Estee Lauder Companies Inc

:rit.;' i*;= *;; i:* i;:il ffi ,.d,ri.tl'll tut*

' ,''

.,.'. i::

Sharynn M. Tomlin Angelo State University EL

www.el.com

In lvlay 201 I . CEO Fabrizio Freda of Estde Laucler nracle the follon,ins conrnrettts clurittg tlte conlpiutli"* scheclttlecl confereuce call: Demand tbr premiurn -eoods ancl services in the U.S. is expectecl to lise 8 percent tltis yeat'. Oul luxru'y brancls-Bobbi Brou'n. L:r N4er. Jo iVialone. Ton.r Fot'cl--erew stfoll-s clouble-cli-eits fbr the qu?rrter. ht onr Skitt Care category. rvhich sau, stl'oll-q increases iti all regions, recent technologically-advanced innovatiorrs inclucle Clinique Repairrvear Laser Foctts. Estde LaudeL Aclvancecl Night Repair E),e Recoverli 6o,r'tptr". La Mer Regenerating Senttn. and Oligins Plantscription. We are pleased with the success of these uerv procittcts. Oul Hcir Crrre categot'y is irnproving. Follorvin-u a successltl test in l0 stores. Butnble and bun'rble had expattcled to all stancl-alone Sephora clools in the U.S, Oul Bumble salon netu'ot'k should benetlt fiont the ret-erral pro-sraln at Sephola. The brand has also launched its th'st ever pritlt ad campaign tbl its nerv textru'e cleam iu North Amelica in April. ibllou,ed by the U.K. this tnouth. Our Fntgnux'e cate-sol'y grerv this quarter clespite a tough compat'isou rvith the three-year t'elautlch o1'pureDKNY. Ser,eral of oul Lecent launches perfblrned well. incluctirtg Coach Poppy artcl Estie Laucler Pleasures Bloonr. as u'ell as the prernium Jo Malone ancl Tom Forcl fi'agrances. We are assnming a rvorldrvide license lbr Zegna. ',r'hich sl'roulcl strettgthett ottr itrtet'trational Fragratrce porttblio especially in China ancl Enlope. Through nine of our braucls. we llo\\I hacl a plesence in clepartment stores. tieestanclin,u stores. and Sephola in 38 cities in China. Our online initiative in the conntry extends onr reach to ulore than 346 cities. Estde Lattcier retrraius the top-ranked Plesti-se brand in its distribution in China. \Ve are particularly pieased lvith our pto-etess tn Brazil. Our NI-A-C ancl Clinique brancls continne to lesonate u'ith coltstttners. Tut'key is a tast-_elorving entergin-u malket in tlre European region. Our sales there gainecl 34 percent in the qual'ter. ancl u'e continue to -saiu share. We also gained share in South Afiica. u'het'e iurproved coltsullter insights led to better product ilssortment and r.ttore efl'ective marketiu-e campaigns. In Russia. our sales-everl,-cla1' reurains strong. rising more than 20 pelcerlt. q,hich is abont clotlble I

the ovelall Plestige beauty -erou,th. Estde Laucler leleases its tburth quarter and t-iscal yeal financial t'esttlts in mitl-Augnst ct1' each vear. The U.S. stock market clroppecl rnoLe thtn 1.000 points in the 10 clays prior to the colrlpany's Au-sust 15. 201 I release.

History Beautl'. 1,outh. ancl "torever )/out1_g" al'e comlnon themes in the pet'soual ploducts indttstry. But more than that. tr 1,oun-u entreprerleur namecl Estie Laucler i'elt that nof onl)' could she provicle a procluct that espoused those qualities. but a qualitl' artd plestige not beible seen itt the cosrnetics tnarketplace. The Estde Laucler Conipan.v u'as founcled in 1946 b1'Nft's. Estde Laucler and het' husbancl. Joseph Laucier. Estde Laucler r.r'as ahvays interested in beattty ar"rd began hel bttsiness selling the skin care ploducts her chemist uncle Johu Schotz cievelopecl. Her first prodttcts u'et'e solcl to beauty salons and hotels.

Iu the eally ),ears. Estie Lauclel u,as unable to convince N4adisorl At'enue to carry her proclucts, Facin,u this rej'ection. she begau to rnarket her proclucts clirectly to let custornel's saniple her' proclucts belbre they bought them. With that snccess. Estde Laucler began targeting high-class custoutel's b1'sellin-u her ploclucts exclusively throtrgh boittiques aud depaltmellt stores. In l9'18.

30

SHARYNN M. TOMLIN Saks Filih Arenue in Neu' York. in better stores in the United u,ere prodncts selectir,ell'distributed During the next l51.ears fhe rvith the introdttction of Estde Laucler its opelations States. and in 1960 the companl,globalized the follorving "vear' The opening rvith Kong urarket the Hong London. prgclucts at Harrocls in Oil. and Skin Cleansing Cretne Pack. Purpose Creme. Rich All *'ere Supel iir-st pr.oclucts solcl (a and presti-ee fiagrance line of such as Ararnis tbllou'ecl. Lotiol. Aclclitiolerl brancls -erooming pr.oclucts lbr men launched in 1964). Clinique (the first derrnatologist-guided. allelgy testecl. fl.a-sl.ance tiee cosmetics blancl launchecl in 1968). Prescliptives, and OriginS Natural Resonrces. Estde Laucier colttiltues to acquire more bratrd licensing of natnes stlch as Tornnty Hilfi-eer'. MAC. Bobbi Brorvn. La N{er. Kiton tra-srances. Donna Karan. attcl Aveda' Estde Laucler u,as ntunecl one of 10 Outstandin-c Women in Br,rsiness in the United States by business ancl tinancial editors in 1967. A year later she received the Spirit of Achievelnent Aq,arcl tl'ont Albert Einstein College of lVleclicine at Yeshiva University. This u'as the same yeat the conrpany expandecl again b1'opeuin-u Clinique Labolatories. Inc. The year 1983 was an extrilol'clinary one rvith the illtrodtlctiort of its p|odr.rcts in the SoYiet Uniott. In November 1998. Estde Laucler began selling a varietl' of products over the Interuet and.t'as one of the tirst major prcstige cosmetics tirms to offer online shopping. A nerv division callecl ELC Opline u'as created to mana-ge all online strategies and activities tbr all of its brands. Dtu'ing this salte tine tiane other acquisitions. including Jo Malone. Stila Cosmetics (sold seten years later) Gloss.cont. ancl Nerv York-based Bumble and bumble LLC rvere acquired. In 2003. Darphin ancl Roclan + Fiekls were acquired. ancl a license r.r'ith fuIichael Kors tvas signed shortly atterward. In 200-1. the courpany's teeu-oriented Jane business rvas sold. ancl Estde Lauclel iaunched Beauty Flirt. anci Goocl Skin thlough its BeautyBank division, fbllou'ed by Grassroots in 2005 ancl Daisl' Fuentes in 2006. The sante year'also sau, license a-sreelrents u'ith Sean John, Missoni. and Donalcl Trump. In April 2006. the Stila brancl. rvhich had been purchasecl in 1999, rvas sold. Since 2008. Estde Lauclel companies har.e sr.rccesstully launchecl multiple new plocluct lilles. itrcluclin-e Grassloots Research Labs. and in 2010 Estde Lauder annoultced the acquisition of Smashbox Beautl, Cosmetics from the Factol brothers. -sl€at-grandsons of the le-eendary IVIax Factor. Today Est6e Lauder ltas 28 bl'ancls. sells products in over 150 countlies and territories, atrcl enplol's over 31,200 people u'orlchvide. While l4rs. Estde Lauder passed arvay in April 2004. in her lit'e she u,itnessed the -uror.r,th of tr small home operation to a rvot'ldq'ide corporation, rvith anlnal re\.enues of rnore than 57.8 billion. She rvas very proud that the colnparly went public in 1995. ancl toclay it conlinues to be led by her chilclreu ancl grandchildren. Estde Laucler established its

filst clepaltment store account with

lnternal lssues Vision/Mission/Ethics

Estde Laucler Con.rpanies' tision is: "bringing the best to everyone we touch and being the best in evelything ll,'e cio. By 'the best' rve rnean the best products, the best people and the best ideas." Furthelmore. the courpany is committecl to unconlprornisecl ethics and integrity. For all ernployees doniesric:rl11, ancl globalll.. ancl the boarcl of directols. the hi-qhest stanclaril of ethics is a condition of emplol'ntent. The conlpan), otficial homepage elaborates b1, stating the follorving:

"The Estde Laucler Companies. Iuc. is courmittecl to the highest stairtlald of professional ancl personal concluct. All employees of the colnpany are expected to condnct rhentselr.es at all tintes rvithin the letter ancl spirit of the Code. The Cocle of Conduct applies to all ernployees of the Compan.v throughout the u'orld aucl to the members of the Boalcl of Dilectors." A tull clescription of tlre cocle of conduct can be tbutrd at http:// u'rvrv.elcoutpatries.com/pclt\/code-of'-conduct-20

1

0.pdf.

Estie Laucler cloes not have a rvritten mission statelnent. Organizational Structure Estie Lauclel utilizes a strategic lnsiness unit-type structure attcl. as noted above, contintles to be mana_secl primaril;'trl,tanril-v urentbers. As inclicated in Exiribit l. three of the top l2 execr"rtives haye Lalclet' as their'last name. ancl others ma1, be tanrily tnetnbers. The courpany has manufhctur.in_e tircilities. R&D operations. ancl business otlices ou neat'ly e\rer)/ contitlent. as indicated in

CASE

4.

ESTEE LAUDER COMPANIES, lNC.

-

2411

31

EL's Top Twelve Executives \\'iliianr

Liurder',

Chairnrrrn oi the Boitrd

, Yi1 Glallal Flutnart Re.rources Arrrr lliGcsq

F{i}rvev Uedeoti, Lxectrtive YI1 (lit'btii i{t'sc.trcli antl Det'eiont€llt. Corpor.tt.'

F,xecutive

l iruder, itior Ccrptrrilte

I'.r-elvn Se

I:abrieio Frer'll, CEO ancl Pi:eside:rt

YP

S.rr:r

lloss,

i:recutive VP anci (ieiieiai Couuscl

Gregorl

Polcer',

Executive YP. Glub.ri Suppit Clrain

Prcrdttct In n(]\'.1tiort. ;n,.1 Package

Developnrent

Exhibit 2. belorv each -uroup vice president are fbur tlivisions: skin cale. rnakeup. ti'aglance,

ancl

hair care. Financial Position

Estie Lauder"s fiscal year ends on June 30. The corllpilrl),'s fiscal 2010 incoure statentents ancl balance sheets are pi'ovicled in Exhibits 3 and -l respectivell,. Note that net incotne tuore thnu dclublecl in 2010. Its successes in t'iscal 2010 demonstlates Estde Lauder's lesilience after a disappointing dorvnturn in 2009. Note that net sales incleasecl 6 percent. ol to 57.8 billion. due to grou'th in rnakeup. skin cale. ancl hair care procluct cate-uolies. -rlertelatiu-e a t'ecord gross margin of 76.-5 percent. Operating income almost doubled fiom 1009 to 2010. and net earnin-ss increased t'om S2ltl million to S-178 nrillicu. By-Segment Data

Financial lesults for the colnpiluy's tbur divisions-skin care. makeup, fia-erance. ancl haircare. are lrroviclecl in.Exhibit 5. Note that sales of skin cale products Account f'or -{l pelcent. or 53.-t-l billion. of net sales. ibllorvecl by makeup at 38 percent ol 52.96 billion. ti'agrance at 15 percent or Sl.l'7 billion. and hail cale products at 5 pelcent oL 5390.575 nriliion. Also shou,n in Exhibit 5. Estde Laurler clerived 56 percent of its sales tlom outsicle Nolth anri SoLrth Arnelica.'Net sales in the Americas remainecl relatir,el)' flat u'ith a stnall ittcrease of less than I percent or total sales of 53.4 billion. U.S. sales accountecl for irpplclxiuratell'S2.9

Et's Worldwide Facilities

Facility

Location

\{urrutircturins. I 3 Factones

Belgiurlt. Srt'itzc-rllttttl. Lrttitetl Kingtlom. anrl Citttitrht -lokt'tl. t,lclr ille. Neu York: Oc'r'el. Belsititti: Jitpan: \Iarkhitttt. Orltttt'it'r: Bllrittc- I'litlllesotil: Urtitr--rl Stittes.

I{cse arclt itucl Developntetlt Olleratiolls. -175 Scir'tttists

Shungluri. China: I(obe. Business Oftices.

-13

\\krrltln

icle

Neu Zculancl. Afl'icii .,\'o

I

1 1

1'6,.' lt

t t 1'r

:

//u

u' \\'. c I c ( ) t'lt p it lr i c -r . c {) I r'} /.

Jui-r;.ttt

North .\rtrerica. South Autericlt. Cetttt'al AnrL'rica. Asia. Eiurope. I'lirldle Eltst.,{ttstrttliit.

Ri.-hard Krtnc.s, F.xecutive YP anil

ci:o

32

SHARYNN M. TOMLIN

Consolidated Statements of Earnings (in millions, except per share data) Year Ended June 30,

2009

201 0

$7,795.8

Net Snles

O1;erati ng

*

_

r

.881.6

.996.8

I

5.412,2

5,914.0

5.067.0

4.883.9

5.088.9

6l.l

76.8

0.4

1(r.6

I -r..3

31.8

-+8.8

5,966.4

_

e.\ Iren se.s

Sellir']g. gellentl itttd atitrtittistt'lttive

Restntcturing atttl otlter si)ecial chalges Gtrorlu'

$7,910"8

$7,323.8

i.819.-f

tlf sule s Gross Profit

Ct-rst

2008

iI

I i ntpai rttrett t

Iinllairnrettt ol' otitet' intitttgitrle itrttt Iong-Iiveti

1-1.0

a\sets

_

789.9

0perating Incollte Interest exltrltse. ttet

7-1. 3

Interest exlleltse ott tlebt extitt-gttisltttteilt

)1 ,3

Iiarnirtgs llefot'e Ittcottre Tbxes Provisiort t'oL ittct-rttte tttxe

5.0?3.8 418.4 5 .1

r. I 76.5

Net eunriuqs attributable to n()rlc()ntrol1iug irtiet'ests

Net Earnings

-_

_ _

s2.42

___-_l]2,9 484.0

22(t.8 (

I

$+zs.J

7 43.9

_-_llil

482..1

(!1

66.8

312.7

e

_l0l

810.7

1

688.3

s

Net Larnings

5.103.3

8..i

)_

(

$21.8.4

i0.2)

_$473.8_

Net earnings attributalrle to'l-hc' l:stee Llttttlet' Contltatties ]ttc. per c()lttitt()tt shltt'e: Basic

Dilutetl

si.ll . ! l:lo

sr l8

_

_ _

s_1.4+

s2.1L

\\rcightet[ itvet'age colt'lttttltt sltat'es otttstatrtling: 96.3

93.9

B asic

t97 .7

r

Diluterl

t00.7

tL)7.7

197.1

5.ff

s.55

s.55

Cash tlivirlentis rieclltt'etl per c()llllll()ll sitat'c

r

EI -Conrllutt i cs.cottt.

Consolidated Balance Sheets (000 omitted) 2009

201 0

ASSE'I'S

Currertt Assets r.l2a.7

s86-1.5

Accotrnts receir lrlrle . l'lc.t

716.?

ti5 3.3

Inventorv attrl pt'tttttotional tttet"citatttlise. ttet

lll(r.6

795.t)

s

Caslt aitti citslt c'tlttivitlettts

Prellnitl e\l)eltses utttl otltet' cttt't'ettt assets

Jr7

ig?7_

5

_ 3.nl.q

Total (ltrrrent,\ssets Plopert\'. Plattt artd h,c;ttilltttcttt. ttet

r

--

.013.6

l.e 1

ill

-

.426,7

Other ilsscts Inve stittettts. ltt cost ot'ttLtt'ket vitlttc

_ 751.5

otlrirt'ill Otlier irrtungitrlc it:sets. ttet

C

Other"irssets

I

__

assets

_3

.

_

7ry?

_

3l

()9.5 I 6._8

r .19_!:0

Total othet'itssets

lotal

tl7

12.2

__

J5,335.6

l 5t). I

_

-1.7

| .237 .,+ _

*_$5.176.6

-

CASE

4.

ESTEE LAUDER COMPANIES, lNC.

2009

201 0

LIARII,ITIES AND trQUITY Current f.iahilities Short-terrtr debt Acccluttts 1ra1'able

sl3 + J-)i -)

s3 3.8

5.6

33.2

Accruecl ittctltttc ti.txes

3:9.

Total Current Liabilities Noncttrrent Liallilities

1,572:2

I-ong-tet'ttt cleht

I

j___

_ilII

i. i I 8:0

Other lccrue(l liabilities

I

1..159.2 .*_

.105.(i

i .3 87.6

Accmett ittcottre taxes

163.3

:5e.

I

Other noncun'ent Iiabilitics

-t29.7

-!06

I __

_J2q{_

Total littttcut'retrt Liabilities

-_ 3.r0?__

fbfal Liabilities Equit3' Coninton stock. S.01 piir vitltre :650.0(X).00() shares Class A atrthorizeti:

_

2,0*53.4

3.512.6

l.(i

2.7

sitltre s isstreti:

*)A.767.-135 at Jutte 30. 1010. ancl 183.91 I .350 at June 30. l(X)9: l-10.0()0.000 sltares Class B atrthorizecl: shitres issttetl atttl otitstanclirtg: 77.081.0-l I irt .Iurte :10. l010. ancl 78.067 .)61 at Jtttre 30' 1009 Puicl-in caltital

1.-118.7

t. i45.6

Retitinetl eitt'tt i ttss

3 .5

6J.0

3.195.0

r\c ctttntr 1 ate tt otltet' collll)rehett

si

(196.7

ve I oss

+.798 Lcss: Tre rtsttrv stock. at e tlst: 70. i 15.805 Cirtss A sltares itt Jttttc- 30. 1010. irntl 65.19-1.4'77 Class A slutrcs at Jtrtte 30. l0t)9

{

'['otal Stockholtlers' I!qtritl' Noncontrollitrg Interests

)

-i.ll6.

7

1.fi50.3

}

1.984.-l

_ ll .0_ l.e(t-l

Total Eqtritl'

$5,335.6

Total Liabilities antl Ecluitl'

( 1 17.

i

)

I

t1.586. i

t

1.640.{) 14.{)

_

1.664.0 _ $5.176.6

billiou or 38 1:er.cent of those sirles. ht Europe. the lvlidclle East. alld Atiica. net saies iuct'easecl 9 percent.f1om 52.6 billion to 52.tt billion. reflecting highel llet silles li'om travel retail ancl distlibutol busiuesses. Ner sales in Asia/Pacitlc iucleasecl l(r pelcent. or f}otn Sl.-1 trillion in 2009 to Sl.5 billion in 2010. Str.irte-gic g1o\\,tl1 i1 China. cornbinecl rvith positive results in Korea anci Hong Korlg. contributed to sales grou'th of this region. Most of the grotvth itr the inte|national markets is anticipateil in Russia ancl Chinn. Currentll, irt Russia. ttre Clinique and Estde Lirttder brancls represent about 60 percent of the skin care shaLe of the market. In China. skiu care sales incr.eased b)' 30 perceut. Hou'ever. cleveloping markets such as Blazil arlcl India are shtlrviug si-uns

of potential gains.

Corporate Social ResPonsibilitY Esfde Lauder stron-ul;, aclvocates cofpol'ilte social |esponsibilitl' to its custorue|s ltttd ctrt.ttlttttl.ti.in u,lrich it operates. Corporate philanthlollic pl'o-sranrs aticl cottrlttttllitf invollement initia-

of nuttterotts clrganiz-ations declicatecl to healtli .,nd huutalt services. eclucation. the envit'onntent. ancl the arts. Since 1992. The Estie Lirttclet Cour'a1ies I1c. hirs been at the lbreilont of incleasing -ulobal arvareuess fbt caltcer throtlgh its .

.

1rrr,e sgppor.tecl the activities ancl grou'th

ri'nual Breast Calcer.,{rvareness Carrpai-un. Recently the companv annouucecl the establishmetrt ,i the E,stde Lancler Tribal Scholals Prograni to ltlovide scholalships to Auterican Indian stucients - rldv i nll nrarketi n g.

L'rttsi

ness atrcl ellv i t'otlurental

sc

ietrce s.

-

2011

33

34

SHARYNN

M

TOMLIN

Financial Data per Segment for 2008-2010 (in $ millions) Revenue

l01i)

1009

l00B

I

s2.886.0

s2.e96.8

I'lakeulr

l.e78.l

1.83{).9

3.000.-i

[jnigntttce

r

.136.9

1.150.9

1.-i32.0

-{ r 3,9

-101.4

Othe r

55.+

61 .7

5-i.5

Tirtitl

$7.81 1.5

$7,331.9

$7.910.8

l0l0

Operating Inconle t009

1008

Skin Cltt'e

53.117.

Hirir Care

J-'.411

-il 6.8

I Iakeulr FrirgLattce

16.3

Hiiil

(6.1t

Cat'e

C)ther'

_').+

'[otal

sllT{.6

s-f05.6

179.8

359.+

r

3fr.2

)

{ 1,6)

$5 I 0.1

$811.1

r60.8

I r.5

tl ll l.l

1l

I

I

s29-i.

5+J+.i

Skin Citt'e

ll7,

(-1.1

(ieographic Reventtes Anal)'sis Asiit/Pucific Eurolte ltr litltllr-

s

1.5

1008

l(x)9

l0 r0 10.i

s

1.19e.-+

1.859.3

l.6l

i.-l+1.

lJll

I .3

S

l.l9l.(r -1.006.7

Fiast/Atl'icir ,.\tncricits

Totnl 5'r,r

i

$7,811.5

-)

3.7 I 1.5

$7,331.9

$7,91().8

tlt'r': F.LCortrplttt i es.cottt'

Est6e Lltrclel beiieves that the longterm success of the cotporation is dependelrt on its i'ter-actiol 11,itl.r tire hunuur ancl ecologicai ertvironments. At Estie Lauder'. envit'ottt.uetttal ancl e'rplo.vee saf'ety pefbnrrauce is et'ely employee's lespousibility. The anunal pertbt'mance t'evie$'s of implt,yees in the uranufirctuling and lelatecl aleas al'e partially based otr reachin-s thei| sites' enyir.olureltal lrealtft ancl sat'et1, objectives. The cornpany has established loug-terur ellvll'ollilelltal. health. ancl salety zel'o \\,aste anci zero acciclents goals. The mallagelnent systems at ail Estde the Laucler manptactur.in-u opelatiorrs ale cerlitiecl by an iuclepenclent thircl parl,y to confbrm to to cotrtinnotts and ISO l-1001 stanclartls. All operations ancl tacilities at'e cleclicated to excellence iprproyentent through inrpleurentation of envit'ottlrental ancl sat-ety initiatives'

Marketing Product

Estde Laucler ltar.kets nrore than 9.000 products tln(le1' ttratry brantl nttlnes. such as: Estde Kiton. Laucler'. Aramis. Clinique. Prescliptives. Lab Series Skincare tbr N4en. Origirls. M'A'C. La \,ler. Bobbi Bros'n. Tonutry Hiltiger. Donna Kat'an Cosuretics. Jo N{alone' Aveda. Bumble alcl bultble. N4ichael Ksls Beaut1,. Roclan + Fielcls. Dalphin. Atnericau Beauty. Flirtl. Donalcl Truntp. Gooil Skin. GlassLoots. Sean John. N,Iissoni. ancl Daisy Fuentes. and its tleu'acclttisitiolt. S'rashbox. Exhibit 6 lists a t'erv of the cornpany's blancl nanre ploducts ancl the clate of Product launch or acquisition. Note that SnlashBtlx \\'as iutroclttcecl in 2010. The cor.npan\,'s ploclncts are clivicleci into skin care (moistltrizers. creatns. lotiotls. cleausers. sitnsereells. ancl self:tanning proclucts). nrakeup (lipsticks. tllasci.iras. tbundatiorls. blusltes. eye tiaglance shaclorvs. nail polishes ancl porvclersl plus cornpacts. brttshes. ancl other makettp tools), on parbased (eau cle- per.tirpre spralis. colognes. perfirmes. lotions. porvclet's, creal'tls. aucl soaps (sllatnpoos, conditionticuiat. lragr.ancesr plus trath ancl arorrathet'apy proclucts). atlcl hair cale ers. st-vli1g gels ancl ct'elnes. hail coloring ploclttcts. ancl hairspra-vs). Estde Lauder places high provide r.alue ou cousuller conrnrunication iurcl awareltess. Ntttlerotls systellls ale in place to

CASE

4.

ESTEE LAUDER COMPANIES, lNC, __ 2A11

Est6e Lauder Brands Year Acquired

Brand Name Laucler

Estu