| ESTEE LAUDER COMPANIES INC “Item 1A Risk Factors |
| The Estee Lauder Companies Inc, founded in 1946 by Estee and Joseph Lauder, is one of the world’s leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products |
| Our products are sold in over 130 countries and territories under the following well-recognized brand names: Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, MAC, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, Rodan + Fields, American Beauty, Flirt!, Good Skin™ and Grassroots |
| We are also the global licensee for fragrances and cosmetics sold under the Tommy Hilfiger, Donna Karan, Michael Kors, Donald Trump, Sean John, Missoni and Daisy Fuentes brand names |
| Each brand is distinctly positioned within the market for beauty products |
| We are a pioneer in the cosmetics industry and believe we are a leader in the industry due to the global recognition of our brand names, our leadership in product innovation, our strong market position in key geographic markets and the consistently high quality of our products |
| We sell our prestige products principally through limited distribution channels to complement the images associated with our brands |
| These channels, encompassing over 20cmam000 points of sale, consist primarily of upscale department stores, specialty retailers, upscale perfumeries and pharmacies and prestige salons and spas |
| In addition, our products are sold in freestanding company-owned stores and spas, our own and authorized retailer web sites, stores on cruise ships, television direct marketing, in-flight and duty-free shops and certain fragrances are sold in self-select outlets |
| We believe that our strategy of pursuing limited distribution strengthens our relationships with retailers, enables our brands to be among the best selling product lines at the stores and heightens the aspirational quality of our brands |
| Beginning in fiscal 2005, we began to sell our newly developed brands, American Beauty, Flirt!, Good Skin™ and Grassroots at Kohl’s Department Stores |
| In fiscal 2006, we developed Dianoche by Daisy Fuentes, which became available at Kohl’s Department Stores in August 2006 |
| In April 2006, we completed the sale of certain assets and operations of our reporting unit that marketed and sold Stila brand products, which was originally acquired in August 1999 |
| In February 2004, we sold the assets and operations of our reporting unit that sold jane brand products, which was originally acquired in October 1997 |
| We have been controlled by the Lauder family since the founding of our company |
| Members of the Lauder family, some of whom are directors, executive officers and/or employees, beneficially own, directly or indirectly, as of August 22, 2006, shares of Class A Common Stock and Class B Common Stock having approximately 88dtta2prca of the outstanding voting power of the Common Stock |
| Unless the context requires otherwise, references to “we,” “us,” “our” and the “Company” refer to The Estee Lauder Companies Inc |
| and its subsidiaries |
| Products Skin Care - - Our broad range of skin care products addresses various skin care needs for women and men |
| These products include moisturizers, creams, lotions, cleansers, sun screens and self-tanning products, a number of which are developed for use on particular areas of the body, such as the face or the hands or around the eyes |
| Skin care products accounted for approximately 37prca of our net sales in fiscal 2006 |
| Makeup - - We manufacture, market and sell a full array of makeup products, including lipsticks, lip glosses, mascaras, foundations, eyeshadows, nail polishes and powders |
| We also sell related items such as compacts, brushes and other makeup tools |
| Makeup products accounted for approximately 39prca of our net sales in fiscal 2006 |
| 2 ______________________________________________________________________ Fragrance - - We offer a variety of fragrance products for women and men |
| The fragrances are sold in various forms, including eau de parfum sprays and colognes, as well as lotions, powders, creams and soaps that are based on a particular fragrance |
| Fragrance products accounted for approximately 19prca of our net sales in fiscal 2006 |
| Hair Care - - Hair care products are offered mainly in salons and in freestanding retail stores and include hair color and styling products, shampoos, conditioners and finishing sprays |
| In fiscal 2006, hair care products accounted for approximately 5prca of our net sales |
| Given the personal nature of our products and the wide array of consumer preferences and tastes, as well as competition for the attention of consumers, our strategy has been to market and promote our products through distinctive brands seeking to address broad preferences and tastes |
| Each brand has a single global image that is promoted with consistent logos, packaging and advertising designed to enhance its image and differentiate it from other brands |
| Estee Lauder - Estee Lauder brand products, which have been sold since 1946, are positioned as luxurious, classic and aspirational |
| We believe that Estee Lauder brand products are technologically advanced and innovative and have a worldwide reputation for excellence |
| The broad product line principally consists of skin care, makeup and fragrance products that are presented in high quality packaging |
| In April 2005, we announced a creative collaboration with fashion designer, Tom Ford, pursuant to which he collaborated with the Estee Lauder brand to create a Tom Ford for Estee Lauder collection, which launched in fiscal 2006 |
| Aramis - - We pioneered the marketing of prestige men’s fragrance, grooming and skin care products with the introduction of Aramis products in 1964 |
| Clinique - - First introduced in 1968, Clinique skin care and makeup products are all allergy tested and 100prca fragrance free and have been designed to address individual skin types and needs |
| The products are based on the research and related expertise of leading dermatologists |
| Clinique skin care products are generally marketed as part of the 3-Step System: Cleanse, Exfoliate, Moisturize |
| Clinique also offers fragrances for men and women and a line of hair care products |
| Prescriptives - - We developed and introduced Prescriptives in 1979 |
| Prescriptives is positioned as a color authority with an advanced collection of highly individualized products primarily addressing the makeup and skin care needs of contemporary women with active lifestyles |
| The products are characterized by simple concepts, minimalist design and an innovative image and, through a system of color application and extensive range of makeup shades, accommodate a diverse group of consumers |
| Lab Series - Lab Series Skincare for Men, introduced by Aramis 17 years ago, offers the full range of advanced products for cleansing, shaving, treatment and body that are especially formulated to answer the unique needs of men’s skin |
| It is positioned as a plant-based line of skin care, makeup and aromatherapy products that combine time-tested botanical ingredients with modern science to promote total well-being |
| Origins sells its products at our freestanding Origins stores and through stores-within-stores (which are designed to replicate the Origins store environment within a department store), at traditional retail counters, in perfumeries and directly to consumers over the Internet |
| Origins also has a license agreement to develop and sell products using the name of Dr |
| Andrew Weil |
| Tommy Hilfiger - We have an exclusive global license arrangement to develop and market a line of men’s and women’s fragrances and cosmetics under the Tommy Hilfiger brand |
| We launched the line in 1995 with a men’s fragrance, tommy |
| Today, we manufacture and sell a variety of fragrances and ancillary products for men and women |
| MAC - MAC products comprise a broad line of color-oriented, professional cosmetics and professional makeup tools targeting makeup artists and fashion-conscious consumers |
| The products are sold through a limited number of department and specialty stores, at freestanding MAC stores and directly to consumers over the Internet |
| We acquired the companies behind MAC in three stages: in December 1994, March 1997 and February 1998 |
| Bobbi Brown - In October 1995, we acquired the Bobbi Brown line of color cosmetics, professional makeup brushes and skin care products |
| Bobbi Brown products are manufactured to our specifications, primarily by third parties, and sold through a limited number of department and specialty stores and directly to consumers over the Internet |
| La Mer - - La Mer products primarily consist of moisturizing creams, lotions, cleansers, toners and other skin care products |
| The line, which is available in very limited distribution in the United States and certain other countries, is an extension of the initial Crème de la Mer product that we acquired in 1995 |
| 3 ______________________________________________________________________ Donna Karan Cosmetics - In November 1997, we obtained the exclusive global license to develop, market and distribute a line of fragrances and other cosmetics under the Donna Karan New York and DKNY trademarks, including certain products that were originally sold by The Donna Karan Company |
| We launched the first DKNY women’s fragrance in fiscal 2000 and the first DKNY men’s fragrance in fiscal 2001 |
| Under this license, fragrances have been expanded to include extensive lines of companion bath and body products |
| Aveda - - We acquired the Aveda business in December 1997 and have since acquired selected Aveda distributors and retail stores |
| Aveda, a prestige hair care leader, is a manufacturer and marketer of plant-based hair care, skin care, makeup and fragrance products |
| We sell Aveda products to third-party distributors and prestige salons and spas, cosmetology schools, certain non-US department stores and specialty retailers and directly to consumers at our own freestanding Aveda Experience Centers and certain Aveda Institutes |
| Jo Malone is known for its prestige skin care, fragrance and hair care products showcased at its flagship store in London |
| Products are also available through a company catalogue, at freestanding stores and at a very limited group of specialty stores in the United States, Canada and the United Kingdom |
| Bumble and bumble - In June 2000, we acquired a controlling majority equity interest in Bumble and Bumble Products, LLC, a marketer and distributor of quality hair care products, and Bumble and Bumble, LLC, the operator of a premier hair salon in New York City (collectively “Bumble and bumble”) |
| Bumble and bumble styling and other hair care products are distributed to top-tier salons and select specialty stores |
| In fiscal 2004, we opened a second wholly-owned salon and a training and education center |
| In fiscal 2007, we intend to acquire the remaining equity interest in Bumble and bumble |
| Darphin - - In April 2003, we acquired Laboratoires Darphin, the Paris-based company dedicated to the development, manufacture and marketing of prestige skin care and makeup products which are distributed through high-end independent pharmacies and specialty stores |
| Michael Kors - In May 2003, we entered into a license agreement for fragrances and beauty products under the “Michael Kors” trademarks and purchased certain related rights and inventory from another party |
| All fragrances including MICHAEL and MICHAEL for Men, as well as ancillary bath and body products, are sold in department stores, specialty stores, at freestanding Michael Kors boutiques and over the Internet |
| Rodan + Fields - In July 2003, we acquired the Rodan + Fields skin care line launched in 2002 by Stanford University-trained dermatologists Katie Rodan, MD and Kathy Fields, MD The line offers solutions for specific skin problems, targeting them with individually packaged and dedicated regimens |
| The line is currently sold in US specialty stores and over the Internet |
| American Beauty - Launched in 2004, the luxurious makeup and advanced skin care line celebrates the beauty of American style |
| These products, which are sold in the United States at Kohl’s Department Stores and Kohls |
| com, have been developed to meet the needs of the modern American woman, with a straightforward makeup and skin care appeal |
| - Launched in 2004 and sold in the United States at Kohl’s Department Stores and Kohls |
| com, this makeup line is all about experimenting with color, pop culture and trends; “you can Flirt! |
| with the possibilities |
| ” Good Skin™ - Launched in 2004 and sold in the United States at Kohl’s Department Stores and Kohls |
| com, this line of skin care products was created with the expertise of a dermatologist |
| good skin, easy to choose, easy to use, doctor formulated for you |
| ™ Donald Trump The Fragrance - In September 2004, the Company announced that it joined forces with Donald Trump in a multi-year deal |
| The agreement established Mr |
| Trump as the spokesperson for a new men’s fragrance called Donald Trump The Fragrance |
| Grassroots - Introduced in 2005 and sold in the United States at Kohl’s Department Stores and Kohls |
| com, Grassroots offers a range of wholesome, naturally-sourced products to help care for you and your family |
| This line’s seven product categories include face, body, hair, post-pregnancy, babies, kids and pets |
| Sean John Fragrances - Introduced in 2005, Sean “Diddy” Combs played an active role in creating a signature scent, “Unforgivable,” that captured a mood of sexiness and elegance |
| That signature scent and ancillary products are available at selected department and specialty stores as well as travel retail outlets around the world |
| Missoni - - In 2006, we launched fragrance and ancillary products under our exclusive global licensing agreement with Milan-based fashion house, Missoni |
| Missoni products are sold in select distribution channels worldwide |
| 4 ______________________________________________________________________ Daisy Fuentes - In early fiscal 2007, we launched Dianoche, the first fragrance under our license agreement with Daisy Fuentes |
| Dianoche holds two scents that connect in a single bottle and is available exclusively at Kohl’s Department Stores nationwide or online at Kohls |
| In addition to the foregoing brands, we manufacture and sell Kiton and Toni Gard products as a licensee |
| We also have licenses from, and are developing products to be sold under the Tom Ford brand name |
| Distribution We sell our products principally through limited distribution channels to complement the images associated with our brands |
| These channels include more than 20cmam000 points of sale in over 130 countries and territories and consist primarily of upscale department stores, specialty retailers, upscale perfumeries and pharmacies and prestige salons and spas |
| In addition, our products are sold in freestanding company-owned stores and spas, our own and authorized retailer websites, stores on cruise ships, television direct marketing, in-flight and duty-free shops and certain fragrances are sold in self-select outlets |
| We maintain a dedicated sales force which sells to our retail accounts in North America and in the major overseas markets, such as Western Europe and Japan |
| We have wholly-owned operations in over 35 countries, and controlling interests in joint ventures that operate in four other countries, through which we market, sell and distribute our products |
| In certain countries, we sell our products through selected local distributors under contractual arrangements designed to protect the image and position of the brands |
| In addition, we sell certain products in select domestic and international military locations |
| For information regarding our net sales and long-lived assets by geographic region, see Note 17 of Notes to Consolidated Financial Statements, which is incorporated herein by reference |
| Our net sales in the United States in fiscal 2006, 2005 and 2004 were dlra3cmam141dtta4 million, dlra3cmam094dtta5 million and dlra2cmam901dtta1 million, respectively |
| Our long-lived assets in the United States at June 30, 2006, 2005 and 2004 were dlra452dtta7 million, dlra425dtta5 million and dlra416dtta0 million, respectively |
| There are risks inherent in foreign operations, including changes in social, political and economic conditions |
| We are also exposed to risks associated with changes in the laws and policies that govern foreign investment in countries where we have operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment |
| In addition, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates |
| Changes in such rates also may affect the relative prices at which we and foreign competitors sell products in the same markets |
| Similarly, the cost of certain items required in our operations may be affected by changes in the value of the relevant currencies |
| We principally sell Aveda products to independent salons and spas, cosmetology schools, third-party distributors and specialty retailers and directly to consumers at our own freestanding Aveda Experience Centers and certain Aveda Institutes |
| There are currently about 7cmam000 points of sale, primarily in the United States, that sell Aveda products |
| Bumble and bumble products are principally sold to more than 2cmam400 independent salons, primarily in the United States |
| Darphin products are principally sold through high-end independent pharmacies, principally in Europe, representing approximately 4cmam000 points of sale |
| As part of our strategy to diversify our distribution, we have been selectively expanding the number of single-brand, freestanding stores that we own and operate |
| The Origins, Aveda and MAC brands are the primary focus for this method of distribution |
| At this time, we operate 467 single-brand, freestanding stores worldwide, the majority of which are in the United States, and expect that number to increase moderately over the next several years |
| We sell American Beauty, Flirt!, Good Skin™, Grassroots and our newly developed fragrance, Dianoche, by Daisy Fuentes in approximately 750 Kohl’s Department Stores in the United States |
| We sell some of our products directly to consumers over the Internet through our own websites (Estee Lauder, Clinique, Lab Series, Prescriptives, Origins, MAC, Bobbi Brown, La Mer, Aveda, Jo Malone and Rodan + Fields), and through Gloss |
| com is a joint venture in which we own a controlling majority interest |
| Chanel, Inc |
| and Clarins (USA) Inc |
| became partners in the venture in August 2000 and Chanel and Clarins products are also available on the website |
| As is customary in the cosmetics industry, our practice is to accept returns of our products from retailers if properly requested, authorized and approved |
| In accepting returns, we typically provide a credit to the retailer against sales and accounts receivable from that retailer on a dollar-for-dollar basis |
| In recognition of this practice, and in accordance with US generally accepted accounting principles, we report sales on a net basis, which is computed by deducting the amount of actual returns received and an amount established for anticipated returns from gross sales |
| 5 ______________________________________________________________________ Customers Our strategy has been to build strong strategic relationships with selected retailers globally |
| Senior management works with executives of our major retail accounts on a regular basis and we believe we are viewed as an important supplier to these customers |
| acquired The May Department Stores Company, resulting in the merger of our previous two largest customers |
| As of and for the fiscal year ended June 30, 2006, this customer accounted for 14prca of our accounts receivable and 16prca of our consolidated net sales |
| In fiscal 2005 and 2004, no single customer accounted for more than 10prca of consolidated net sales |
| Marketing Our marketing strategy is built around our vision statement: “Bringing the Best to Everyone We Touch |
| Estee Lauder formulated this marketing philosophy to provide high-quality service and products as the foundation for a solid and loyal consumer base |
| Our marketing efforts focus principally on promoting the quality and benefits of our products |
| Each of our brands is distinctively positioned, has a single global image, and is promoted with consistent logos, packaging and advertising designed to enhance its image and differentiate it from other brands |
| We regularly advertise our products on television and radio, in upscale magazines and newspapers and through direct mail and photo displays at international airports |
| In addition, our products receive extensive editorial coverage in prestige publications and other media worldwide |
| Promotional activities and in-store displays are designed to introduce existing consumers to different products in the line and to attract new consumers |
| Our marketing efforts also benefit from cooperative advertising programs with retailers, some of which are supported by coordinated promotions, such as purchase with purchase and gift with purchase |
| At in-store counters, sales representatives offer personal demonstrations to market individual products as well as to provide education on basic skin care and makeup application |
| We conduct extensive sampling programs and we pioneered gift with purchase as a sampling program |
| We believe that the quality and perceived benefits of sample products have been effective inducements to purchases by new and existing consumers |
| Starting with the launch of the Clinique website in 1996, we have used the Internet to educate and inform consumers about certain of our brands |
| Currently, we have seventeen single-brand marketing sites, eleven of which have e-commerce capabilities, and Gloss |
| com, our majority-owned, multi-brand marketing and e-commerce site |
| The creative staff designs and produces the sales materials, advertisements and packaging for all products in each brand |
| Global net advertising, merchandising, sampling and promotional expenditures were dlra1cmam793dtta1 million, dlra1cmam793dtta7 million and dlra1cmam595dtta5 million for fiscal 2006, 2005 and 2004, respectively |
| These amounts include revenues and expenses relating to purchase with purchase and gift with purchase promotions that are reflected in net sales and cost of sales |
| Our marketing and sales executives spend considerable time in the field meeting with consumers and key retailers and consulting with sales representatives at the points of sale |
| Information Systems Information systems support business processes including product development, marketing, sales, order processing, production, distribution and finance |
| Of the many systems currently being utilized, the most significant to our business needs are: (i) a centralized data repository of essential attributes for each of the products we offer, or plan to offer, which enables us to globally manufacture and market products of consistent quality; (ii) a sales analysis system to track weekly sales at the stock keeping unit (SKU) level at most significant retail sales locations (ie, sell-through data), increasing our understanding of consumer preferences and enabling us to coordinate more effectively our product development, manufacturing and marketing strategies; (iii) an automated replenishment system with many of our key domestic customers, allowing us to replenish inventories for individual points of sale automatically, with minimal paperwork; and (iv) an inventory management system to provide us with a global view of finished goods availability relative to actual requirements, facilitating inventory control and distribution for both existing product lines and new product launches |
| The efficiencies provided by these systems have resulted in increased sales, fewer out-of-stocks and reduced retail inventories |
| We expect that these systems will continue to provide inventory and sales efficiencies in the short and medium terms |
| As part of our long-term effort to enhance these efficiencies, we are implementing our Strategic Modernization Initiative (“SMI”), which includes an enterprise-wide global program that we expect will deliver a single set of integrated data, processes and technologies, which would be scalable and used to standardize business processes across brands, operating units and sales affiliates |
| The implementation of SMI at our Aveda operating unit is planned for fiscal 2007 |
| 6 ______________________________________________________________________ Research and Development We believe that we are an industry leader in the development of new products |
| Marketing, product development and packaging groups work with our research and development group to identify shifts in consumer preferences, develop new products and redesign or reformulate existing products |
| In addition, research and development personnel work closely with quality assurance and manufacturing personnel on a worldwide basis to ensure consistent global standards for our products and to deliver products with attributes that fulfill consumer expectations |
| We maintain ongoing research and development programs at our facilities in Melville, New York; Oevel, Belgium; Petersfield, UK; Tokyo, Japan; Markham, Ontario; Blaine, Minnesota; Shanghai, China; and Colombes, France |
| As of June 30, 2006, we had approximately 444 employees engaged in research and development |
| Research and development expenditures, which are included in advertising, merchandising and sampling expenditures, totaled dlra72dtta0 million, dlra72dtta3 million and dlra67dtta2 million in fiscal 2006, 2005 and 2004, respectively |
| Our research and development group makes significant contributions toward improving existing products and developing new products and provides ongoing technical assistance and know-how to our manufacturing activities |
| The research and development group has had long-standing working relationships with several US and international medical and educational facilities, which supplement internal capabilities |
| We do not conduct animal testing of our products |
| Manufacturing, Warehousing and Raw Materials We manufacture skin care, makeup, fragrance and hair care products in the United States, Belgium, Switzerland, the United Kingdom, Canada and France |
| We continue to streamline our manufacturing processes and identify sourcing opportunities to improve innovation, increase efficiencies and reduce costs |
| Our major manufacturing facilities operate as “focus” plants that primarily manufacture one type of product (eg, lipsticks) for all of the principal brands |
| Our plants are modern and our manufacturing processes are substantially automated |
| While we believe that our manufacturing facilities are sufficient to meet current and reasonably anticipated manufacturing requirements, we continue to identify opportunities to make significant improvements in capacity and productivity |
| To capitalize on innovation and other supply benefits, we continue to utilize third parties on a global basis for finished goods production |
| We have established a global distribution network designed to meet the changing demands of our customers while maintaining service levels |
| We are continuously evaluating and restructuring this physical distribution network |
| We intend to establish regional inventory centers strategically positioned throughout the world in order to facilitate timely delivery of our products to our customers |
| The principal raw materials used in the manufacture of our products are essential oils, alcohol and specialty chemicals |
| We also purchase packaging components that are manufactured to our design specifications |
| Procurement of materials for all manufacturing facilities is generally made on a global basis through our centralized supplier relations department |
| A concentrated effort in supplier rationalization has been made with the specific objective of reducing costs, increasing innovation and improving quality |
| As a result of sourcing initiatives, there is increased dependency on certain suppliers, but we believe that these suppliers have adequate resources and facilities to overcome any unforeseen interruption of supply |
| We are continually benchmarking the performance of the supply chain and will add or delete suppliers based upon the changing needs of the business |
| We have, in the past, been able to obtain an adequate supply of essential raw materials and currently believe we have adequate sources of supply for virtually all components of our products |
| As we integrate acquired brands, we continually seek new ways to leverage our production and sourcing capabilities to improve manufacturing performance |
| 7 ______________________________________________________________________ Competition The skin care, makeup, fragrance and hair care businesses are characterized by vigorous competition throughout the world |
| Brand recognition, quality, performance and price have a significant influence on consumers’ choices among competing products and brands |
| Advertising, promotion, merchandising, the pace and timing of new product introductions, line extensions and the quality of in-store sales staff also have a significant impact on consumers’ buying decisions |
| We compete against a number of manufacturers and marketers of skin care, makeup, fragrance and hair care products, some of which have substantially greater resources than we do |
| Our principal competitors among manufacturers and marketers of skin care, makeup, fragrance and hair care products include: · L’Oreal SA, which markets Lancôme, Ralph Lauren, Giorgio Armani, Garnier, L’Oreal, Maybelline, Biotherm, Helena Rubinstein, Redken, Matrix, Kiehl’s Since 1851, Shu Uemura, SkinCeuticals, The Body Shop and other brands; · Unilever NV, which markets Dove, Pond’s, Thermasilk, Vaseline Intensive Care and other brands; · The Procter & Gamble Company, which markets SK-II, Cover Girl, Olay, Giorgio Beverly Hills, Hugo Boss, Rochas, Escada, Lacoste, Max Factor, Pantene, Clairol, Wella, Valentino, Gucci, Sebastian, Aussie, Dolce & Gabbana and other brands; · Beiersdorf AG, which markets Nivea, Eucerin, La Prairie, Juvena and other brands; · Avon Products Inc, a direct marketer of Avon Color, Anew, Skin-so-soft, mark, Avon Wellness, beComing, and other products; · Shiseido Company, Ltd, which markets Shiseido, Cle de Peau Beaute, Zirh, Nars, Decleor, Issey Miyake, Jean Paul Gaultier, Helene Curtis, Za, Carita, Aupres and other brands; · LVMH Moët Hennessey Louis Vuitton (“LVMH”), which markets Christian Dior, Kenzo, Givenchy, Guerlain, Benefit, Make Up For Ever, Fresh, Aqua di Parma and other brands; · Coty, Inc, which markets Lancaster, Davidoff, Isabella Rossellini, Rimmel, Astor, Adidas, The Healing Garden, Chopard, Jennifer Lopez, Kenneth Cole, Marc Jacobs, Sarah Jessica Parker, David and Victoria Beckham, Stetson, Calvin Klein, Cerruti, Vera Wang and other brands; · Revlon, Inc, which markets Revlon, Almay, Ultima II and other brands; · Chanel, Inc |
| ; · Clarins SA, which markets Clarins, Azzaro, Thierry Mugler and other brands; · Elizabeth Arden, Inc, which markets Elizabeth Arden, Elizabeth Taylor fragrances, Geoffrey Beene, Halston, Britney Spears, Prevage, Badgley Mischka, Alfred Sung, Hummer, Nanette Lepore, Cynthia Rowley, Lulu Guinness, Bob Mackie and other brands; and · Kao Corporation, which markets Sofina, Sensai, Kanebo, Molton Brown, Twany, Lissage, est, RMK, Lunasol, Biore, Jergens, John Frieda and other brands |
| We also face competition from a number of independent doctor-aligned brands, such as NV Perricone MD, dr |
| Additionally, some retailers have developed their own beauty brands, such as: · Gap Inc, which markets The Gap, Old Navy and Banana Republic products; · Limited Brands Inc, which markets Victoria’s Secret Beauty and Bath and Body Works; and · Sephora |
| Some of our competitors also have ownership interests in retailers that are customers of ours |
| Trademarks, Patents and Copyrights The trademarks used in our business include the brand names Estee Lauder, Clinique, Aramis, Prescriptives, Lab Series, Origins, Tommy Hilfiger, Donna Karan New York, DKNY, MAC, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and bumble, Darphin, Michael Kors and Rodan + Fields, American Beauty, Flirt!, Good Skin™ and Grassroots and the names of many of the products sold under these brands |
| We own the material trademark rights used in connection with the manufacturing, marketing and distribution of most of our major products both in the United States and in the other principal countries where such products are sold |
| We are the exclusive worldwide licensee for fragrances, cosmetics and related products for Tommy Hilfiger, Donna Karan New York, DKNY, Michael Kors, Donald Trump, Sean John, Missoni and Daisy Fuentes |
| Origins, pursuant to a license agreement, sells products using the name of Dr |
| Andrew Weil and Estee Lauder, pursuant to a license agreement, sells products using the name Tom Ford for Estee Lauder |
| We are in the process of developing new products under a license from Tom Ford |
| We protect our trademarks for our principal products in the United States and significant markets worldwide |
| We consider the protection of our trademarks to be important to our business |
| A number of our products incorporate patented or patent-pending technology in formulations or packaging |
| In addition, several products are covered by design patents, patent applications or copyrights |
| While we consider these patents and copyrights, and the protection thereof, to be important, no single patent or copyright is considered material to the conduct of our business |
| 8 ______________________________________________________________________ Employees At June 30, 2006, we had approximately 26cmam200 full-time employees worldwide (including sales representatives at points of sale who are employed by us), of whom approximately 11cmam700 are employed in the United States and Canada |
| None of our employees in the United States is covered by a collective bargaining agreement |
| In certain other countries, a limited number of employees are covered by a works council agreement or other syndicate arrangements |
| We believe that relations with our employees are good |
| We have never encountered a material strike or work stoppage in the United States or in any other country where we have a significant number of employees |
| Government Regulation We and our products are subject to regulation by the Food and Drug Administration and the Federal Trade Commission in the United States, as well as by various other Federal, state, local and international regulatory authorities and the regulatory authorities in the countries in which our products are produced or sold |
| Such regulations principally relate to the ingredients, labeling, packaging and marketing of our products |
| We believe that we are in substantial compliance with such regulations, as well as with applicable Federal, state, local and international and other countries’ rules and regulations governing the discharge of materials hazardous to the environment |
| There are no significant capital expenditures for environmental control matters either planned in the current year or expected in the near future |
| Along with other unrelated parties, we have been named as a potentially responsible party by the Office of the Attorney General of the State of New York with regard to a landfill in Long Island, New York |
| Item 1A Risk Factors |
| There are risks associated with an investment in our securities |
| Please consider the following risks and all of the other information in this annual report on Form 10-K and in our subsequent filings with the SEC Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial |
| If any of the events contemplated by the following discussion of risks should occur or other risks arise or develop, our business, prospects, financial condition and results of operations, as well as the prices of our securities, may be adversely affected |
| The beauty business is highly competitive, and if we are unable to compete effectively our results will suffer |
| We face vigorous competition from companies throughout the world, including multinational consumer product companies |
| Some of these competitors have greater resources than we do and may be able to respond to changing business and economic conditions more quickly than us |
| Competition in the beauty business is based on pricing of products, innovation, perceived value, service to the consumer, promotional activities, advertising, special events, new product introductions, electronic commerce initiatives and other activities |
| It is difficult for us to predict the timing and scale of our competitors’ actions in these areas |
| Also, the trend toward consolidation in the retail trade, particularly in developed markets such as the United States and Western Europe, has resulted in us becoming increasingly dependent on key retailers, including large-format retailers, who have increased their bargaining strength |
| This trend has also resulted in an increased risk related to the concentration of our customers |
| A severe adverse impact on their business operations could have a corresponding material adverse effect on us |
| Our ability to compete also depends on the continued strength of our brands, our ability to attract and retain key talent and other personnel, the efficiency of our manufacturing facilities and distribution network, and our ability to protect our intellectual property |
| Our inability to continue to compete effectively in countries around the world could have an adverse impact on our business |
| 12 ______________________________________________________________________ Our inability to anticipate and respond to market trends and changes in consumer preferences could adversely affect our financial results |
| Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer tastes for skin care, makeup, fragrance and hair care products as well as to where and how consumers shop for those products |
| We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products |
| While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, we recognize that consumer tastes cannot be predicted with certainty and can change rapidly |
| If we are unable to anticipate and respond to trends in the market for cosmetics products and changing consumer demands, our financial results will suffer |
| Our future success depends on our ability to achieve our long-term strategy |
| Our long-term strategy is based on five strategic imperatives: 1 |
| Strengthen product categories 3 |
| Strengthen and expand geographic presence 4 |
| Diversify and strengthen distribution channels 5 |
| Achieve operational and cost excellence Achieving our long-term objectives may require investment in new brands, categories, distribution channels, technologies and geographic markets |
| These investments may results in short-term costs without any current revenues |
| In addition, there may be costs incurred in disposing of brands |
| Although we believe that our strategic imperatives will lead to growth in revenue and profitability, we may not realize in full, or in part, the anticipated benefits |
| The failure to realize benefits, which may be due to our ability to execute plans or other risks described in this 10-K, could have a material adverse effect on our business, financial condition and operating results |
| Any future acquisitions may expose us to additional risks |
| We continuously review acquisition opportunities that would expand our current product offerings, our distribution channels, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities |
| The financing for any of these acquisitions could result in an increase in our indebtedness, dilute the interests of our stockholders or both |
| Acquisitions may entail numerous risks, including: · difficulties in assimilating acquired operations or products, including the loss of key employees from or customers of acquired businesses; · diversion of management’s attention from our core businesses; · adverse effects on existing business relationships with suppliers and customers; and · risks of entering markets in which we have limited or no prior experience |
| Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition and operating results |
| In addition, there can be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms |
| A general economic downturn or sudden disruption in business conditions may affect consumer purchases of discretionary items, which could adversely affect our financial results |
| The general level of consumer spending is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, and consumer confidence generally, all of which are beyond our control |
| Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products |
| In addition, sudden disruptions in business conditions, for example, as a consequence of events such as the outbreak of SARs in 2003 or those that are currently taking place in the Middle East, or as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, or as a result of adverse weather conditions, such as Hurricane Katrina, can have a short and, sometimes, long-term impact on consumer spending |
| Events that impact consumers’ willingness or ability to travel and/or purchase our products while traveling may impact our travel retail business, which is a significant contributor to our overall results |
| A downturn in the economies in which we sell our products or a sudden disruption of business conditions in those economies could adversely affect our sales |
| 13 ______________________________________________________________________ Changes in laws, regulations and policies that affect our business could adversely affect our financial results |
| Our business is subject to numerous laws, regulations and policies |
| Changes in the laws, regulations and policies, including the interpretation or enforcement thereof, that affect, or will affect, our business, including changes in accounting standards, tax laws and regulations, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result could adversely affect our financial results |
| Our success depends, in part, on the quality and safety of our products |
| If our products are found to be defective or unsafe, or if they otherwise fail to meet our consumers’ standards, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations and financial condition |
| Our success depends, in part, on our key personnel |
| Our success depends, in part, on our ability to retain our key personnel, including our executive officers and senior management team |
| The unexpected loss of one or more of our key employees could adversely affect our business |
| Our success also depends, in part, on our continuing ability to identify, hire, train and retain other highly qualified personnel |
| Competition for these employees can be intense |
| We may not be able to attract, assimilate or retain qualified personnel in the future, and our failure to do so could adversely affect our business |
| This risk may be exacerbated by uncertainties associated with our long-term strategy, SMI (as defined below) and other initiatives |
| We are subject to risks related to our international operations |
| We operate on a global basis, with approximately 51prca of our fiscal 2006 net sales generated outside the United States |
| We maintain offices in over 35 countries and have key operational facilities located outside the United States that manufacture, warehouse or distribute goods for sale throughout the world |
| Foreign operations are subject to many risks and uncertainties, including but not limited to: · fluctuations in foreign currency exchange rates, which can affect our results of operations; the value of our foreign assets; the relative prices at which we and foreign competitors sell products in the same markets; and the cost of certain inventory and non-inventory items required in our operations; · changes in foreign laws, regulations and policies, including restrictions on trade, import and export license requirements, and tariffs and taxes, as well as changes in United States laws and regulations relating to foreign trade and investment; and · adverse weather conditions, social and geopolitical conditions, such as terrorist attacks, war or other military action |
| These risks could have a material adverse effect on our business, prospects, results of operations and financial condition |
| A disruption in operations could adversely affect our business and financial results |
| As a company engaged in manufacturing and distribution on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in logistics or information systems, loss or impairment of key manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which we have no control |
| If such an event were to occur, it could have an adverse affect on our business and financial results |
| Our information systems and websites may be susceptible to outages and other risks |
| We have information systems that support our business processes, including product development, marketing, sales, order processing, production, distribution, finance and intracompany communications throughout the world |
| We have e-commerce and other Internet websites in the United States and many other countries |
| These systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events |
| Despite the implementation of network security measures, our systems may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering |
| The occurrence of these or other events could disrupt or damage our information systems and adversely affect our business and results of operations |
| 14 ______________________________________________________________________ We are subject to risks associated with implementing global information systems |
| As part of a program that we call our “Strategic Modernization Initiative,” or “SMI,” we are implementing enterprise-wide global programs intended to deliver a single set of integrated data, processes and technologies, which would be scalable and used to standardize business processes across brands, operating units and sales affiliates |
| The implementation of SMI at our Aveda operating unit is planned for fiscal 2007 |
| The full implementation of SMI is not expected until 2010 |
| Failure to implement SMI as planned, in terms of timing, specifications and/or costs, could have an adverse impact on our business and results of operations |
| The price of our securities periodically may rise or fall based on the accuracy of analysts’ or others’ predictions of our earnings or other financial performance |
| Our business planning process is designed to maximize the long-term strength, growth and profitability of the Company, not to achieve an earnings target in any particular fiscal quarter |
| We believe that this longer-term focus is in the best interests of the Company and our stockholders |
| However, we do recognize that it may be helpful to provide investors with guidance as to what we think will be our future net sales and earnings |
| Accordingly, when we announced our year-end financial results for fiscal 2006, we provided guidance as to our expected net sales and earnings for the fiscal year ending June 30, 2007 and the quarter ending September 30, 2006 |
| While we generally expect to provide updates to our guidance when we report our results each fiscal quarter, we assume no responsibility to update any of our forward-looking statements at such times or otherwise |
| In all of our public statements when we make, or update, a forward-looking statement about our sales and/or earnings expectations, we accompany such statements directly, or by reference to a public document, with a list of factors that could cause our actual results to differ materially from those we expect |
| Such a list is included, among other places, in our earnings press release and in our periodic filings with the Securities and Exchange Commission (eg, in our reports on Form 10-K and Form 10-Q) |
| These and other factors make it more difficult for outside observers, such as research analysts, to predict what our earnings will be in any given fiscal quarter or year |
| Outside analysts, like all investors, have the right to make their own predictions as to what the Company’s financial results will be in a given fiscal year or quarter or even in future years |
| Outside analysts, however, have access to no more material information about the Company’s plans than any other public investor, and the Company does not endorse their predictions as to our future performance |
| Nor does the Company assume any responsibility to correct the predictions of outside analysts or others when they differ from the Company’s own internal expectations |
| When the Company announces actual results that differ from those that outside analysts or others have been predicting, the market price of the Company’s securities could be affected |
| Investors who rely on the predictions of outside analysts or others when making investment decisions with respect to the Company’s securities do so at their own risk |
| The Company takes no responsibility for any losses suffered as a result of such changes in the prices of the Company’s securities |