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EL > SEC Filings for EL > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for ESTEE LAUDER COMPANIES INC


2-Nov-2012

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, 2012 and 2011, 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)                                               2012        2011

NET SALES
By Region:
The Americas                                             $  1,182.1   $ 1,105.4
Europe, the Middle East & Africa                              824.9       858.2
Asia/Pacific                                                  542.5       512.4
                                                            2,549.5     2,476.0
Returns associated with restructuring activities                  -         0.7
Net Sales                                                $  2,549.5   $ 2,476.7

By Product Category:
Skin Care                                                $  1,113.5   $ 1,072.9
Makeup                                                        960.4       928.8
Fragrance                                                     347.6       356.8
Hair Care                                                     113.9       103.8
Other                                                          14.1        13.7
                                                            2,549.5     2,476.0
Returns associated with restructuring activities                  -         0.7
Net Sales                                                $  2,549.5   $ 2,476.7

OPERATING INCOME (LOSS)
By Region:
The Americas                                             $    172.3   $   149.2
Europe, the Middle East & Africa                              196.9       187.7
Asia/Pacific                                                  113.2        97.2
                                                              482.4       434.1
Total charges associated with restructuring activities         (0.4 )      (4.1 )
Operating Income                                         $    482.0   $   430.0

By Product Category:
Skin Care                                                $    259.0   $   223.7
Makeup                                                        161.3       159.6
Fragrance                                                      53.4        48.3
Hair Care                                                      10.7         5.1
Other                                                          (2.0 )      (2.6 )
                                                              482.4       434.1
Total charges associated with restructuring activities         (0.4 )      (4.1 )
Operating Income                                         $    482.0   $   430.0


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                        THE ESTÉE LAUDER COMPANIES INC.



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



                                                                  Three Months Ended
                                                                     September 30
                                                                  2012         2011

Net sales                                                           100.0 %      100.0 %
Cost of sales                                                        21.1         21.6
Gross profit                                                         78.9         78.4

Operating expenses:
Selling, general and administrative                                  60.0         60.9
Restructuring and other charges                                         -          0.1
                                                                     60.0         61.0

Operating income                                                     18.9         17.4
Interest expense, net                                                 0.6          0.7
Interest expense on debt extinguishment                               0.8            -
Other income                                                          0.1            -

Earnings before income taxes                                         17.6         16.7
Provision for income taxes                                            5.9          5.5

Net earnings                                                         11.7         11.2
Net earnings attributable to noncontrolling interests                   -            -

Net earnings attributable to The Estée Lauder Companies Inc.         11.7 %       11.2 %

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 or our objectives. 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 consumers' changing shopping habits. To be the global leader in prestige beauty, we continued to implement a long-term strategy that is guiding us through fiscal 2015. 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, and we plan to continue building upon and leveraging our history of outstanding creativity, innovation and entrepreneurship. We have succeeded in expanding our distinctive "High-Touch" service model and will continue to look for ways to expand it in newer channels and within geographic regions. As an example, we are developing capabilities to deliver superior retailing experiences, particularly in Company-operated retail stores. We are expanding our efforts to evolve our e-commerce-based online strategy into a multi-pronged digital strategy encompassing e-commerce, m-commerce, as well as digital and social media. We are leveraging our regional organization in an effort to assure that we are locally relevant with our products, services, marketing and visual merchandising.


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THE ESTÉE LAUDER COMPANIES INC.

As part of our strategy, we are continuing to shift our product 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 are also focusing our attention on luxury consumers across all product categories and have seen an improvement in the net sales of many of our higher-end prestige products. We will also continue to build our makeup product category through the introduction of new product offerings, continue expanding our hair care brands both in salons and in other retail channels and continue to focus our efforts to enhance our fragrance business.

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, the Middle East, Eastern Europe and Brazil and focus on consumers who purchase in the travel retail channel, in stores at their travel destinations or when they return to their home market. We also continue to expand our digital presence which has resulted in growth in the net sales of our products sold online. In North America, we continue to recognize the need to drive profitable growth in our traditional department store channel and see many benefits from the changes we have previously implemented. At the same time, we are also expanding our presence in other channels, such as specialty retailers, Company-operated stores and online. Internationally, we continue to take actions to grow profitability in European perfumeries and pharmacies and in department stores in Asia. In addition, we are 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 an important source of sales growth and profitability. Our business in this channel has benefitted from the implementation of programs we designed to target consumers in distinct travel corridors, enhance consumers' "High-Touch" experiences and convert travelers into purchasers.

We plan to continue to invest in the significant modernization of our global information systems, which includes the Strategic Modernization Initiative ("SMI") as well as other initiatives, and continue to shift our focus from gift with purchase activities to advertising, merchandising and sampling initiatives. These initiatives should over time enable overall profitability improvements by enhancing gross margin and supporting efficiencies in select operating expenses, while increasing our strategic investment spending.

We have a strong, diverse and highly valuable brand portfolio with global reach and potential, as well as a track record of outstanding creativity, innovation, entrepreneurship and healthy growth. We plan on continuing to bring highly innovative products to consumers and elevating our personalized "High-Touch" service model. We intend to invest in select areas of our business to improve our capabilities or develop new ones. Our main focus areas are digital, research and development, product innovation, consumer insight and local relevance. While our overall business is performing well, certain Western European countries and Korea are seeing worse-than-expected weakness due to economic uncertainties and volatility. We also saw a slowing in the exceptional growth we had experienced in travel retail, due in part to select retailer destocking and tighter working capital management, but in view of the activities we see at retail in the channel, we expect sales to improve throughout the remainder of the fiscal year. We believe we have and will continue to offset to some extent the impact of these events as a result of our strategy to mitigate weaknesses we find in certain areas with strengths in others. However, if adverse economic conditions or the degree of uncertainty or volatility worsen or are further prolonged, then we expect there to be a negative effect on ongoing consumer confidence, demand and spending and, as a result, our business. We will continue to monitor these and other risks that may affect our business.

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 calendar 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, 2012, is approximately $361 million to $366 million, of which approximately $251 million to $253 million relates to restructuring charges, approximately $50 million of other costs to implement the initiatives, approximately $42 million to $45 million in sales returns and approximately $18 million in inventory write-offs. The restructuring charges are comprised of approximately $188 million to $190 million of employee-related costs, approximately $40 million of other exit costs and contract terminations (substantially all of which have resulted in or will result in cash expenditures), and approximately $23 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, 2012 was $303.0 million.


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THE ESTÉE LAUDER COMPANIES INC.

We expect that the implementation of this Program, combined with other on-going cost savings efforts, will result in savings of approximately $760 million to $785 million through the end of fiscal 2013 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 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, the reformulation of Ojon brand products and the exit from the global distribution of Sean John 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)                   2012         2011

Employee-related costs        $     0.1    $     2.2
Asset write-offs                      -          0.1
Contract terminations                 -          0.1
Other exit costs                    0.2          0.6
Total restructuring charges   $     0.3    $     3.0

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

                                  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
Fiscal 2012                             37.1            1.7              12.6            2.2        53.6
Three months ended September
30, 2012                                 0.1              -                 -            0.2         0.3
Charges recorded through
September 30, 2012               $     162.0    $      19.3    $         21.3    $      11.5    $  214.1


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                        THE ESTÉE LAUDER COMPANIES INC.



The following table presents accrued restructuring charges and the related
activities under the Program to date:



                                  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                                 37.1             1.7             12.6             2.2        53.6
Cash payments                          (23.6 )             -            (12.4 )          (2.0 )     (38.0 )
Non-cash write-offs                        -            (1.7 )              -               -        (1.7 )
Translation adjustments                 (1.4 )             -                -             0.1        (1.3 )
Balance at June 30, 2012                47.9               -              0.8             0.5        49.2

Charges                                  0.1               -                -             0.2         0.3
Cash payments                           (8.8 )             -             (0.3 )          (0.3 )      (9.4 )
Translation adjustments                  0.3               -                -             0.1         0.4
Balance at September 30, 2012    $      39.5    $          -    $         0.5    $        0.5    $   40.5

Accrued restructuring charges at September 30, 2012 are expected to result in cash expenditures funded from cash provided by operations of approximately $26 million, $12 million and $3 million in fiscal 2013, 2014 and 2015, respectively.

Total Returns and Other Charges Associated with Restructuring Activities



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



                                                               Three Months Ended
                                                                  September 30
(In millions)                                                 2012            2011

Sales returns (included in Net Sales)                     $          -    $       (0.7 )
Cost of sales                                                        -             0.1
Restructuring charges                                              0.3             3.0
Other charges                                                      0.1             1.7
Total returns and charges associated with
restructuring activities                                  $        0.4    $        4.1


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THE ESTÉE LAUDER COMPANIES INC.

During the three months ended September 30, 2011, we recorded adjustments to reflect revised estimates of then-anticipated sales returns associated with prior initiatives. Other charges in connection with the implementation of the Program primarily relate to consulting and other professional services.

Other Intangible Asset Impairments

During the fourth quarter of fiscal 2012, the Darphin reporting unit experienced an unanticipated deterioration in its results of operations due to softness in its European business, which is its primary market. Based on a qualitative analysis at that time, we reviewed and revised Darphin's long-term forecast. We concluded that these changes in circumstances triggered the need for an interim impairment test of the reporting unit's trademark and goodwill as of June 30, 2012. We determined that the trademark was not impaired, with the estimated fair value exceeding its carrying value by less than 2%. As of September 30, 2012, the carrying value of the trademark was $8.2 million. The estimated fair value of the trademark was 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 trademark were based on the expectation that the economic uncertainties in Europe would be temporary and not permanent in nature. If the decline in this market is more severe than we have anticipated, or other business disruptions arise, a resulting change in the key assumptions could have a negative impact on the estimated fair value of this trademark and it is possible we could recognize an impairment charge in the future. After completing the interim impairment test during the fourth quarter of fiscal 2012 on the trademark, we completed step one of the impairment test for goodwill and concluded that the fair value of the Darphin reporting unit was substantially in excess of its carrying value including goodwill.

First Quarter Fiscal 2013 as Compared with First Quarter Fiscal 2012

NET SALES

Net sales increased 3%, or $72.8 million, to $2,549.5 million, primarily reflecting growth in each of our product categories, except for fragrance, which declined slightly. Geographically, net sales growth in the Americas and Asia/Pacific was partially offset by declines in Europe, the Middle East & Africa. Excluding the impact of foreign currency translation, net sales increased 6%. The following discussions of Net Sales by Product Categories and Geographic Regions exclude the impact of an adjustment to reduce the reserve for then-anticipated returns associated with restructuring activities of $0.7 million recorded during the prior-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 4%, or $40.6 million, to $1,113.5 million, primarily reflecting the continued success of our strategic focus on growing this category. The recent launches of Perfectionist CP+R and the Optimizer line of products from Estée Lauder, The Moisturizing Soft Cream from La Mer, and Even Better Eyes Dark Circle Corrector from Clinique, as well as higher sales of Advanced Night Repair Synchronized Recovery Complex from Estée Lauder, contributed approximately $129 million, combined, to the increase. Partially offsetting these increases were lower sales of Idealist Even Skintone Illuminator and Idealist Cooling Eye Illuminator, both of which were new launches in the prior-year period, Perfectionist CP+ Serum and Resilience Lift Extreme from Estée Lauder and Repairwear Laser Focus from Clinique of approximately $94 million, combined. Excluding the impact of foreign currency translation, skin care net sales increased 7%.

Makeup

Makeup net sales increased 3%, or $31.6 million, to $960.4 million. The recent launches of Pure Color Vivid Shine Lipstick and Pure Color Gelee Powder Eyeshadow from Estée Lauder, Pore Refining Solutions Makeup, High Impact Extreme Volume Mascara and Stay-Matte Oil-Free Makeup from Clinique, and Longwear Even Finish Foundation from Bobbi Brown, contributed approximately $40 million, combined, to the increase. Higher sales from existing products, Chubby Stick Moisturizing Lip Colour from Clinique and Studio Fix Foundation from M†A†C contributed approximately $14 million, combined, to the increase. Partially offsetting these increases were approximately $29 million of lower sales of Pure Color Eyeshadow and Doublewear Stay-In-Place Makeup from Estée Lauder and Repairwear Laser Focus Makeup from Clinique, which were all new launches in the prior-year period. Excluding the impact of foreign currency translation, makeup net sales increased 6%.


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THE ESTÉE LAUDER COMPANIES INC.

Fragrance

Net sales of fragrance products decreased 3%, or $9.2 million, to $347.6 million. Incremental sales from the recent launches of DKNY Be Delicious So . . .

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