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EL > SEC Filings for EL > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for ESTEE LAUDER COMPANIES INC


4-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 150 countries and territories. The following table is a comparative summary of operating results for the three months ended September 30, 2011 and 2010, 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. 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
(In millions)                                                  2011           2010

NET SALES
By Region:
The Americas                                                $   1,105.4    $    997.2
Europe, the Middle East & Africa                                  858.2         680.9
Asia/Pacific                                                      512.4         413.6
                                                                2,476.0       2,091.7
Returns associated with restructuring activities                    0.7             -
                                                            $   2,476.7    $  2,091.7

By Product Category:
Skin Care                                                   $   1,072.9    $    857.7
Makeup                                                            928.8         794.2
Fragrance                                                         356.8         334.5
Hair Care                                                         103.8          94.4
Other                                                              13.7          10.9
                                                                2,476.0       2,091.7
Returns associated with restructuring activities                    0.7             -
                                                            $   2,476.7    $  2,091.7
OPERATING INCOME (LOSS)
By Region:
The Americas                                                $     149.2    $    103.1
Europe, the Middle East & Africa                                  187.7         138.6
Asia/Pacific                                                       97.2          60.9
                                                                  434.1         302.6
Total returns and charges associated with restructuring
activities                                                         (4.1 )        (4.6 )
                                                            $     430.0    $    298.0

By Product Category:
Skin Care                                                   $     223.7    $    149.9
Makeup                                                            159.6         103.2
Fragrance                                                          48.3          50.3
Hair Care                                                           5.1           1.8
Other                                                              (2.6 )        (2.6 )
                                                                  434.1         302.6
Total returns and charges associated with restructuring
activities                                                         (4.1 )        (4.6 )
                                                            $     430.0    $    298.0


Table of Contents

                        THE ESTÉE LAUDER COMPANIES INC.



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



                                                                  Three Months Ended
                                                                     September 30
                                                                  2011         2010

Net sales                                                           100.0 %      100.0 %
Cost of sales                                                        21.6         23.3
Gross profit                                                         78.4         76.7

Operating expenses:
Selling, general and administrative                                  60.9         62.3
Restructuring and other charges                                       0.1          0.2
                                                                     61.0         62.5

Operating income                                                     17.4         14.2
Interest expense, net                                                 0.7          0.7

Earnings before income taxes                                         16.7         13.5
Provision for income taxes                                            5.5          4.4

Net earnings                                                         11.2          9.1
Net loss attributable to noncontrolling interests                       -          0.1

Net earnings attributable to The Estée Lauder Companies Inc.         11.2 %        9.2 %

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, supporting and discontinuing products impact 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.

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. Therefore, we present certain net sales information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates.

Overview

We believe that the best way to continue to increase stockholder value is to provide our customers and consumers with the products and services that they have come to expect from us in the most efficient and profitable manner while recognizing their changing shopping habits. To be the global leader in prestige beauty, we are implementing a long-term strategy that is guiding us through fiscal 2014. The strategy has numerous initiatives across geographic regions, product categories, brands and functions that are designed to leverage our strengths, make us more productive and grow our sales.

We believe we have a strong, diverse brand portfolio with global reach and potential. Our strategy continues to build on and leverage our history of outstanding creativity, innovation and entrepreneurship. We have succeeded in expanding our "High-Touch" service model and will continue to look for ways to expand it in newer channels and within geographic regions. We are expanding our efforts to evolve our e-commerce-based online strategy into a multi-pronged digital strategy encompassing e-commerce, as well as digital and social media. We are leveraging our regional organization in an effort to assure that we are locally relevant in each market.


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THE ESTÉE LAUDER COMPANIES INC.

As part of our strategy, we are continuing to shift our category mix towards higher margin categories with greater global growth potential. Skin care, our most profitable product category, is a strategic priority for our innovation and investment spending, particularly in the Asia/Pacific region. We also focused our attention on luxury consumers across all categories and have seen an improvement in the net sales of many of our higher-end prestige products, due to an improvement in the luxury retail environment.

We are strengthening our geographic presence by seeking share growth in large, image-building cities within core markets such as the United States, the United Kingdom, France, Italy and Japan. In addition, we continue to prioritize efforts to expand our presence and accelerate share growth in emerging markets such as China, Russia, the Middle East, Eastern Europe and Brazil. We continue to expand our digital presence which has resulted in growth in net sales of our products sold over the Internet. In North America, we recognized the need to drive profitable growth in our traditional department store channel and saw many benefits from the changes we have previously implemented and continued to reshape our organization to meet the needs of the changing retail landscape. Internationally, we continue to take actions to grow profitability in European perfumeries and pharmacies and in department stores in Asia, while emphasizing our skin care and makeup initiatives to boost our travel retail business and continuing efforts to grow our online, specialty retailer and prestige salon businesses. The travel retail business continues to be a source of sales growth and profitability. Our business in this channel is benefiting from the implementation of programs we designed to enhance consumers' "High-Touch" experiences and convert travelers into purchasers. In addition, we see travel retail as another way to capture the attention of travelers from emerging markets, who either buy in the channel, in stores at their destinations or when they return to their homes.

The recent economic uncertainty and financial market volatility taking place in the United States, Japan and certain European countries have not significantly impacted our business. This is due in part to our belief that we are better positioned as a result of our strategy to manage our business effectively and efficiently and we will allocate resources appropriately. However, if the degree of uncertainty or volatility worsens or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and as a result, our business. We continue to monitor global economic uncertainties and other risks that may affect our business. The disasters that occurred in Japan during the prior fiscal year did not have a significant impact on our business or our consolidated financial results for the three months ended September 30, 2011.

Returns and 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 charges, inclusive of cumulative charges recorded to date and through the remainder of the Program, totaling between $350 million and $450 million before taxes. While we will continue to seek cost savings opportunities, our current plans are to identify and approve specific initiatives under the Program through fiscal 2012 and execute those initiatives through fiscal 2013. The total amount of charges (pre-tax) associated with the Program recorded, plus other initiatives approved through September 30, 2011, is approximately $305 million to $310 million, of which approximately $200 million to $202 million relates to restructuring charges, approximately $50 million of other costs to implement the initiatives, approximately $39 million to $42 million in sales returns and approximately $16 million in inventory write-offs. The restructuring charges are comprised of approximately $153 million to $155 million of employee-related costs, approximately $27 million of other exit costs and contract terminations (substantially all of which have resulted in or will result in cash expenditures), and approximately $20 million in non-cash asset write-offs. The total amount of cumulative charges (pre-tax) associated with the Program recorded from inception through September 30, 2011 was $243.5 million.

We expect that the implementation of this Program, combined with other on-going cost savings efforts, will result in savings of approximately $675 million to $725 million (program inception through the end of fiscal 2012 is estimated to be approximately $660 million to $690 million) 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.


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THE ESTÉE LAUDER COMPANIES INC.

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 was the reduction of the workforce by approximately 2,000 employees. Specific actions taken since program inception included:

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

† Turnaround or 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, and have made changes to turnaround others. This included the exit from the global wholesale distribution of our Prescriptives brand and the reformulation of Ojon brand products. In connection with these activities, we incurred charges for product returns, inventory write-offs, reduction of workforce and termination of 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 outsource providers and employee-related termination costs.

Restructuring Charges



The following table presents restructuring charges related to the Program as
follows:



                                Three Months Ended
                                   September 30
(In millions)                   2011         2010

Employee-related costs        $     2.2    $     0.7
Asset write-offs                    0.1          0.1
Contract terminations               0.1          0.3
Other exit costs                    0.6          0.6
Total restructuring charges   $     3.0    $     1.7

The following table presents aggregate restructuring charges related to the Program:

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

Fiscal 2009                     $      60.9    $       4.2    $         3.4    $        1.8    $   70.3
Fiscal 2010                            29.3           11.0              2.3             6.2        48.8
Fiscal 2011                            34.6            2.4              3.0             1.1        41.1
Three months ended September
30, 2011                                2.2            0.1              0.1             0.6         3.0
Charges recorded through
September 30, 2011              $     127.0    $      17.7    $         8.8    $        9.7    $  163.2


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                        THE ESTÉE LAUDER COMPANIES INC.



The following table presents accrued restructuring charges and the related
activity under the Program:



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

Charges                          $      60.9    $        4.2    $         3.4    $        1.8    $    70.3
Cash payments                           (7.5 )             -             (0.5 )          (1.6 )       (9.6 )
Non-cash write-offs                        -            (4.2 )              -               -         (4.2 )
Translation adjustments                  0.6               -                -               -          0.6
Other adjustments                       (2.4 )             -                -               -         (2.4 )
Balance at June 30, 2009                51.6               -              2.9             0.2         54.7

Charges                                 29.3            11.0              2.3             6.2         48.8
Cash payments                          (49.5 )             -             (5.1 )          (6.0 )      (60.6 )
Non-cash write-offs                        -           (11.0 )              -               -        (11.0 )
Translation adjustments                 (0.8 )             -                -               -         (0.8 )
Balance at June 30, 2010                30.6               -              0.1             0.4         31.1

Charges                                 34.6             2.4              3.0             1.1         41.1
Cash payments                          (30.6 )             -             (2.4 )          (1.4 )      (34.4 )
Non-cash write-offs                        -            (2.4 )              -               -         (2.4 )
Translation adjustments                  1.2               -             (0.1 )           0.1          1.2
Balance at June 30, 2011                35.8               -              0.6             0.2         36.6

Charges                                  2.2             0.1              0.1             0.6          3.0
Cash payments                           (6.9 )             -             (0.2 )          (0.3 )       (7.4 )
Non-cash write-offs                        -            (0.1 )              -               -         (0.1 )
Translation adjustments                 (0.7 )             -                -               -         (0.7 )
Balance at September 30, 2011    $      30.4    $          -    $         0.5    $        0.5    $    31.4

Accrued restructuring charges at September 30, 2011 are expected to result in cash expenditures funded from cash provided by operations of approximately $22 million, $7 million and $2 million in fiscal 2012, 2013 and 2014, respectively.

Total Returns and Charges Associated with Restructuring Activities



The following table presents total charges associated with restructuring
activities related to the Program:



                                                               Three Months Ended
                                                                  September 30
(In millions)                                                 2011           2010

Sales returns (included in Net sales)                      $      (0.7 )  $         -
Cost of sales                                                      0.1            0.8
Restructuring charges                                              3.0            1.7
Other charges                                                      1.7            2.1
Total returns and charges associated with restructuring
activities                                                 $       4.1    $       4.6

During the three months ended September 30, 2011, we recorded adjustments to reflect revised estimates of anticipated sales returns associated with prior initiatives. During the three months ended September 30, 2010, the cost of sales adjustment primarily related to inventory write-offs associated with turnaround operations of $0.8 million. Other charges in connection with the implementation of the Program primarily relate to consulting and other professional services.


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THE ESTÉE LAUDER COMPANIES INC.

Other Intangible Asset Impairments

As of our latest annual indefinite-lived asset impairment test on April 1, 2011, we determined that the trademark related to the Darphin reporting unit had an estimated fair value exceeding its carrying value by approximately 13% and the trademark related to the Ojon reporting unit had an estimated fair value that was equal to its carrying value. As of September 30, 2011, the carrying values of the trademarks were $8.4 million and $10.0 million, respectively. The estimated fair values of the trademarks were based on the use of a royalty rate to determine discounted projected future cash flows ("relief-from-royalty method"). The key assumptions that were used to determine the estimated fair value of the Darphin trademark were predicated on new market initiatives including expanded international distribution. The key assumptions that were used to determine the estimated fair value of the Ojon trademark were predicated on new market initiatives including expanded international distribution and consumer reception to the reformulated product line. If such plans do not materialize, if there is a delay in new market initiatives, or if there is a decline in the business environment, a resulting change in the key assumptions could have a negative impact on the estimated fair value of these trademarks and it is possible we could recognize an impairment charge in the future.

First Quarter Fiscal 2012 as Compared with First Quarter Fiscal 2011

NET SALES

Net sales increased 18%, or $385.0 million, to $2,476.7 million, primarily reflecting strong growth in all of our geographic regions and product categories. Excluding the impact of foreign currency translation, net sales increased 14%. The following discussions of Net Sales by Product Categories and Geographic Regions exclude the impact of an adjustment to reduce the reserve for anticipated returns associated with restructuring activities of $0.7 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 25%, or $215.2 million, to $1,072.9 million, primarily reflecting the continued success of our strategic focus on growing this category. The recent launches of Idealist Even Skintone Illuminator and Idealist Cooling Eye Illuminator from Estée Lauder, Turnaround Overnight Radiance Moisturizer from Clinique and the Plantscription line of products from Origins contributed incremental sales of approximately $63 million, combined. The relaunch of the reformulated Nutritious Vita-Mineral and Resilience Lift lines of products from Estée Lauder contributed incremental sales of approximately $49 million, combined. Higher sales from existing products Renutriv Ultimate Lift Age-Correcting Serum and Advanced Night Repair Synchronized Recovery Complex from Estée Lauder, Repairwear Laser Focus Wrinkle & UV Damage Corrector from Clinique and various products from La Mer contributed approximately $65 million, combined, to the increase. This growth was partially offset by approximately $25 million of lower sales from the Resilience Lift Extreme line of products from Estée Lauder and Cyber White EX from Clinique. Excluding the impact of foreign currency translation, skin care net sales increased 20%.

Makeup

Makeup net sales increased 17%, or $134.6 million, to $928.8 million, primarily reflecting an increase in net sales from our makeup artist brands of approximately $89 million, combined. The recent launches of new Pure Color lip and eye products and Doublewear Stay-In-Place Makeup SPF 10 from Estée Lauder, and Repairwear Laser Focus Makeup, Lid Smoothie Antioxidant 8-Hour Eye Colour and Chubby Stick Moisturizing Lip Colour Balm from Clinique, contributed approximately $51 million, combined, to the increase. This growth was partially offset by lower sales of Pure Color Lipgloss and Double Wear Maximum Coverage Camouflage Makeup from Estée Lauder, and Vitamin C Lip Smoothie Antioxidant Lip Colour from Clinique of approximately $10 million, combined. Excluding the impact of foreign currency translation, makeup net sales increased 13%.


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THE ESTÉE LAUDER COMPANIES INC.

Fragrance

Net sales of fragrance products increased 7%, or $22.3 million, to $356.8 million. Incremental sales from the recent launches of DKNY Golden Delicious, Estée Lauder Sensuous Nude and Coach Poppy Flower contributed approximately $37 million to the category. Higher sales of Tom Ford and Jo Malone fragrances contributed approximately $19 million to the increase. Partially offsetting these increases were approximately $15 million of lower sales of Estée Lauder pleasures bloom, pureDKNY, and Coach Poppy, which were new launches in the prior-year period, as well as lower sales of Estée Lauder Sensuous and DKNY Be Delicious of approximately $15 million, combined. We continue to expect challenges in this category due to competitive dynamics. Excluding the impact of foreign currency translation, fragrance net sales increased 3%.

Hair Care

Hair care net sales increased 10%, or $9.4 million, to $103.8 million, primarily reflecting an increase in sales from Aveda including the introduction of new products led by Be Curly Style-Prep. Also contributing incremental sales to this category was the recent launch of the Sleek & Straight line of products from Bumble and bumble. The category also benefited from an improved retail environment for our products as well as net sales generated from expanded global distribution. Partially offsetting these increases were lower net sales of Ojon brand products due in part to softness in the direct response television channel. Excluding the impact of foreign currency translation, hair care net sales increased 8%.

Geographic Regions

Net sales in the Americas increased 11%, or $108.2 million, to $1,105.4 million. The increase during the current-year period was primarily attributable to growth in the United States from our heritage and makeup artist brands, which benefited from a strong retail environment for our products, new skin care offerings and an increase in sales of higher-end prestige skin care products which resulted in higher net sales in the United States of approximately $88 million. These increases reflect, in part, our ongoing efforts to work with retailers in the U.S. department store channel on strengthening the "High-Touch" concepts used to help market our products. Net sales in Latin America increased . . .

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