Estee Lauder Companies Outlines Plans for Long-Term Growth

During an analyst and investor meeting webcast yesterday, The Estee Lauder Companies Inc. said it expects a combination of sales growth initiatives, operational efficiencies and productivity gains to drive long-term sales over the next five years at a cumulative average growth rate of between 6% and 7% in constant currency, while earnings per share are expected to average 12% to 15% growth over the same period.

Key sales growth drivers include new product innovation across all product categories, strategic distribution diversification and continued global expansion. Profit improvement initiatives now underway and others being developed – including productivity enhancements in the company’s global supply chain and additional expense savings-will contribute to earnings growth and free cash flow.

Fred H. Langhammer, president and chief executive officer, said, “We believe our sound fundamentals, strong asset base and the very solid positioning of our brands in the marketplace will enable us to achieve our financial objectives. Through new and existing marketing and sales efforts, we see significant opportunities for our established brands and developing brands to generate solid top-line growth. In addition, we continue to seek efficiencies and reduce costs to generate productivity gains.”

The company’s supply chain and manufacturing initiatives, designed to integrate and align all elements of its global operations, are expected to reduce costs by $106 million to $132 million over the next five years. Savings are expected to come from cost reductions in global sourcing, operation efficiencies in manufacturing and transportation, and reductions in inventory obsolescence. The company also plans to standardize business systems and processes. These efforts are expected to result in an approximate 180 basis point improvement in cost of goods over the five-year period, allowing the company to achieve its goal of 25% cost of goods and a 75% gross margin.

Business unit productivity improvement, reductions in selling and administrative expenses and initiatives in process standardization, systems and globalization are expected to result in a 200 basis point decrease in operating expenses as a percent of sales over the five-year period, contributing to the company’s goal of achieving its interim 13% to 13.5% operating margin target by the end of fiscal 2007.

The company reiterated its long-term strategy to support its brands and to drive sales through continued marketing. The company said it planned to increase advertising and promotional spending in line with sales growth.

Geographically, the company expects growth to continue in all regions with the fastest growth in international markets due to increases in established brands, developing brands and travel retail, as well as continued expansion in new and emerging markets, such as Eastern Europe and China.

On a product category basis, the company expects its hair care business, off of a smaller base, to grow most rapidly, followed by makeup, skin care and fragrance. The company is accelerating new product innovation, particularly in skin care and makeup, as it takes advantage of technological breakthroughs and focuses on the goal of increasing product speed to market. The current goal is to reduce the product development timeline by 30%.

The company currently sells its products in several distribution channels, with North American prestige department stores the primary channel. While North American department stores are likely to remain the cornerstone of the company’s distribution, faster growth is expected from newer distribution channels including hair salons, travel retail and the company’s free-standing retail stores. These will result from the company’s focus on increasing its customer base through strategic distribution diversification.

The company is targeting a 15% to 18% inventory reduction in relative terms by the end of fiscal 2007 through SKU reductions, forecasting improvements and expansion of vendor managed inventory processes. This reduction is expected to contribute to overall working capital improvement. These improvements, coupled with increased profitability, are also expected to drive increases in cash flow and return on invested capital.