How did The Estée Lauder Companies perform financially in fiscal 2006?

Net sales grew to $6,463.8 million from $6,280.0 million, but operating income declined to $619.6 million from $726.8 million, mainly due to $92.1 million in cost savings initiative charges. Net earnings were $244.2 million, or $1.12 per diluted share, compared with $406.1 million, or $1.78 per diluted share, in fiscal 2005.

What drove the decline in net earnings?

Net earnings were reduced by $80.3 million in losses from discontinued operations, largely from the sale of the Stila brand, and by a net increase of about $35 million in the income tax provision from an IRS settlement and an AJCA repatriation adjustment. Operating income also fell due to the special charges and higher cost of sales and operating expense margins.

Which product categories and regions performed best?

Makeup net sales increased 6% to $2,504.2 million and skin care rose 2% to $2,400.8 million, while hair care grew 16% to $318.7 million. Fragrance net sales decreased 4% to $1,213.3 million. The Americas, Europe, the Middle East & Africa, and Asia/Pacific all reported higher net sales, with Asia/Pacific up 6% to $869.7 million.

What are the main risks and legal exposures disclosed?

Key risks include intense competition, dependence on key retailers following consolidation, and challenges in the fragrance business. Legal matters include a consolidated securities class action and derivative suit filed in 2006, a New York State environmental claim related to the Blydenburgh landfill with an accrual recorded, and a Portuguese tax matter that was resolved favorably. Management believes none of these will have a material adverse effect.

What capital allocation actions did the company take?

The company repurchased about 11.2 million Class A shares for $400.5 million and paid $85.4 million in dividends. It redeemed the remaining $68.4 million of 2015 Preferred Stock in October 2005 and reduced total debt to $521.5 million. It also planned to acquire the remaining equity interest in Bumble and bumble in fiscal 2007.

EL 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 25, 2006. Cited figures are marked; the original filing is the authoritative source.

The Estée Lauder Companies Inc. reported fiscal 2006 (year ended June 30, 2006) net sales of $6,463.8 million^a, up from $6,280.0 million in fiscal 2005, with growth in makeup, skin care and hair care offset by lower fragrance sales.

Operating income fell to $619.6 million^b from $726.8 million, reflecting $92.1 million in special charges related to a cost savings initiative, which included a voluntary separation program for 494 employees. Net earnings declined to $244.2 million, or $1.12 per diluted share, from $406.1 million, or $1.78 per diluted share, in fiscal 2005. Net earnings were also reduced by discontinued operations of $80.3 million, mainly related to the April 2006 sale of the Stila brand, and by an approximately $35 million net increase in the income tax provision from an IRS settlement and an AJCA repatriation adjustment.

Cash flow from operations improved to $709.8 million^c from $478.1 million, and total debt declined to $521.5 million from $714.7 million at June 30, 2005. The company repurchased about 11.2 million Class A shares for $400.5 million during fiscal 2006 and paid an annual dividend of $.40 per share. Management expects to complete the purchase of the remaining equity interest in Bumble and bumble in fiscal 2007, and the filing notes that the fragrance category and certain core brands remain challenging, along with retailer consolidation, with Federated Department Stores' acquisition of The May Department Stores Company making one customer 16% of consolidated net sales.

The company also disclosed several legal matters, including a consolidated securities class action filed in March 2006 following the Shin complaint, a related shareholder derivative action, and a New York State environmental claim tied to the Blydenburgh landfill. Management believes none of these will have a material adverse effect on results of operations or financial condition, though the securities actions are at an early stage and the company intends to defend them vigorously.

02—Key points

Key Highlights

Net sales rose to $6,463.8 million in fiscal 2006 from $6,280.0 million, with growth in makeup, skin care and hair care partly offset by a decline in fragrance sales to $1,213.3 million.
Operating income decreased 15% to $619.6 million, including $92.1 million in special charges tied to the cost savings initiative, and operating margin was 9.6% versus 11.6% in fiscal 2005.
Net earnings fell to $244.2 million, or $1.12 per diluted share, from $406.1 million, or $1.78 per diluted share, reflecting discontinued operations charges of $80.3 million and a tax settlement with the IRS.
Net cash flows provided by operating activities increased to $709.8 million from $478.1 million, and total debt fell to $521.5 million from $714.7 million.
The company repurchased about 11.2 million Class A shares for $400.5 million in fiscal 2006 and paid a $.40 per share annual dividend.
One customer, Federated Department Stores following its merger with The May Department Stores Company, accounted for 16% of consolidated net sales in fiscal 2006.
A consolidated securities class action filed in March 2006 and a related shareholder derivative action are pending in the Southern District of New York, and management believes the claims are without merit.

03—Questions

Frequently Asked Questions

How did The Estée Lauder Companies perform financially in fiscal 2006?
Net sales grew to $6,463.8 million from $6,280.0 million, but operating income declined to $619.6 million from $726.8 million, mainly due to $92.1 million in cost savings initiative charges. Net earnings were $244.2 million, or $1.12 per diluted share, compared with $406.1 million, or $1.78 per diluted share, in fiscal 2005.
What drove the decline in net earnings?
Net earnings were reduced by $80.3 million in losses from discontinued operations, largely from the sale of the Stila brand, and by a net increase of about $35 million in the income tax provision from an IRS settlement and an AJCA repatriation adjustment. Operating income also fell due to the special charges and higher cost of sales and operating expense margins.
Which product categories and regions performed best?
Makeup net sales increased 6% to $2,504.2 million and skin care rose 2% to $2,400.8 million, while hair care grew 16% to $318.7 million. Fragrance net sales decreased 4% to $1,213.3 million. The Americas, Europe, the Middle East & Africa, and Asia/Pacific all reported higher net sales, with Asia/Pacific up 6% to $869.7 million.
What are the main risks and legal exposures disclosed?
Key risks include intense competition, dependence on key retailers following consolidation, and challenges in the fragrance business. Legal matters include a consolidated securities class action and derivative suit filed in 2006, a New York State environmental claim related to the Blydenburgh landfill with an accrual recorded, and a Portuguese tax matter that was resolved favorably. Management believes none of these will have a material adverse effect.
What capital allocation actions did the company take?
The company repurchased about 11.2 million Class A shares for $400.5 million and paid $85.4 million in dividends. It redeemed the remaining $68.4 million of 2015 Preferred Stock in October 2005 and reduced total debt to $521.5 million. It also planned to acquire the remaining equity interest in Bumble and bumble in fiscal 2007.

04—Continue

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