The Estee Lauder Companies Inc. 2008 Annual Report
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THE EST{E LAUDER COMPANIES INC. 2008 ANNUAL REPORT INC. 2008 ANNUAL LAUDER COMPANIES THE EST{E 140 THE EST{E LAUDER COMPANIES INC. 29 2008 ANNUAL REPORT THE EST{E LAUDER COMPANIES INC. 767 FIFTH AVENUE NEW YORK, NEW YORK 10153 8,000,000,000 666732es_cov6732es_cov 1 99/19/08/19/08 110:06:320:06:32 PPMM HOW WE GROW Our strategy for profi table growth is maintaining our unwavering commitment to “bringing the best to everyone we touch” while continually expanding into new regions, new distribution channels and new brands. This is our story. TODAY, OUR PRODUCTS ARE SOLD IN MORE THAN 140 COUNTRIES AND TERRITORIES. WE HAVE 29 BRANDS. AND WE ACHIEVED NEARLY $8,000,000,000 IN GLOBAL SALES. 666732es_cov6732es_cov 2 99/19/08/19/08 110:06:320:06:32 PPMM CONTENTS 2 Chairman’s Message 4 Chief Executive’s Review 9 Fiscal 2008 Highlights 14 Multi-National Expansion 20 Multi-Channel Distribution 26 Multi-Brand Leadership 42 Portfolio of Brands 52 Board of Directors 53 Executive Offi cers 54 Financial Section 110 Management’s Report on Internal Control Over Financial Reporting 111 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 112 Report of Independent Registered Public Accounting Firm 113 Stockholder Information 666732es_txt6732es_txt 1 99/24/08/24/08 11:24:59:24:59 PPMM HOW WE GROW LEONARD A. LAUDER ENTREPRENEURSHIP IS IN OUR BLOOD, from our founder to our beauty experts who advise our consumers. 2 666732es_txt6732es_txt 2 99/24/08/24/08 33:18:24:18:24 PPMM CHAIRMAN’S MESSAGE Dear Fellow Stockholders: Every year for the past 62 years, The Estée Lauder Companies has continued to grow. I am proud to report that thanks to the efforts of our 32,000 dedicated employees, we continued that trend with excellent fi nancial results in the 2008 fi scal year. I am often asked how the Company will maintain its growth record as we look forward to the next era — especially in times as challenging as the present. I believe the answer can be found in our unparalleled multi-national, multi-channel and multi-brand strategy. As Chairman of the Company, I am extremely gratifi ed by the progress we have made. We have grown from just three brands in the 1960s to a dynamic portfolio of 29 cherished brands today that help women and men look and feel their best. Until 1961, our products were available on only one continent. Today, we sell our stellar brands in more than 140 countries and territories. As our consumers ventured out to try other shopping venues, we also expanded our distribution to match their lifestyles. Our Company’s strength lies in its innovation, ability to stay fresh and relevant, and unwavering commitment to “Bringing the Best to Everyone We Touch.” I applaud the efforts of our Chief Executive Offi cer, William Lauder, and his outstanding leadership team, to amplify our progress in the years ahead. They are working to ensure that we continue to exceed consumers’ expectations, that outstanding quality remains the hallmark of our products and services, and that all of our talented people work together to focus our resources on achieving new levels of success. While the challenges of operating a business on a global scale are great, I am confi dent that our opportunities are even greater, and that we are well positioned to make the most of those opportunities. As always, your support of our Company, our brands and our leadership is greatly appreciated. Sincerely, Leonard A. Lauder Chairman 3 666732es_txt6732es_txt 3 99/24/08/24/08 11:25:00:25:00 PPMM LEADING CHANGE FOR GROWTH WILLIAM P. LAUDER I am CONFIDENT that together we will BRING the Company to even greater levels of SUCCESS in the world of luxury beauty. 4 666732es_txt6732es_txt 4 99/24/08/24/08 11:25:00:25:00 PPMM CHIEF EXECUTIVE’S REVIEW Dear Fellow Stockholders: The Estée Lauder Companies’ achievements in fi scal 2008 were outstanding by any standard. Global sales reached an all-time record of nearly $8 billion and earnings per share rose by double digits. Our growth was broad-based, with particular strength in emerging markets and new distribution channels. These results are even more notable given the multiple economic challenges — particularly in the United States. We benefi ted from our ongoing strategy to build a diversifi ed business base that is multi-national, multi-channel and multi-brand. After a year of solid accomplishments, it is important to ask what lies ahead. How will we lead the change necessary for growth? The answer is that we must commit ourselves to delivering even greater growth in the future — not just top-line growth, but strong, sustainable and more profi table growth. And, to take our business to the next level, it is crucial that we stay keenly focused on the long term, understanding that we are managing for the next quarter century, not for the next fi scal quarter. STRONG FOUNDATION, STRATEGIC FOCUS Long-term entrepreneurial growth is in our blood — from our founder to the front lines at the counter. Creativity is one of our outstanding competitive assets. We plan to deliver profi table growth by marrying these fundamental strengths with more sharply focused strategies. Those strengths include our ability to listen to consumers, our creative passion and our talented, dedicated employees. To capitalize on our strengths, we will align our strategies more acutely: prioritizing our investments, exercising greater fi nancial discipline and operating in a more closely aligned manner across business units and borders. I am delighted that Fabrizio Freda has joined us as President and Chief Operating Offi cer to help drive these strategies forward. Fabrizio is a highly accomplished executive with more than two decades of experience in global consumer products and luxury goods companies. His international perspective and operational and fi nancial insight will help us better align our goals and allocate investments to those brands, regions and channels that offer exceptional growth opportunities. With an eye toward ensuring continuity and consistent superior perfor- mance over the long term, I have mapped out a succession plan that anticipates Fabrizio becoming Chief Executive Offi cer within two years of his hire. With our strong foundation and sharper alignment, we will continue our efforts to diversify across regions, channels and product categories. This approach has provided numerous avenues of opportunity in the past and I am confi dent it will be the source of even greater profi table growth in the years ahead. 5 666732es_txt6732es_txt 5 99/24/08/24/08 11:25:04:25:04 PPMM MULTI-NATIONAL SCOPE Our growth in 2008 was powered to a large extent by our international business. Nearly 60 percent of our total sales came from outside the United States this year, with our strongest gains coming from emerging markets such as China, Russia, Latin America, Eastern Europe and the Middle East. Both China and Russia, for example, exceeded $100 million in sales for the fi rst time. We also made progress in more established markets, as the European region topped the $3 billion sales mark. Whatever the local language, our brands speak to the aspirations of millions of global consumers. In India, where we see immense potential, Estée Lauder and Clinique both opened stores in fi scal 2008, becoming our fi fth and sixth brands in the country. We purchased a stake in Forest Essentials, a prestige Indian beauty brand based on ancient naturalistic Ayurvedic principles, to gain a greater understanding of Indian beauty traditions. We are rolling out our brands in other promising international markets at a steady pace, as our insights into consumers’ desires translate into exciting new products and new markets. M.A.C has expanded to Korea and Indonesia, for example, while La Mer has opened in Russia and Dubai, and Bobbi Brown will soon be in Russia. MULTI-CHANNEL OPPORTUNITY As consumers exercise their ability to shop when, where and how they want, new channels of distribution are becoming increasingly important to us. Our online sales grew 40 percent this past fi scal year, with particularly strong performances by La Mer, Estée Lauder, Aveda and Jo Malone. Direct response TV is another exciting shopping venue where many of our brands have been smash hits — including Clinique, Origins, Bobbi Brown and Ojon. The growth in our travel retail business also has been robust, with sales soaring approximately 20 percent this year as our brands expanded in airport locations including Bangkok, Buenos Aires, London, Moscow, Paris, Seoul, Singapore and Tel Aviv. Increasingly, our brands are sold in retail locations beyond traditional department stores. Our 577 single-brand, freestanding stores worldwide are showcases for brands such as M.A.C, Aveda, Origins, Jo Malone and Estée Lauder. Darphin has been a pioneer in spas in Europe and, recently, Asia. Origins’ Dr. Andrew Weil integrative wellness-based products have launched in European pharmacies. We continue to nurture our traditional department store channel by creating innovative programs designed to bring consumers to our counters. Globally, department stores still account for more than 50 percent of our net sales. BeautyBank, our entrepreneurial think tank dedicated to developing new brands and products for consumers shopping outside the traditional department store channel, is leading the way in leveraging the power of new distribution points. Following strong sales in the U.S.-based 6 666732es_txt6732es_txt 6 99/24/08/24/08 11:25:04:25:04 PPMM Kohl’s Department Stores, BeautyBank rolled out its top-selling Tri-Aktiline Instant Deep Wrinkle Filler internationally, with a groundbreaking, multi-channel, multi-national campaign in specialty cosmetics stores, direct response TV, the Internet and travel retail.