01—Abstract
Summary
Summary of the 10-K filed August 28, 2007. Cited figures are marked; the original filing is the authoritative source.
The Estée Lauder Companies Inc. reported fiscal 2007 (year ended June 30, 2007) net sales of $7,037.5 milliona, up 9% from $6,463.8 million, with growth in all product categories and geographic regions.
Operating income rose 21% to $749.9 millionb, and operating margin improved to 10.7% of net sales from 9.6% in the prior year, which had included a $92.1 million cost savings charge. Net earnings increased to $449.2 million, and diluted EPS rose to $2.16 from $1.12. Growth was led by Europe, the Middle East & Africa, where net sales rose 16% to $2,493.4 million, and Asia/Pacific, up 13% to $983.2 million.
The Americas grew 3% to $3,560.9 millionc. Balance sheet and capital allocation changed materially. The company repurchased 22.5 million shares for $1,004.3 million, including a $750.0 million accelerated share repurchase in March 2007.
Total debt rose to $1,088.5 milliond from $521.5 million after the issuance of $300.0 million of 5.55% Senior Notes due 2017 and $300.0 million of 6.00% Senior Notes due 2037. Stockholders' equity fell to $1,199.0 million from $1,622.3 million, and total debt was 48% of total capitalization at June 30, 2007, versus 24% a year earlier. Operating cash flow declined to $661.6 million from $709.8 million, reflecting higher inventory and receivables.
Management highlighted continuing challenges, including retailer consolidation (Macy's, Inc. accounted for 14% of fiscal 2007 net sales), weak economics in the fragrance category, and pharmacy-channel and impairment charges of about $30 million in skin care. The Lauder family controls about 89.1% of the voting power.
02—Key points
Key Highlights
- Net sales rose 9% to $7,037.5 million, with growth in every product category and region; skin care $2,601.0 million, makeup $2,712.7 million, fragrance $1,308.6 million, hair care $377.1 million.
- Operating income increased 21% to $749.9 million; operating margin was 10.7% versus 9.6% in fiscal 2006, which included a $92.1 million cost savings initiative charge.
- Diluted EPS from net earnings was $2.16, up from $1.12; net earnings were $449.2 million compared with $244.2 million.
- Europe, the Middle East & Africa net sales increased 16% to $2,493.4 million, and Asia/Pacific rose 13% to $983.2 million; the Americas grew 3% to $3,560.9 million.
- Repurchased 22.5 million shares for $1,004.3 million, including a $750.0 million accelerated share repurchase; 6.9 million shares remain under the authorization.
- Total debt increased to $1,088.5 million from $521.5 million after $600.0 million of senior notes were issued in May 2007; total debt was 48% of total capitalization versus 24% a year earlier.
- Macy's, Inc. (formed by the merger of Federated's and May's department stores) accounted for 14% of fiscal 2007 net sales, and 54% of net sales were generated outside the United States.
03—Questions
Frequently Asked Questions
How did The Estée Lauder Companies perform in fiscal 2007?
Net sales grew 9% to $7,037.5 million, operating income rose 21% to $749.9 million, and net earnings reached $449.2 million, or $2.16 per diluted share. Growth was broad across product categories and regions, and fiscal 2006 had been depressed by a $92.1 million cost savings charge.
Why did total debt and stockholders' equity change so much?
The company issued $600.0 million of senior notes in May 2007 and funded a $750.0 million accelerated share repurchase, along with total repurchases of $1,004.3 million for the year. Total debt rose to $1,088.5 million, and stockholders' equity fell to $1,199.0 million from $1,622.3 million.
Which regions and product categories drove growth?
Europe, the Middle East & Africa led regional growth with net sales up 16%, including about $122 million of exchange rate benefit from the weaker U.S. dollar, and Asia/Pacific rose 13%. By category, makeup and skin care grew the most in dollar terms, while hair care grew 18%.
What risks does management highlight?
Management cites intense competition, retailer consolidation and customer concentration (Macy's, Inc. at 14% of net sales), the fragrance business model being difficult to make profitable, changing consumer preferences, international operating risks, and the Strategic Modernization Initiative's implementation risks. Legal matters include a New York landfill potentially responsible party claim and a securities class action that was dismissed, though the plaintiff did not file an amended complaint.
How much cash is the company returning to shareholders?
The company paid dividends of $103.6 million in fiscal 2007 and declared an annual dividend of $.50 per share, up from $.40. Share repurchases totaled $1,004.3 million, and 6.9 million shares remained under the repurchase authorization at June 30, 2007.
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