency net sales increases in Korea and Australia were lessened by unfavorable currency translation.

In addition to the ongoing global financial crisis, net sales during the current-year period have been negatively impacted by foreign currency translation, though to a lesser extent than we anticipated.

We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. If the U.S. dollar strengthens, there would be an adverse impact on our future results.

We have continued to aggressively implement Company-wide cost containment efforts and a more measured approach to spending during the current-year period. Despite the significant improvement in our operating results, we remain cautious regarding the uncertain duration of the global economic downturn as well as the potential impact of the H1N1 virus. For the remainder of the fiscal year, we expect to accelerate investment spending above first quarter levels behind our brands and key priorities.

Charges Associated with Restructuring Activities

In an effort to drive down costs and achieve synergies within our organization, 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, inclusive of cumulative charges recorded to date and over the next few fiscal years, totaling between $350 million and $450 million before taxes.

We expect that the implementation of this Program, combined with other on-going cost savings efforts, will result in savings of approximately $450 million to $550 million (beginning with approximately $175 million to $200 million in fiscal 2010) including the reduction of certain costs relative to an assumed normalized spending pattern. Our long-range forecast for operating margin reflects these anticipated savings, net of strategic reinvestments.

The Program focuses on a redesign of our organizational structure in order to integrate the Company in a more cohesive way and operate more globally across brands and functions. The principal aspect of the Program is the reduction of the workforce by approximately 2,000 employees. Specific actions taken during the three months ended September 30, 2009 included:

† Resize and Reorganize the Organization - We continued the realignment and optimization of our organization to better leverage scale, improve productivity and reduce complexity in each region and across various functions. This included reduction of the workforce which occurred through the consolidation of certain functions through a combination of normal attrition and job eliminations.

† Exit Unprofitable Operations - To improve the profitability in certain of our brands and regions, we have selectively exited certain channels of distribution, categories and markets. During the first quarter of fiscal 2010, we approved the exit from the global wholesale distribution of our Prescriptives brand by January 31, 2010. In connection with these activities, we recorded a reserve for anticipated product returns, wrote off inventory and incurred costs to reduce workforce and terminate contracts.

† Outsourcing - In order to balance the growing need for information technology support with our efforts to provide the most efficient and cost effective solutions, we continued the outsourcing of certain information technology processes. We incurred costs to transition services to an outsource provider.

For the three months ended September 30, 2009, aggregate restructuring charges of $14.7 million were recorded in our consolidated statements of earnings related to the Program. These charges reflected employee-related costs, asset write-offs, contract terminations and other exit costs.

                        THE ESTÉE LAUDER COMPANIES INC.



The following table presents accrued restructuring and the related activity as
of and for the three months ended September 30, 2009 under the Program:



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

Balance at June 30, 2009         $      51.6    $          -    $         2.9    $        0.2    $   54.7
Charges                                 13.4             0.2              0.6             0.5        14.7
Cash payments                          (14.8 )             -             (0.8 )          (0.7 )     (16.3 )
Non-cash write-offs                        -            (0.2 )              -               -        (0.2 )
Translation adjustments                  0.5               -                -               -         0.5
Balance at September 30, 2009    $      50.7    $          -    $         2.7    $          -    $   53.4

Accrued restructuring charges at September 30, 2009 are expected to result in cash expenditures funded from cash provided by operations of approximately $37 million, $14 million and $2 million in fiscal 2010, 2011 and 2012, respectively.

Cumulative restructuring charges related to the Program as of September 30, 2009 were as follows:

                          September 30
(In millions)                 2009

Employee-related costs   $         74.3
Asset write-offs                    4.4
Contract terminations               4.0
Other exit costs                    2.3
Total                    $         85.0

The total amount of restructuring charges incurred plus other initiatives approved through September 30, 2009, include approximately $90 million for employee-related costs, approximately $7 million in asset write-offs and approximately $12 million of contract terminations and other exit costs.

We incurred other special charges in connection with the implementation of the Program for the three months ended September 30, 2009 of $3.5 million related to consulting, other professional services, and accelerated depreciation. The total amount of other special charges expected to be incurred to implement these initiatives, including those incurred through September 30, 2009, is approximately $38 million. In addition to the other special charges, and predominantly related to the exit from the global wholesale distribution of the Prescriptives brand, we recorded $18.5 million reflecting anticipated sales returns (less a related cost of sales of $3.9 million) and a write-off of inventory associated with exiting unprofitable operations of $9.5 million. The total amounts expected to be incurred, including those incurred through September 30, 2009, related to sales returns is between $29 million to $33 million and approximately $10 million related to inventory write-offs.

Total charges associated with restructuring activities included in operating income for the three months ended September 30, 2009 were $42.3 million.

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 working capital management, will continue to negatively affect our net sales and operating results. In line with our strategic plan, we will continue to seek ways to contain costs and reduce our inventory levels.

First Quarter Fiscal 2010 as Compared with First Quarter Fiscal 2009

NET SALES

Net sales decreased 4%, or $70.1 million, to $1,833.4 million, primarily reflecting declines in Europe, the Middle East & Africa and in the Americas, partially offset by growth in Asia/Pacific. Net sales decreases in the fragrance, makeup and hair care product categories were partially offset by growth in the skin care category. Excluding the $54.3 million impact of foreign currency translation, net sales decreased slightly. The following discussions of Net Sales by Product Categories and Geographic Regionsexclude the impact of anticipated returns associated with restructuring activities of $18.5 million recorded during the current-year period. We believe the following analysis of net sales better reflects the manner in which we conduct and view our business.

Product Categories

Skin Care

Net sales of skin care products increased 2%, or $13.5 million, to $730.3 million. The recent launches of Advanced Night Repair Synchronized Recovery Complex and the new Time Zone line of moisturizing products from Estée Lauder contributed incremental sales of approximately $63 million, combined. These increases were partially offset by approximately $47 million of lower sales from existing products in the Perfectionist, Advanced Night Recovery, Idealist and Future Perfect lines from Estée Lauder and products from Good Skin LabsTM, as well as Clinique's 3-Step Skin Care System, which anniversaried a program that featured value-driven introductory kits. Excluding the impact of foreign currency translation, skin care net sales increased 5%.

Makeup

Makeup net sales decreased 3%, or $25.0 million, to $717.9 million, primarily reflecting lower combined net sales from our heritage brands. These declines reflected a challenging comparison to the prior-year period which featured a greater number of new launches. Among those prior-year launches were High Impact Lip Colour SPF 15, reformulated Superfit Makeup and Defining Liner for Lips from Clinique and Sumptuous Bold Volume Lifting Mascara from Estée Lauder, which collectively had lower sales of approximately $26 million in the current-year period. Sales declines in most other product lines were mostly offset by approximately $25 million of incremental sales from the recent launches of Even Better Makeup SPF 15 and Superbalanced Powder Makeup SPF 15 from Clinique and Double Wear Stay-in-Place Lip and Eye Pencils from Estée Lauder. Excluding the impact of foreign currency translation, makeup net sales decreased 1%.

Fragrance

Net sales of fragrance products decreased 11%, or $36.3 million, to $291.5 million, due in part to the continued economic downturn, coupled with competitive dynamics. This decline reflected lower sales of DKNY Delicious Night and Estée Lauder Sensuous, which were launched in the prior-year period, of approximately $17 million combined. Also contributing to the decrease were certain Sean John and Clinique fragrances, as well as DKNY Red Delicious Women and Estée Lauder pleasures delight, which collectively reflected lower sales of approximately $23 million. The recent launches of DKNY Be Delicious Fresh Blossom and Very Hollywood Michael Kors partially offset these declines by collectively contributing sales of approximately $13 million to the category. Excluding the impact of foreign currency translation, fragrance net sales decreased 8%.

Hair Care

Hair care net sales decreased 1%, or $0.9 million, to $97.9 million, primarily reflecting a soft salon retail environment in the United States. These declines were partially offset by overall growth in the Asia/Pacific region, as well as an increase in net sales of styling and hair color products and sales generated from direct-response television programs. Excluding the impact of foreign currency translation, hair care net sales increased 1%.

Geographic Regions

Net sales in the Americas decreased 5%, or $46.7 million, to $892.3 million. This decrease was mostly driven by lower net sales in the United States. Net sales in Canada and Latin America were relatively flat as compared with the prior-year period and reflected the adverse impact of the strengthening of the U.S. dollar. Economic conditions in the Americas 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 4%.

In Europe, the Middle East & Africa, net sales decreased 6%, or $39.6 million, to $601.9 million, primarily reflecting the unfavorable impact of foreign currency translation. Net sales decreases of approximately $34 million were reported in the United Kingdom, Spain, Italy and the Balkans, reflecting the stronger dollar, a soft retail environment and customer destocking. Partially offsetting these decreases were higher net sales of approximately $6 million in the Middle East, from our travel retailing business and in South Africa. Excluding the impact of foreign currency translation, net sales in Europe, the Middle East & Africa were flat as compared with the prior-year period.

Net sales in Asia/Pacific increased 11%, or $34.7 million, to $357.7 million, reflecting growth from substantially all countries in the region. China, Hong Kong, Japan and Korea contributed approximately $31 million to the increase. Net sales growth in China, Hong Kong, Korea and Australia benefited from the launches of new skin care products while the sales increase in Japan was generated from the strengthening of the Japanese yen. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 12%.

We believe the unfavorable global economic conditions will continue to adversely impact our 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 decreased to 24.3% as compared with 26.3% in the prior-year period. This improvement primarily reflected favorable changes in the mix of our business of approximately 90 basis points, as well as lower obsolescence charges and favorable manufacturing variances of approximately 50 basis points, each. Also contributing to the improvement in cost of sales margin was a decrease in the level and timing of promotional activities of approximately 40 basis points and the favorable effect of exchange rates of approximately 20 basis points. Partially offsetting these improvements was the impact of charges associated with restructuring activities of approximately 50 basis points.

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 or channels of distribution which have margin and product cost structures different from those of our current mix of business.

OPERATING EXPENSES

Operating expenses decreased to 63.7% of net sales as compared with 68.9% of net sales in the prior-year period. In light of the uncertainty surrounding the global economic environment and the potential impact of the H1N1 virus, we aggressively applied various Company-wide cost containment efforts and a more measured approach to spending. The implementation of these initiatives helped reduce selling, general and administrative costs by approximately 270 basis points and advertising, merchandising and sampling costs by approximately 200 basis points. Also contributing to the improvement in operating expense margin were lower net losses from foreign exchange transactions of approximately 100 basis points and an adjustment associated with incentive-based compensation of approximately 80 basis points. Partially offsetting these improvements were charges associated with restructuring activities, as previously discussed, of approximately 100 basis points and higher costs of global information technology systems and infrastructure of approximately 80 basis points.

Changes in advertising, sampling and merchandising 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 increased over 100%, or $127.9 million, to $220.4 million. Operating margin improved to 12.0% of net sales as compared with 4.8% in the prior-year period, reflecting our higher gross margin and the decrease in our operating expense margin as previously discussed. The following discussions of Operating Results by Product Categoriesand Geographic Regions exclude the impact of total charges associated with restructuring activities of $42.3 million, or 2.3% 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

All product categories benefited from Company-wide cost containment initiatives and a more measured approach to spending, as well as strict inventory management, resulting in significant improvements in their operating income. Skin care operating income increased over 100%, or $70.8 million, to $114.3 million, primarily reflecting improved results from certain of our heritage brands driven by increased net sales from higher-margin product launches. Makeup operating income increased 98%, or $53.4 million, to $107.8 million, primarily reflecting improved results from certain of our heritage brands and from our makeup artist brands. Fragrance operating results increased over 100%, or $33.7 million, to $28.2 million, primarily reflecting a favorable comparison to the prior-year period's support spending behind the launches of Estée Lauder Sensuous and DKNY Delicious Night. Hair care operating results increased over 100%, or $10.6 million, to $9.6 million, primarily reflecting savings generated from cost containment initiatives.

Geographic Regions

Operating income in the Americas increased over 100%, or $57.4 million, to $113.9 million, driven by Company-wide cost containment efforts and a more measured approach to spending, particularly from certain of our heritage brands and our makeup artist brands, partially offset by lower net sales as previously discussed.

In Europe, the Middle East & Africa, operating income increased over 100%, or $85.7 million, to $93.3 million, reflecting improvements in travel retail and substantially all countries in the region. This increase reflected higher results from our travel retail business and in the United Kingdom, Russia, France, Spain and Germany of approximately $67 million, combined.

In Asia/Pacific, operating income increased 95%, or $27.0 million, to $55.5 . . .