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| EL > SEC Filings for EL > Form 10-Q on 6-Feb-2013 | All Recent SEC Filings |
6-Feb-2013
Quarterly Report
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 and six months ended December 31, 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 Six Months Ended
December 31 December 31
(In millions) 2012 2011 2012 2011
NET SALES
By Region:
The Americas $ 1,140.2 $ 1,071.3 $ 2,322.3 $ 2,176.7
Europe, the Middle East & Africa 1,105.3 1,046.3 1,930.2 1,904.5
Asia/Pacific 687.6 620.0 1,230.1 1,132.4
2,933.1 2,737.6 5,482.6 5,213.6
Returns associated with restructuring
activities (0.1 ) (0.1 ) (0.1 ) 0.6
Net Sales $ 2,933.0 $ 2,737.5 $ 5,482.5 $ 5,214.2
By Product Category:
Skin Care $ 1,279.9 $ 1,165.9 $ 2,393.4 $ 2,238.8
Makeup 1,049.3 983.6 2,009.7 1,912.4
Fragrance 458.8 441.1 806.4 797.9
Hair Care 131.9 121.4 245.8 225.2
Other 13.2 25.6 27.3 39.3
2,933.1 2,737.6 5,482.6 5,213.6
Returns associated with restructuring
activities (0.1 ) (0.1 ) (0.1 ) 0.6
Net Sales $ 2,933.0 $ 2,737.5 $ 5,482.5 $ 5,214.2
OPERATING INCOME (LOSS)
By Region:
The Americas $ 132.1 $ 112.4 $ 304.4 $ 261.6
Europe, the Middle East & Africa 324.6 310.1 521.5 497.8
Asia/Pacific 211.0 180.6 324.2 277.8
667.7 603.1 1,150.1 1,037.2
Total charges associated with
restructuring activities (14.6 ) (6.1 ) (15.0 ) (10.2 )
Operating Income $ 653.1 $ 597.0 $ 1,135.1 $ 1,027.0
By Product Category:
Skin Care $ 356.7 $ 312.2 $ 615.7 $ 535.9
Makeup 226.5 208.5 387.8 368.1
Fragrance 77.3 73.2 130.7 121.5
Hair Care 10.1 12.5 20.8 17.6
Other (2.9 ) (3.3 ) (4.9 ) (5.9 )
667.7 603.1 1,150.1 1,037.2
Total charges associated with
restructuring activities (14.6 ) (6.1 ) (15.0 ) (10.2 )
Operating Income $ 653.1 $ 597.0 $ 1,135.1 $ 1,027.0
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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 Six Months Ended
December 31 December 31
2012 2011 2012 2011
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 19.4 20.1 20.2 20.8
Gross profit 80.6 79.9 79.8 79.2
Operating expenses:
Selling, general and administrative 57.9 57.7 58.9 59.2
Restructuring and other charges 0.4 0.2 0.2 0.2
Impairment of other intangible assets - 0.2 - 0.1
Total operating expenses 58.3 58.1 59.1 59.5
Operating income 22.3 21.8 20.7 19.7
Interest expense, net 0.5 0.6 0.5 0.6
Interest expense on debt extinguishment - - 0.4 -
Other income 0.7 0.4 0.4 0.2
Earnings before income taxes 22.5 21.6 20.2 19.3
Provision for income taxes 7.2 7.0 6.6 6.3
Net earnings 15.3 14.6 13.6 13.0
Net earnings attributable to
noncontrolling interests - (0.1 ) - -
Net earnings attributable to The Estée
Lauder Companies Inc. 15.3 % 14.5 % 13.6 % 13.0 %
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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 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 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.
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, expand our hair care brands both in salons and in other retail channels and 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 retail 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 benefited 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 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 Southern European countries, Korea and Australia 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 improved results 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 economic conditions or the degree of uncertainty or volatility worsen or the adverse conditions previously discussed 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. Hurricane Sandy, which affected parts of the northeastern United States and other areas in late October 2012, did not have a significant impact on our business or our consolidated financial results for the three and six months ended December 31, 2012.
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.
As part of SMI, we anticipate the continued migration of our operations to SAP-based technologies, with the majority of our locations being enabled through 2014. As a result, we have experienced, and may continue to experience, fluctuations in our net sales and operating results due to accelerated orders from certain of our retailers to provide adequate safety stock to mitigate any potential short-term business interruption associated with the SAP rollout. In particular, approximately $94 million of accelerated orders were recorded as net sales in the fiscal 2013 second quarter that likely would have occurred in the fiscal 2013 third quarter. Similarly, approximately $30 million of accelerated orders were recorded as net sales in the fiscal 2012 second quarter that would have occurred in the fiscal 2012 third quarter. The impact on net sales and operating results by product category and geographic region is as follows:
Three Months Ended Three Months Ended
December 31, 2012 December 31, 2011
Operating Operating
(In millions) Net Sales Results Net Sales Results
Product Category:
Skin Care $ 48 $ 40 $ 16 $ 13
Makeup 32 26 9 6
Fragrance 10 9 2 2
Hair Care 4 3 3 2
Other 0 0 0 0
Total $ 94 $ 78 $ 30 $ 23
Region:
The Americas $ 29 $ 23 $ 2 $ 1
Europe, the Middle East & Africa 15 12 3 3
Asia/Pacific 50 43 25 19
Total $ 94 $ 78 $ 30 $ 23
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Combined, these actions created a difficult comparison between the fiscal 2013 second quarter and the fiscal 2012 second quarter of approximately $64 million in net sales and approximately $55 million in operating results and impacted our operating margin comparisons. We believe the presentation of certain quarter and year-to-date comparative information in the following discussions that exclude the impact of the timing of these orders is useful in analyzing the net sales and operating results of 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 anticipated the Program would result in total cumulative restructuring charges and other costs to implement those initiatives of between $350 million and $450 million before taxes. As of December 31, 2012, we closed the Program. We concluded the approval of all initiatives under the Program and anticipate commencing the execution of those initiatives through fiscal 2014. As a result of the closure of the Program and evaluation of the initiatives that have been implemented, as of December 31, 2012, we anticipate total cumulative restructuring charges and other costs to implement those initiatives to total between $325 million and $350 million and that such charges will be substantially recorded through fiscal 2013. We will continue to monitor the progress of these initiatives and revise estimates as appropriate.
The following is a reconciliation of cumulative approved charges under the Program as compared with the revised estimated charges related to initiatives under the Program and total cumulative charges incurred through December 31, 2012:
Restructuring Charges Total
Contract Restructuring
Employee- Terminations Charges and
Related Asset and Other Total Inventory Other Other Costs to
(In millions) Costs Write-offs Exit Costs Restructuring Returns Write-offs Charges Implement
Approved charges from
inception through
December 31, 2012 $ 205.5 $ 23.5 $ 43.5 $ 272.5 $ 43.0 $ 20.0 $ 50.0 $ 385.5
Adjustments of estimated
costs over (under) (29.0 ) (2.0 ) (2.0 ) (33.0 ) (10.0 ) 5.0 (13.0 ) (51.0 )
Revised estimated charges
as of December 31, 2012 $ 176.5 $ 21.5 $ 41.5 $ 239.5 $ 33.0 $ 25.0 $ 37.0 $ 334.5
Cumulative charges
incurred through
December 31, 2012 $ 175.5 $ 19.4 $ 32.5 $ 227.4 $ 30.6 $ 23.2 $ 36.4 $ 317.6
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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. Any changes from adjustments of estimated costs, as referenced above, have been included within our expected savings. Our long-range forecast for operating margin reflects these anticipated savings, net of strategic reinvestments.
The Program focused 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. As of December 31, 2012, we identified approximately $10 million of previously-approved restructuring costs that will not be incurred related to these activities, primarily as a result of certain employees relocating to other available positions within the Company.
† 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. As of December 31, 2012, we identified approximately $21 million of previously-approved returns and other costs related to these activities that will not be incurred, primarily as a result of better-than-expected sales of products prior to the exit of the operations, as well as lower employee-related and store closure costs than originally estimated.
† 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. As of December 31, 2012, we identified approximately $20 million of previously-approved outsourcing initiatives for information technology services stemming from the decision not to implement certain aspects of these initiatives, as well as lower costs than originally anticipated to transition services on initiatives that were implemented.
THE ESTÉE LAUDER COMPANIES INC.
Restructuring Charges
The following table presents restructuring charges related to the Program as
follows:
Three Months Ended Six Months Ended
December 31 December 31
(In millions) 2012 2011 2012 2011
Employee-related costs $ 13.5 $ 2.1 $ 13.6 $ 4.3
Asset write-offs 0.1 0.4 0.1 0.5
Contract terminations - 1.2 - 1.3
Other exit costs (0.3 ) 0.2 (0.1 ) 0.8
Total restructuring charges $ 13.3 $ 3.9 $ 13.6 $ 6.9
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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
Six months ended December 31,
2012 13.6 0.1 - (0.1 ) 13.6
Charges recorded through
December 31, 2012 $ 175.5 $ 19.4 $ 21.3 $ 11.2 $ 227.4
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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 13.6 0.1 - (0.1 ) 13.6
Cash payments (16.3 ) - (0.4 ) - (16.7 )
Non-cash write-offs - (0.1 ) - - (0.1 )
Translation adjustments 0.3 - - - 0.3
Balance at December 31, 2012 $ 45.5 $ - $ 0.4 $ 0.4 $ 46.3
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Accrued restructuring charges at December 31, 2012 are expected to result in . . .
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