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Operator
Good day, everyone and welcome to the Estee Lauder Companies fiscal 2009 second quarter conference call.
Today's call is being recorded and Webcast.
For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr.
Dennis D'Andrea.
Please go ahead, sir.
Dennis D'Andrea - VP of IR
Good morning, everyone.
We have on today's call William Lauder, Chief Executive Officer, Fabrizio Freda, President and Chief Operating Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer.
Dan Brestle, our Vice Chairman and President of ELC North America is also on the call and he will be available for questions.
Today's call will have a slightly different format.
Rick will discuss our second quarter results and full fiscal 2009 outlook.
William will give a view of the market conditions and how we are addressing them and Fabrizio will provide an update on our strategic plan including actions already taken.
We will then open up the call for questions.
We have allotted an extra 30 minutes to allow plenty of time.
Since many of our remarks today contain forward-looking statements let me refer you to our press release and our reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements.
And I'll turn the call over to Rick.
Rick Kunes - EVP,CFO
Thank you, Dennis and good morning everyone.
I will provide an abbreviated version of our second quarter financial results so that we can devote more time to our long-term strategy.
Let me refer you to this morning's press release for details of our product categories and geographic regions as well as other components of our P&L.
I also want to refer you to the second quarter and full year update we announced on January 16th.
In local currency sales this quarter decreased 6% over last year.
Market conditions in the US, troubled retail and some important European countries came in far below our previous assumptions.
In addition, the strengthening of the dollar caused foreign exchange translation to negatively impact sales by 6 percentage points, resulting in reported sales declining 12% to $2.04 billion.
Net earnings for the quarter were $158 million, compared with $224.4 million in the prior year quarter.
And diluted EPS was $0.80, compared to $1.14 in the prior year quarter.
As you are well aware, economic pressures, unemployment and consumer sentiment continued to severely worsen around the globe affecting holiday retail sales.
However, we believe based on both internal estimates and third party sources, that we gained market share in our distribution on a global basis.
This bright spot underscores our strategy to continue to make prudent investments in our brands.
In the US, where consumption patterns are most apparent, consumer across all income levels drastically curtailed their spending.
In the past few months a major shift in consumer psychology regarding shopping and buying has affected manufacturers and retailers alike.
The luxury sector, which had remained robust through mid September, was especially hard-hit, declining 24% to 28% during the November, December period.
Overall, during the holiday season, people still bought gifts but they spent less and bought fewer items.
As a result, the 2008 holiday quarter ended up being one of the worst in decades.
Average same store sales reported by US Prestige Department Stores declined 12%.
Beauty sales in that channel decreased 7%.
Retailers slashed prices across fashion and luxury categories but they largely held prestige cosmetic prices firm which should help us maintain our strong brand equity going forward.
In the Americas region, our sales for the quarter fell 12% largely because of the difficult US department store business.
Most of our products are positioned between basic staples that consumers need and more exclusive luxury goods that they desire and our results reflect that.
We didn't perform as well as some household product companies, nor as poorly as some luxury good players many of which have beauty products in their mix.
Consumers who purchased in the quarter were largely enticed by value, innovation and newness which helped some of our brands.
For example, the Estee Lauder and Clinique brands enjoyed strong sales of value group driven gift sets, particularly skincare offerings.
Retail sales of our products in the US Department Stores declined 6.7% according to NPD, because it was difficult to compete with huge markdowns in other categories in the stores.
We also suffered from destocking, our shipments fell approximately 19% President on a bright note, NPD reported that we gained some share in a channel, in particular, Clinique sales outpaced the beauty industry and its share rose 80 basis points.
Results in other US channels were mixed.
Sales in our free standing stores and salons suffered the effects of the downturn but we generated gains through our eCommerce business.
Many consumers were enticed with free shipping offers.
In fact, December 15th was the biggest online sales day in our history.
Our results in Europe, the Middle East and Africa were also weaker than expected.
Sales declined in most established countries.
Some retailers in Europe are also managing inventory tightly.
We experienced trade destocking throughout most major countries and we believe this will continue for at least the next quarter.
Data from major Western European markets indicate we grew faster than Prestige Beauty.
In addition, certain emerging markets, notably the Middle East, did well.
Sales in our highly profitable travel retail channel fell sharply due to a falloff in passenger traffic and retailer destocking as well as the impact of weaker currencies in certain countries, particularly the Korean won.
Although sales decreased in the Americas and Europe they grew 8% in Asia-Pacific.
In local currencies, sales rose 13% with many countries up double-digit.
The economies in this region so far have held up better than in other parts of the world.
That said, Japan officially entered a recession during the quarter, tempering the momentum we've seen.
Nevertheless our sales in Japan grew low single digits over the same period last year.
Our data for the first six months of fiscal 2009 indicates overall share gains of 70 basis points in Asia, within our distribution.
Despite the overall sales increase this quarter in the region, growth has been tempered by a softening retail environment which we believe will continue and may worsen further.
Looking at our business by category, we had the best performance in hair care, showing gains across Europe and Asia.
Skincare grew double digits in the Asia-Pacific region.
Skincare is our most profitable segment and will be a major focus of our strategy.
Moving on to working capital and cash flow, our cash balance at the end of December was $729 million.
Our days sales outstanding were 46 days this quarter compared with 43 days last year.
So far we have seen no material issues with either our retailers or our suppliers.
We moved a few of our smaller customers to a cash on delivery basis.
For others, orders continue to flow and we are being paid regularly.
We will continue to keep an eye on the financial health of the parties with which we do business.
Despite lower sales in the quarter our inventory days improved to 166, compared with 174 days last year.
Reflecting positive working capital trends, our net trade cycle improved to 117 days, from 149 days a year ago.
For the six months, net cash flows from operating activities were $217 million, compared with $362 million in the prior year period.
And we spent $158 million for capital expenditures in the first half of fiscal 2009 reflecting tighter control on uses of cash versus our plan.
As our results indicate, we are not immune to the negative global economic conditions confronting many companies.
However, we remain relevant in the marketplace with strong fundamentals and solid long-term growth potential.
We are profitable, our cash flow is relatively strong, we have enviable assets and the ability to grow our market share.
However, given the climate, we are being prudent and taking aggressive steps to protect our business.
Here are some of the actions we have taken.
In our first quarter, we implemented belt tightening plans in every affiliate brand and function to protect profits as much as possible during the global recession.
For the first half of this fiscal year, we reduced planned operating expenses by approximately $120 million from existing cost containment efforts and belt tightening.
This equates to about $250 million in expected spending reductions for the full fiscal year.
We have ample liquidity and access to credit.
In early November, we closed a $300 million offering of five year notes as a defensive measure and to provide flexibility for our business opportunities.
To preserve cash we suspended our share repurchase program in September.
On last quarter's call we said we were actively reducing discretionary capital spending by 10% this fiscal year.
We are now looking for a 25% reduction and expect a portion of that savings will come from postponing upgrades to counters, manufacturing projects and other discretionary items.
We have reviewed our pension plans and they are adequately funded at this time, thus not requiring any significant immediate cash infusion.
However, we are staying on the offensive and investing smartly in areas where we believe we can capture market share and drive growth.
Let me now discuss our thoughts on the remainder of the fiscal year.
In these volatile times and unpredictable times we are significantly more cautious than we were just three months ago.
We believe that the current global economic conditions will contribute to soft retail sales for the balance of our fiscal year and beyond.
Additionally, the economic environment creates other business risks for us, including the possibility of store closures, retailer bankruptcies, slowing growth in the market, markets dependent on oil and the possibility of short-term deflation followed by inflation.
We have run a variety of scenarios, weighing these risks and all of them show us generating profit and positive cash flow.
Like many companies, our ability to forecast has become more difficult but we want to give you some guidance for the remainder of the year.
For the year, on a constant currency basis, our international business is expected to be our leading performer.
As of now, we are assuming that sales growth in Asia will continue in the low teens, although the environment could worsen.
Europe should post a modest decline.
Sales in the Americas are forecasted to decline at mid single digit rates, reflecting the continued challenging economy.
We expect 2009 local currency sales to be flat to down 3% compared to last year.
Foreign currency translation is likely to lower our reported sales by approximately 5 to 7 percentage points.
For the remainder of the fiscal year, our assumption for the Euro is $1.30, for the yen, $0.89 and for the pound, $1.38.
If the dollar strengthens or weakens against these major currencies it will further impact our financial results.
We are maintaining our revised full year EPS forecast of between $1.30 and $1.60.
This includes approximately $0.25 to $0.27 related to the negative impact of foreign currency translation.
Also included in our estimated EPS is $0.05 due to higher debt levels.
For fiscal '09 we expect to generate around $475 million of cash flow from operations, and to use about $275 million for capital expenditures.
We are anticipating that the high level of volatility and uncertainty in the marketplace will have a dramatic impact on our results for our fiscal third quarter.
Sales for the third quarter are forecasted to decline 2% to 4% in local currency, reflecting a weak retail outlook.
The negative impact of foreign exchange translation is expected to lower sales by about 7 to 8 percentage points.
We expect EPS for the three months ended March 31, 2009, to be between zero and $0.08.
Summing up, while other companies have stopped giving guidance all together, we want to continue to provide our expectations, despite the limited visibility.
Our assumptions remain dependent on how consumption and trade inventories evolve during the next five months.
Economists vary in their predictions of the timing of an economic turnaround.
Our outlook assumes that's the downturn will last for at least another 12 to 18 months.
We will manage our business through these serious economic times by reducing costs and conserving cash, but we will not cut vital investments.
We will continue to invest behind branding, innovation and the development of our people and capabilities to gain global share so that we emerge stronger and more competitive when the economy eventually rebounds.
And now I'll turn the call over to William.
William Lauder - President, CEO
Thank you, Rick.
Good morning and thank you for joining today's conference call.
Although we are obviously disappointed with our short-term results, we remain fully focused on building our business for the long-term.
We are bracing for a prolonged global market downturn and we are taking actions to protect and strengthen our business.
We're positioning each of our businesses to reflect our commitment to the consumer.
This involves cutting costs to reflect our lower sales base, reorganizing to work smarter, emphasizing strategic execution and rebalancing our portfolio.
Importantly, with our solid cash flow, we continue to invest wisely.
We're confident we will emerge from the downturn a stronger and healthier Company than before with greater market share and a more competitive position.
We've shown our ability to weather difficulties numerous times in the past.
In the years following recessions, slowdowns and retail disruptions, the Estee Lauder Companies grew global sales, emerged more successful and gained ground on competitors.
We know this recession is likely to be longer, deeper and tougher than any in recent memory.
We anticipate being able to withstand the pressures.
In my remarks, I will provide you with an overview of the actions we are taking and the strong fundamental that anchor our business.
We pride ourselves on our ability to build brand and drive sales around the globe.
We realize we must also excel at cost containment to remain competitive with companies that are more productive and efficient.
The current economic climate makes it even more critical to resize our cost structure.
Additionally, we must accelerate some cost savings and dig even deeper to re-establish the base for our strategic plan.
People costs account for nearly half of our selling, general and administrative expenses so this is an area we cannot ignore.
Preliminary plans call for a reduction of approximately 2,000 people equal to 6% of the workforce.
We are evaluating where cutbacks might occur but they are likely to take place globally throughout the organization.
The reductions will occur through normal attrition, reorganizations and job eliminations.
Additionally, we will reduce our temporary workforce.
This is a very difficult step and we will carry it out with the respect for employees that reflects our Company's values.
This decision comes after months of careful thought.
We feel we have no other choice in these challenging times in order to achieve a competitive and sustainable cost structure.
The majority of these cutbacks will take place over the next 24 months.
The costs associated with the headcount reductions will be one element of the restructuring charges that the Company expect to take.
Fabrizio will cover this later.
In addition, we are implementing an immediate Company-wide freeze in merit increases which will have minimal benefits this year but more substantial savings in fiscal 2010.
The hiring freeze we imposed in the first quarter continues.
The only exceptions are to fill important capabilities that are missing from the organization and positions needed in fast growing emerging markets.
Employees are sharply reducing travel and entertainment expenses.
Some of the Company's travel will be permanently eliminated thanks to global investments we have made in video conferencing and collaboration tools.
Other actions we are taking to protect our Company include expanding our already healthy cash position, adapting our innovation and marketing programs to the current economic reality and consumer value, building capabilities to compete more effectively including enhancing our consumer insight using our strong balance sheet to build share in core markets and brands.
These are just some of the actions we are taking and Fabrizio will elaborate in a few minutes.
Now, let me turn to the fundamentals of our business that gives us confidence in our future.
Companies that will win through these times and emerge stronger are those with diversified businesses, strong balance sheets and healthy cash flow.
We have all three.
As a pioneer of beauty we have grown to amass a powerful and unrivaled brand portfolio with extraordinary global reach and recognition, diverse in geographies, customers, brands and beauty categories.
Today the Company is recognized for its constant flow of first to market innovative products and decades of well honed brand building and commercial expertise.
Which is second to none.
Equally important, the Company continues to have solid financial underpinnings.
We have a healthy balance sheet with relatively low debt.
Our historic conservative stance on leverage has never looked wiser.
Our cash flow remains strong so we are able to weather these tough times while still making investments for future growth.
We enjoy other fundamental strengths.
Our business is well diversified and rests on a solid foundation anchored by three pillars.
We are multi-brand, multi-national and multi-channel.
Our diverse brands range from entry level prestige to super premium luxury.
They are leaders in four major prestige beauty categories.
Our brands are number one in US prestige department store beauty sales led by powerhouse brands, Estee Lauder, Clinique and Mac.
Our skincare and makeup categories each had $3 billion in sales last year.
In recent years our brands have made great strides penetrating international markets and appealing to millions of new consumers.
This vibrant international business which accounts for the majority of sales, 59% in fiscal 2008, is expected to continue driving our growth.
The carefully selected distribution channels we sell our product depends on the region's retailers and shopping habits of local consumers.
Although consumer increasingly shop across multiple channels, North American department stores remain a core distribution channel for us.
We are committed to working with them to jump start sales growth, re-energize the beauty floor and make them more relevant to future consumers which will help our business as well as there's.
In fact, Macy's announcement this week of a major reorganization can be integrated with our own North American realignment.
It gives us the opportunity to work together to develop a new model to better serve consumers and improve performance.
Traditional department stores and perfumeries remain our two largest channels but we have established healthy businesses in many other types of retail locations.
A distinguishing trait that underlines our varied distribution is exceptional personal service and across all channels that commitment to the consumer will be honored.
The beauty business is rapidly changing.
Consumers are increasingly demanding, the competition more intense, the playing field much bigger.
Other shifts include blurring of mass and prestige channels and products, changes in distribution and the consumer's definition and expectations of value.
To maintain our position as the preeminent leader in prestige beauty, we must operate with a more competitive cost structure and a nimble organization able to attract new consumers and find promising opportunities.
Wealth is growing in Asia, the Middle East and other emerging markets.
The global marketplace is expanding.
While at the same time, the world seems to be getting smaller.
It is important to remember that even in the face of a global recession, growth in emerging markets where we enjoy leadership positions remain solid.
That is good news for us.
But consumers in different countries have different wants and needs.
Therefore, it is more important than ever that the consumer be the focus of everything we do.
These demographic shifts along with our increasingly complex business require that we change the way we operate, both within the Company and the marketplace.
We need to be more global in our thinking by increasing our international innovation efforts, international presence and international sales.
Within the Company, we have begun to establish a more multi-functional and integrated organization.
Our Company has been built and fiercely individual, independent brands which is how consumers will continue to see them.
However, brand leaders and other top executives are sharing ideas and resources and meeting regularly in leadership groups.
We realize we need to work differently, more efficiently and cooperatively to leverage our resources and scale and eliminate duplicate efforts.
The current economic situation has accelerated our need to focus, adapt and execute against our priorities with a difficult business climate, it is even more important to work harder and more creatively to confront the challenges.
With lower sales we must first realize our cost base and improve our productivity to preserve and grow margins while still investing in the priorities that will drive our future growth.
We have the drive and the passion to emerge from these challenging times even stronger than before.
In closing, I want to reiterate that there are many reasons why this is the right time to embark on a new strategy and a clearer vision for the future.
We are a Company with a long, successful history, deep core values and enviable assets.
Our goal is to grow to the next level.
Fabrizio and I forged a terrific partnership and along with our senior management believe the Estee Lauder Companies can become a even stronger model for a modern day growth company, one that delivers sustainable, profitable growth for the long-term.
Now I will turn the floor over to Fabrizio who will talk to you about our strategic direction.
Fabrizio?
Fabrizio Freda - President, COO
Thank you William and good morning, everyone.
Today I will provide you with highlights of our long-term strategy.
We are taking an evolutionary approach towards achieving our goals and not trying to do everything at once.
We want to make sure we do it right and at an appropriate pace.
As both William and Rick mentioned we are currently dealing with the acceleration of the global economic slowdown which has occurred in such a short period of time.
In this unprecedented environment there is much we cannot control or predict including consumer sentiment and currency fluctuations.
In fact, the world has changed considerably since we first began developing our strategy almost a year ago.
As a result, the economic crisis has made us adjust part of our approach and lower the base from which we are launching our efforts.
At the same time, it has pushed us to accelerate our focus on change and execute against our new priorities.
In my remarks today, I will focus on the elements of our business we can control, and how we will become more resilient in the face of what we don't control.
Across the Company, we are working new ways that will help drive our future results.
We have taken several initial steps as we embarked on the new plan.
Namely, we established a leadership team, comprised of high level executives from different brands, functions and regions, to address our toughest challenges.
We intend to operate more globally across boundaries and brands.
Working together is a multi-functional group.
Our new team will be faster in making critical investment and decisions and be responsible for achieving our goals, implementing our strategic priorities and resolving critical global business issues.
We created a program management team, also comprised of multi-functional executives to lead the execution of restructuring and cost saving projects that represent the biggest opportunities.
They work under the leadership of Rick, our CFO.
We have begun to deploy the new corporate strategy to our brands, functions and regions, making the Company more cohesive and integrated.
We have high quality teams of people in place to deliver results we're seeking.
The best leader for each job and task have diligently working to succeed in their efforts.
The Company now has one clear vision, to strengthen our position as the global leader in Prestige Beauty, and be a well-diversified brand building powerhouse of unrivaled creativity and innovation.
In a world of brands stretched beyond their origin, and companies that have become conglomerates, we remain a specialist, devoted to prestige beauty, a big, growing market filled with untapped consumer aspirations.
These factors are the foundation needed to achieve our new strategic plan.
Our Company has been very successful in driving sales growth and developing brands, but now we need to do even better.
Our new goal is to deliver sustainable higher level of profitable growth for the years to come.
William Lauder - President, CEO
Hello, are we still on.
Operator
(Technical difficulties)
Fabrizio Freda - President, COO
Okay.
Sorry.
I'll start again.
So these factors are the foundation needed to you achieve our new strategic plan.
Our Company has been very successful in driving sales growth and developing brands, but now we need to do even better.
Our new goal is to deliver higher level of sustainable, profitable growth for the years to come.
Importantly, the Company has many attributes that will not change.
Most notably, our intrinsic values of uncompromising ethics and integrity.
As a a family controlled Company, we remain committed to providing consumers with the highest quality products, treating employees with respect, building fair partnerships and being responsible corporate citizens.
Now, let me explain how these actions are expected to translate into results.
During the next four years from fiscal year 2010 throughout fiscal year 2013, these are the goals we want to achieve.
Keep in mind, that we are starting from a depressive base in fiscal year 2009.
First, we target to gain share in global prestige beauty, with sales growing at least 1% ahead of market every year.
Second, derive more than 60% of sales from outside the United States, making us even more balanced and diversified.
Third, strive for an annual step change in profit improvement, with an initial goal of growing our operating margin between 12% and 13% by fiscal year 2013.
Fourth, create a substantial increase from current levels in return on invested capital.
And fifth, reducing the inventory days 15% to 20% which will liberate more cash to generate growth.
These improvements will also substantially reduce obsolescence which is currently about $150 million per year.
Achieving these goals will enhance our leadership position and create more value for stockholders.
So, how will we accomplish these objectives, while also creating a sustainable business model and protecting our key strengths and core values?
By focusing resources on our biggest opportunities including core brands, geographies and consumer segments.
By addressing underperforming brands.
By driving our superior innovation capability and creativity.
By continuing geographic and channel diversification.
By decisively reducing costs and duplicated efforts.
By creating a more efficient and integrated organizational structure to better leverage scale and the power of our people.
And by building greater capabilities in consumer knowledge, strategic focus, financial discipline and global R&D.
Now, let me go into these elements in more detail.
We have started by making clear strategy choices by brand, category, geography and channel, then determining how to succeed and what capability we needed.
So the first element is to focus and prioritize investment for profitable growth behind the biggest and most lucrative opportunities.
This means focusing on high gross margin segment with the best growth potential.
This should allow us to exploit our distinctive business model which is based on aspirational brands, superior product performance, selective distribution and the power of personal service.
All of which generate a unique consumer experience.
The priority areas we have identified are by category and brands, be the undisputed global leader in skincare, our most profitable category where we have very strong R&D capabilities and where the personal service model is very effective.
Focus will be in certain high growth skincare segment such as the wellness area and the the anti-aging needs of a fast-growing aging population.
This focus will drive our biggest brands, Estee Lauder and Clinique.
Garner greater share in make-up on a worldwide basis on the strength of our fast growing makeup artist brand model which appeals to a broad range of demographic.
These represents a huge opportunity for accelerated profitable international expansion.
Our strong Mac and Bobbi Brown brands will strive for growth in these areas of focus.
Continue growing share in super luxury beauty segment.
A $1 billion category for us with brands such as La Mer, Jo Malone, Bobbi Brown, Estee Lauder, and (inaudible) we have only just begun to tap the full global potential of these exclusive brands.
Although this area has been hot in the U.S.
and Europe in the current environment, and requires some reframing, we are optimistic about the long-term opportunities particularly in Asia.
We plan to play more profitably in premium hair care by staying focused on the upscale salon business model, rapidly expanding international markets.
The Aveda brand will be pivotal in this effort.
By geography, focus resources on the fast-paced emerging markets, notably, China, Russia, Eastern Europe and Middle East that provide return on invested capital, as well as Asia with its rapidly growing middle class consumer base.
Specifically, we see terrific opportunity in skincare as beautiful skin is culturally important in that region.
We aim to grow share in image building core markets, such as US, UK, France, Italy and Japan.
By channel we will continue to drive our core department store and perfumeries across the globe.
It is essential to turn around sales trend in North American department stores.
This channel remains an important destination for many consumers.
We are determined to work with our retailers to create excitement, improve the business model, make our proposition more relevant and attractive to consumers and improve points of sales.
As an example, the recently announced Macy's organization provides an opportunity to do this.
We will aim to grow share in profitable, fast-growing channels where consumers are sensitive to our unique business model, such as the Internet, trolley retail, free-standing stores, European pharmacies and direct response TV.
Separately, we will invest to cultivate tomorrow's winning brands and products.
We have narrowed our focus for acquisition to targets that we believe will probably fill our strategic gaps.
Our entrepreneurial Beauty Banks division is becoming more global in its brand creation efforts.
And we will explore further investment opportunities in incubator brands as we did with (inaudible) in India.
Prioritizing also means deciding where to effectively manage resources for profit margin turnaround.
In some areas we will de-emphasize sales growth until investment grade returns are achieved.
Following are the areas we look to improve.
Underperforming brands.
In the aggregate, they represent about $1 billion in sales but contribute disproportionately lower profit.
The issues confronting each brand are different.
Each underperforming brand has developed a plan to improve profitability and has 18 to 24 months to achieve its goal.
In this environment we are working to speed up the timetable.
Some brands will need to exit categories, geographies or channels to resize into a profitable model.
The fragrance category.
Our flag against task force has developed and recommended a plan for the next three years to improve profits.
We are adjusting pricing strategy, reducing costs, announcing the portfolio and rebalancing investments between new products and classics.
We will invest more effectively on key business drivers, reduce non value added costs and look to grow in markets and channels, particularly in Europe and travel retail.
Let me now change gears and talk about how we are going to succeed in those identified areas of focus and what capabilities do we need to strengthen.
First, we believe the consumer must be in the forefront of our thinking.
Better consumer segmentation will enable us to focus our efforts on the highest impact opportunities and maximize effectiveness of our marketing.
Enhanced consumer insights will allow us to continue to delight the consumer by focusing creativity and imagination in the right areas.
More extensive consumer testing should allow -- should also help us better predict demand which should improve inventory and (inaudible) levels.
Another key area of focus will be the innovation process.
Innovation is our lifeblood.
And it will permeate every element of our business, including products, personal services and marketing.
First, we want to focus more on breakthrough technology and ideas, totally new and unexpected products.
We have also developed plans to increase the success rate of our sustaining innovation and lower the cost of the innovation process.
Finally, we plan to leverage R&D partnerships in key areas to accelerate the development of new ideas.
Importantly, to succeed globally, we must customize our offering to meet regional and local needs and we are redesigning capability to do this at lower costs.
We have made a good start with our Asian skincare and makeup offering in the Clinique and Estee Lauder brand.
We can strengthen capability farther, capitalize on the development and consumer understanding.
Through the focal areas discussed, are expected to sustain growth.
(Technical difficulties).
New priority initiatives under way to reduce costs.
In the current environment, we have established two types of programs.
Temporary belt tightening or resizing savings and systemic structural changes to sustain more profitable long-term growth.
The resizing efforts are intended to carry us through this difficult economic period and preserve as much in profitability and cash as possible in fiscal year 2009 and 2010.
As William said, we have already instituted a hiring freeze except for select positions where we need unique capabilities.
Reduced travel and entertainment and capped non essential marketing and professional fees.
On top of that, the systemic structural changes are expected to generate permanent savings.
Specifically, we have identified roughly $450 million to $550 million in potential savings.
They include aggressively improved cost of goods.
This will be achieved through higher gross margin product mix, working with suppliers to find efficiencies, reducing destructions and optimizing the supply chain.
Is a critical piece of our ongoing effort to be more financially disciplined and operate more effectively.
Our UK manufacturing, North American data procurement and North American Financial reporting process went live in November.
The SAP roll-out will be prioritized to serve top-saving opportunity first.
Third, additionally, we reduced the number of SKU by 10% in 2008.
In fiscal 2009 we have targeted another 10% reduction or about 2,000 SKU but in the current environment we will make an effort to cut even more.
Going forward we expect to implement a one in, one out for SKU maintenance and more rigorous process to ensure profitable product launches.
Fourth, optimizing distribution centers.
Here we have the greatest opportunity internationally where we currently have 36 distribution centers.
The goal is to have fewer centers and less need for safety stock in consolidated warehouse due to lower aggregate demand qualities.
Fifth, realizing in data procurement savings.
The primary mission for the data procurement is to negotiate better prices, reduce usage and leverage scale in an effort to control costs and eliminate duplication.
We are in the process of designating experts in specific procurement category to oversee the bulk of spending.
At the end of fiscal year 2010 we expect the vast majority of our purchasing will be done by professionals.
Fifth, achieving savings from outsourcing select support function if there is a cost advantage.
Another area for saving is optimizing the structure of our three major regions.
The Americas, Europe, the Middle East and Africa, and Asia-Pacific.
And aligning the global brand and function organizations.
We believe we have significant opportunities to better leverage our scale, improve productivity, reduce complexity, and use the corporate view to optimize channel strategies.
Specifically, we see opportunity to optimize and harmonize our European and Asian organization.
We will strive to accelerate sales growth and market share gains through our integrated business approach.
We plan to increase efficiency this the region through brand synergies, shared services and leveraging back office functions.
Define and implement a North American affiliate organization.
Our North America team led by Dan Brestle has mapped a large portion of the necessary functions.
They're working with the brands to establish the organizational structure, position (inaudible) between brands and the new affiliate.
Implement transformational improvements to shared services and achieve productivity improvements in corporate support departments.
Shared services opportunities include centralized support in IT, HR, customer service and accounting.
Based on the need to resize our business, and the reorganization project as William mentioned it, we will need to reduce about 6% of our workforce.
Roughly 2,000 employees over the next 24 months.
This is a very difficult decision but with people costs nearly half of the total cost base, it is needed.
As we proceed through the second half of our fiscal year, we will continue to evolve our strategy and further plans.
We will likely take restructuring and other one-time charges of between $350 million $450 million over the next few years.
The charge will most likely cover the account reduction, some facility closings, improvements on underperforming brands and other non-recurring costs related to the achievement of our plan.
As William mentioned, we also are implementing an immediate Company-wide freeze in merit increases.
Moving to our organizational strategy, we are leveraging the amazing power and talent of our people, developing a highly interdependent organization, focused on superior creativity, operational excellence and continuous learning.
We are strengthening our training programs at all levels with a focus on change leadership, consumer marketing and strategic management skills.
We have also developed a new rewards and accountability system to help ensure that our strategic and organization objectives will be accomplished.
The new compensation plan will affect about six thousand bonus eligible employees at the manager level and above beginning in fiscal year 2010.
Although we had performance based compensations in the past, the new structure will be tied closely to the strategic plan and provide financial incentives for the achievement of specific metrics with more focus on profitability, return on investment and collaboration.
I mentioned earlier that we will need to reinvest a portion of the savings to realize, to fund future growth.
Specifically, we expect to reinvest about $50 million of savings behind the initiatives.
First, we intend to build our competence in consumer knowledge.
Second, we intend to accelerate and better leverage our presence online and in other non-traditional channels.
Third, we expect to intensify our R&D, brand creation, and conceptualizing capabilities particularly in Europe and Asia.
And fourth, we are allocating resources to fund our equity-based new rewards program.
This means we have identified $400 million to $500 million in projected net savings.
These actions should produce a sustainable 12% to 13% operating margin over the four year period.
This margin improvement represents our initial planned time frame and we see the opportunity to work towards an even greater efficiency after 2013.
Historically, we have generated healthy cash flow.
We are striving to improve working capital with major improvements in inventories to announce our overall cash position of the Company, return on invested capital will take on greater importance and will be applied throughout the Company as a decision-making tool.
The strategy I've outlined this morning is the results of months of effort on the part of hundreds of people throughout the organization.
It has been endorsed by the Board of Directors and William and I explained it to employees at all levels.
Now, more than ever, the creativity, ingenuity and dedication of our employees around the world is essential to drive our business throughout this difficult period, and William and I are very proud of the work, energy and commitment they have already shown.
In the coming months and years, employees will enjoy more career development opportunities, be rewarded for their talents and efforts and should continue to take pride in working for a Company that appreciates their ideas and work ethics.
We know we have a top flight group of resourceful employees, many of whom have spent a good part of their careers here.
We expect that they will find the Company with family values and excellence to be an even more exciting and rewarding place to work as our strategic vision is realized and fulfilled.
As we embark on our new strategy, we are asking everyone to embrace our vision and to be guided by our Company new mantra, imagine, integrate and innovate.
The only limits to our future success will be our collective imagination and creativity.
I'm excited to imagine what our best, brightest and most creative people can change and achieve.
We will share ideas and meet together our markets, products and resources realizing the one united, well-integrated company is stronger than 29 individual brands.
That one global interface is greater than 140 separate countries and territories and that multi functional work is more productive than independent efforts.
The vast he's stay Lauder Companies will be integrated into a more cohesive whole.
Lastly, we will innovate, surprise and delight the consumer throughout the products and related personal service we create and by working together in unexplored ways.
By imagining, integrating and innovating we are becoming truly global.
We will take the best ideas no matter where they originate and send them out across markets.
Future globe events could be born in India, ideas can come from China or Brazil boundaries don't matter, creativity does.
We are confident this will continue to be a company where people are excited to come to work , can aspire to great levels of personal development and achievement and everyone will play a pivotal role in taking the Company to greater heights for the benefit of all stockholders and all employees.
That concludes my comments.
We will be happy to take your
Operator
(Operator Instructions).
Our first question today comes from the line of Bill Smit with Deutsche Bank.
Bill Smit - Analyst
Can you just talk about what some of the underlying volume assumptions are to get to that 12% to 13% operating margin because as we all know, there's still a pretty big fixed cost element so I think the margins are probably pretty contingent on some sort of volume growth.
Just a question not related to that but can you just talk about what's going on with the ownership structure and some of the registered B shares that are becoming A shares now?
William Lauder - President, CEO
I'll answer the second question first.
You know, when there are B shareholders who wish to sell shares, they automatically convert to A.
Bill Smit - Analyst
That's like 12.5% of the float, that is right, that's been registered?
William Lauder - President, CEO
We can give you the exact number.
I'm really not certain exactly what the total float is.
The B shares versus the total outstanding shares.
But the only shareholders -- the only B shareholders are original issuers in the Lauder family an those are only B if they remain with the shareholders of the shareholders agreement.
But if they're sold out, they are A shares.
Bill Smit - Analyst
Okay.
Great.
Thank you.
William Lauder - President, CEO
They are -- the B shares when sold are automatically become A.
Except if they're sold intra to the signers of the shareholders agreement.
Bill Smit - Analyst
Okay.
Thanks.
That's good clarification.
Fabrizio Freda - President, COO
Now, to answer your second question, predicting the markets in this period is very difficult, so clearly we didn't feel that we can predict the market in current volatility, particularly 2010 is too high risk prediction.
That's why I can share with you what our assumptions in the numbers, which is not necessarily a prediction.
So we assume that 2010 the global market will be about flat.
And then we assume that the global market as of 2011 will start growing again about between 2% and 5% per year.
Those are our assumptions today.
Bill Smit - Analyst
Okay.
Great.
Thank you very much.
Operator
And your next question comes from the line of Nik Modi with UBS.
Nik Modi - Analyst
Hi, everyone.
The only question I have is in terms of Clinique and Estee Lauder in the US, Fabrizio can you talk about if you have any plans or any programs in place to really start to jump start those brands, at the same time getting them both growing in unison?
Operator
(Technical difficulties)
William Lauder - President, CEO
Can we continue on with the questions, please.
Operator
Please, do sir.
Your next question is from the line of Ali Dibadj.
Ali Dibadj - Analyst
Hey, guys.
William Lauder - President, CEO
Hello.
Ali Dibadj - Analyst
Couple questions about the specificity of the -- in the cost savings plan.
And maybe the first one is in terms of execution, perhaps timely, given the execution of this phone call.
What do you have in terms of your project management office?
I mean, is it -- I'm resisting saying hopefully not same people running this phone call, but how are you managing that?
Do you have a PMO in place?
How does that work?
Rick Kunes - EVP,CFO
We apologize for the technical difficulties.
They're obviously outside of our control but we're glad we're back speaking with you.
As Fabrizio outlined in his script, we have, myself and other senior executives for every single savings initiative there is a senior member of our management team who is responsible for that project.
He has a--beneath him a team of his employees which are working on delivering those savings.
We have identified the key decision makers to make those savings happen and we are working with outside consultants to verify through various benchmarking techniques and others the validity of the savings targets that we have set and as we mentioned, most of those savings we're quite comfortable that they are there and available for us and we're right at the stage of beginning implementation.
So we have a very formal process.
We meet every two weeks to review those projects and so we're very well organized.
Ali Dibadj - Analyst
And then in terms of where the costs are coming from, could you give us a sense of the split between COGS and SG&A and the reason I say that is because as far as our analysis would be concerned, your employee base is growing much faster than your local currency sales so cutting it 6% or 2,000 people, though it sounds like a big number, it actually isn't a big number.
There are others who are cutting more deeply, more quickly, who areen't in dire straits as you guys or in as much difficulty as you guys--so split between COGS and SG&A and then I have a short follow-up.
Rick Kunes - EVP,CFO
Sure.
And as the details of these savings plans become apparent to us and the timing we obviously intend to communicate that going forward.
The split, roughly, Ali, and this is roughly, I would say 30% costs of goods, 70% SG&A costs.
You did mention- you used the words dire straits.
I'm not so sure I would agree with dire straits.
As a Company we have a very strong balance sheet.
We have very strong cash flow.
We have leading market share across the world.
We are quite honestly well positioned and have an opportunity to improve our profitability, there's no question about that.
As far as what lies in front of us I think we're actually quite well positioned compared to many other companies.
Ali Dibadj - Analyst
And then a question around you did mention you announced this to employees, would love to hear perhaps some-- either Fabrizio or you guys-- obviously--we may have lost Fabrizio-- but to get a sense of what the reaction was from people, how are they thinking about the Company going forward because it is a very different message than what they're probably typically used to hearing from management.
Fabrizio Freda - President, COO
Hi, Ali.
Actually, the reaction is excellent.
We have really a great group of talented employees that are basically buying into the strategy and starting implementing it with excellence.
In this moment, we have the team in place and we are learning how to work together in different ways, and how to bring this forward.
With excellence.
I have to say that the ability of the organization I have to say that the ability of the organization so far to change and evolve into a more balanced approach to grow management and cost management has been impressive, in my opinion, and I'm very optimistic for the future in this area.
Ali Dibadj - Analyst
And one last thing, maybe, if you could indulge me.
You mentioned Macy's and other department stores reconfiguring how they operate, reconfiguring their back office.
It doesn't seem particularly, Rick, to your split of cost savings, didn't see from the report, from the release at least, that you're actually going after much of your front line, much of your sales force, much of your beauty advisors, I guess I don't get that.
Why isn't that a pretty big opportunity?
According to our numbers, it is.
I would love to hear the logic there and understand how we should think about that going forward.
Fabrizio Freda - President, COO
You should think about this going forward that the productivity in store is something we honestly measure regularly with our retailers and continue to evolve daily, so this is something we -- it's not new.
Will not necessarily be a new part of the program for the future.
We do this since many years, regularly.
On the contrary, our internal organization and go-to-market is actually was we are looking at for the to market is actually was we are looking at for the future organization and we are going to leverage better scale, better focus, we are going to leverage the ability to be more local and tailored in our offer but be exploiting scale more at the center.
Which is a similar direction that Macy's has announced so I think there is a good fit between the direction that we want to take and what our big customers, big retailers seems to also go in the same direction.
William Lauder - President, CEO
And Ali, If I could add, I just want to remind you that the primary point of difference between ourselves and many of our competitors is the extraordinary focus we put on the point of sale and the effectiveness of our people who offer that high value form of service to the consumer.
Our focus is in scaring out expenses that are not touching the consumer, so that we continue to focus our efforts and our expenditures aimed primarily at the consumer, who ultimately is the most important part of our entire efforts.
Operator
And our next question is from the line of Wendy Nicholson with CitiGroup.
Wendy Nicholson - Analyst
Hi.
My question I think is a little bit of a follow-up to that.
And it has to do with the sort of 12 to 13% operating margin target.
Obviously, we're in an unusual time now where margins are very depressed but in terms of the targeting of the 12% to 13%, given that there is sort of a lack of specificity right now in terms of the charges you're taking, in terms of the timing of the savings, can you give us sort of some sense of the slope of the line, if you will, of the margin expansion?
I mean, if you assume for example that fiscal '09 is supposed to be a 10% and started there, are we talking about 50 to 75 basis points of margin expansion every year or is this still really a 2012, 2013 sort of event?
Rick Kunes - EVP,CFO
So Wendy, the short answer is we intend to improve our operating margin every year and we will provide you the details of that as they become apparent to us, the timing of some of these things.
We did tell you hat the cost associated with achieving these are a restructuring charge of between $350 million, $450 million but that the savings we have identified are $450 million to $550 million of savings.
So it's really just an issue of what is the triggering event that allows and that requires us to take that restructuring charge and as those events happen, we will certainly inform you and we will be taking those choices appropriately.
But we intend to continue to improve our operating margin, year-over-year.
You just have to remember that from where we're starting is a relatively low base because of the economic conditions that we are, but we look for linear and steady improvement over the period of our strategic plan.
Wendy Nicholson - Analyst
And Fabrizio if I can follow up?
Relative to kind of when you started focusing on these things and identifying the opportunities, would you say that the timing of some of these programs or some of the initiatives have been pushed out because of the macro environment is so tough?
I know you pushed out the communication of the goals from December to February.
But just in terms of the actual activity, have you delayed any of these projects given just you how tough these things are?
Fabrizio Freda - President, COO
No, to be honest in terms of cost saving activities we're actually anticipating them, rather than delaying, just because the need of increased productivity caused by the softer sales have anticipated the need.
So thats's the original plan.
We are working on anticipation of (inaudible) That's the original plan.
Our sales is softer and so we are working basically with two aspects.
One is in the short time, try to resize the organization in order to re-establish at least the productivity we started from.
And then, continue applying in a linear way all those savings that we have identified, to go from resizing into restructuring and going to adjusting margin by 2013.
So in a nutshell, is anticipating the saving, adding to them, some resizing needs in the short term and obviously, unfortunately, having a lower base in 2009 as a starting point.
Operator
And your next question comes from the line of Alice Longley with Buckingham.
line of Alice Longley with Buckingham.
Alice Longley - Analyst
Hi, good morning.
I have a question about your outlook.
You said that you were assuming that the downturn will last another 12 to 18 months and then you also said that you're expecting your markets globally to be flat in fiscal 2010.
In that kind of environment, can your earnings grow faster than your norm for the next four years or so?
Do you get an exceptional earnings rebound in that environment?
William Lauder - President, CEO
You know, as I think we just outlined, we anticipate our operating margin to improve every year.
With a slow, very slow sales growth anticipated over the next 12 to 18 months, obviously that means very aggressive cost cutting to make that happen, so I'm not so sure, Alice, that mathematically we would grow at an enormous pace over the short-term but it will show operating margin improvement and what that implies for EPS on a linear basis over the course of our program.
Alice Longley - Analyst
Okay.
Thank you.
And then my other question is you said there were brands amounting to about $1 billion in sales that are underperforming brands.
Which are these?
William Lauder - President, CEO
You know, as you know, Alice, we don't really like to talk specifics about brands.
But I think that many of you have ideas of which those brands are but I think it's critical to understand that we have very specific plans in place on a brand-by-brand basis and they're not the same plans, each brand is being treated differently and being addressed differently based on its particular needs.
And as Fabrizio said, there are certain actions by brands such as exiting certain channels or certain geographies, that we will pursue on a brand-by-brand basis to improve the profitability of those brands and they have a fixed time frame in which though make those improvements.
Operator
And your next question is from the line of Chris Ferrara with Banc of America Merrill Lynch.
Chris Ferrara - Analyst
Hey, guys.
Fabrizio, I guess you talked about two buckets of cost savings, one being the belt tightening and the other being more strategic in nature and I guess I'm trying to get some context around that.
I mean, it sounds like just from belt tightening, you're talking about getting $250 million in savings from this year alone yet the entire duration of the strategic restructuring program you're doing $450 million to $550 million.
Is that $250 million of belt tightening is that stuff that comes back when you don't need to be as tight with the belt?
Implying the $450 million to $550 million is actually a big bigger number than that because it needs to offset that too?
And if not, why would there only be $450 million to $550 million if you could just tighten your belt to get $250 million?
Fabrizio Freda - President, COO
I hope I was clear in my speech, but the belt tightening, part of it which is linked to productivity is there to stay and we will work to make it then a building block of the future strategic changes.
Part of it is just adjusting and reacting in the short term to changes which have been amazingly sudden and fast and we had to react in the short term.
So this is bound to come back and to continue our investment of our core priorities.
So you cannot assume the belt tightening as it is to be the first building block of the structural changes.
Chris Ferrara - Analyst
Just so I understand then, the portion of the $250 million of belt tightening this year that would be something that sticks, that is also part of the $450 million to $550 million, is that correct?
Rick Kunes - EVP,CFO
Yes, that is correct, Chris, but the majority, and a pretty large portion of that belt tightening is expenses that will come back to Fabrizio's point, so the reason that we're aggressively pursuing this resizing exercise is to reset that base and more -- come up with permanent savings to replace those temporary savings that are part of the belt tightening exercise.
So that's one piece of the savings and then on top of that we have the other more systemic and strategic and reorganization type savings that will bring us all the way to the $450 million to $550 million of savings.
Chris Ferrara - Analyst
Got it.
Thanks.
That's helpful.
One of the things, I'm sorry if you talked about out and I missed it but one of the areas it seems that you have opportunity for improvement I guess is advertising and promotion and the expenditures there.
Can you just talk a little bit about how the game plan might be different relative to what we've seen in the last couple of years?
Fabrizio Freda - President, COO
Yes, there are two.
First, is try to invest money on the best drivers and using -- being more sophisticated, return on invested capital, ROI, in order to elevate these different drivers on the key brands in the key markets.
This will allow us to spend the money where the money has better returns and to save the money somewhere else.
Second, in the current environment you are seeing reduced cost and other elements that we are going to exploit by our procurement new systems and third, the approach to business, where we have different brands duplicating a lot of efforts in their activity, for example in production materials for advertising, promotion organization, have created a lot of dispersion of energy.
So the ability to reorganize over these and centralize some of these functions will also save a lot of money that the consumers do not see, mainly saving the money for preparation and process of these advertising and promotion activities where we have big opportunities.
So the combination of those three things will reduce our cost but will not reduce the impact on the consumers.
Operator
And your next question is from the line of Linda Bolton Weiser with Caris.
Linda, please go ahead.
And our next question -- Linda, are you there?
Linda Bolton-Weiser - Analyst
Can you hear me?
Rick Kunes - EVP,CFO
Yes, we can.
Linda Bolton-Weiser - Analyst
Sorry.
Can you elaborate on the part of the strategic plan that has to do with adjusting fragrance pricing strategy?
Fabrizio Freda - President, COO
Yes.
There are some of our brands which have opportunity of pricing, some others actually where we are too expensive in price, other we are too low in price so over the next years, gradually, we will adjust the price in our brands reflecting the real understanding the consumer segment in which they play.
Though it's important to be designing our future portfolio with brands that we may not need, new brands we want to bring in, we'll try to play into the entire pricing spectrum and portfolio opportunity of the category.
Today we are playing in one pricing area mainly with our fragrances and with exception of Jo Malone or Tom Ford we are playing in higher pricing segment.
We are pricing very much in the middle, middle low part.
We need to adjust the overall portfolio to grow share in every single relevant pricing segment in the market.
That's what it means.
Linda Bolton-Weiser - Analyst
And then I think this was asked already but can you just clarify once more, did you say how much the headcount reductions would be in FY '09?
William Lauder - President, CEO
Linda, we did not.
We said it was 2,000 in total and that as the details and timing of those plans were clearer for us, that we would announce that to you because that would be a triggering event obviously for some sort of restructuring charge and that has not happened as of yet.
Operator
And your next question is from the line of Andrew Sawyer with Goldman Sachs.
Andrew Sawyer - Analyst
Hello, guys.
I was wondering if you could talk a little bit more in detail about the portion of your labor force.
Talking about cutting labor force that's not in contact with employees.
Wonder if you could talk a little more detail of your 32,000 employees give or take today-- where are the big buckets of those employees?
Where would you see cuts, what portion of that employee base would you consider customer facing?
William Lauder - President, CEO
I think, Andrew, first of all, 32,000 is a number way higher than what we calculate.
We have approximately -- a lot of people, basically.
Let's put it this way.
The single largest portion of the force that's on our payroll are in manufacturing and distribution in headcount and then the second largest portion of the -- after that would be white collar workers throughout the system and in affiliates and back office operations.
Those are the two biggest buckets of opportunity.
Obviously, as we get more efficient and first of all, as our demands in our manufacturing and distribution plans change and we can gain more efficiencies, we will be reducing head counts there as well as we can gain more efficiencies, both in back office and brand operations, we will again find ways to reduce the headcount where we have activities that are going away on a permanent basis.
Andrew Sawyer - Analyst
And then as far as getting more productivity out of the counter reps, is there anything new to the program that's different than what you guys have been trying to do before?
How are you guys going to manage that aspect of it?
William Lauder - President, CEO
That side of what we've done has already had its own natural balancing factors if you will and we've had very good productivity for FTE in store for a number of years and given in selective markets like North America where the turnover rates have been fairly high, that naturally balances itself on productivity on a very regular basis and we -- (technical difficulties).
Operator
(Technical difficulties)
William Lauder - President, CEO
Andrew if you can queue back up and come back on for the, we can finish the answer to your question or whoever is next.
Operator
Your next question is from the line of Lauren Lieberman with Barclay's.
William Lauder - President, CEO
If you will, if you can hold off our question for one moment and allow me to finish answering Andrews question before we were technologically interrupted, a couple of clarifications just to help you understand.
Of the 32,000 people we have on our payroll, a significant portion of them, about 1/3 of that number related to in-store people who are on our payroll.
But there's also a large number of people who represent our brands and stores around the world predominantly but not exclusively in North America who are not on our payroll but they represent our brand.
The 2000 number we are talking about in a 6% reduction of work force is related to people who are non-retail sales related.
Those are related to activities at our brand, manufacturing, distribution and back office operations.
The activities related to stores as we said earlier, somewhat takes care of itself through natural attrition and productivity, through the standards which the brand has as well as other factors.
Okay.
Lauren.
Lauren Lieberman - Analyst
Okay.
Great.
First question was just on the sort of assumption is--I know it is not a prediction but the assumption for revenue growth and your comments it was sort of a 2% to 5% growth rate for global, prestige beauty beginning in 201.
That seems lower to me than what you might have been incorporated into the Company's thought process historically, and if that's always the rate you saw global beauty growing at then did prior sales assume kind of 3%, 3 percentage points of share gains every year?
Fabrizio Freda - President, COO
No, again as I said, we are not in a condition to make a prediction on the market in this moment.
We don't know where the market will start from, when to start growing again.
So I will not answer the question that we believe, in other words, the question was not which market growth global beauty care, we go back when the recession will be over.
The question is what are the assumptions that we are in our -- the assumptions which are in our 12 margin calculation today are assumptions of a flattish market in 2010 and 2% to 5% growth on the average of 2011 and 2013.
Obviously, if the markets will do better than that our assumption will be conservative.
If the market will do worse than that our assumption will be too aggressive.
That was the answer.
Now if you want my personal belief on the beauty markets I belief that beauty market after recession will start growing again very well.
I believe there is an immense opportunity of growth in these areas particularly in Asia and other emerging markets where many consumer and a big amount of (inaudible) -- is answering and believe they there are opportunity to refrain the North America market in a way that will grow back to normal levels.
But that is not what is in our assumption today because this is really an unpredictable era in this recession phase.
Operator
And your next question is from the line of Connie Maneaty with BMO.
Connie Maneaty - Analyst
Hi.
Good morning.
I am interested in some of the comments you made.
It seems as though at least part of the strategy is to move sales toward the superluxury end of the business where I think you said maybe $1 billion dollars of your sales are there.
You also mentioned with your comments on fragrance and only Tom Ford, Jo Malone play in that area.
Are you trying to move the fragrance business that way and if so you also said that fragrance should play at all relevant price points.
Will some fragrance sales move out of department stores into the mass market?
And then I have a follow up question.
Thanks.
Fabrizio Freda - President, COO
So first question-- we didn't say we are going to move the percentage of the business higher in the superluxury segment we just said that we have a big business in superluxury and the market we believe has high long term potentials.
So we plan to grow share in these very big potential market for the long term.
Second point on fragrances--yes today we have Jo Malone and in a higher price luxury segment and the bulk of our business play in the middle.
But the real focus of our pricing strategy and choices of our portfolio will be profitability.
So we are going to focus our portfolio in the higher return segments and we have done it very (inaudible) to identify them .
For the moment it will be premature to make announcement like going down or up in because also they are
Connie Maneaty - Analyst
Okay.
Thanks.
My follow up is this.
Can first -- first of all what do you estimate retail inventory of our products to be?
And given the upheaval in retail, what confidence do you have that you won't be entering the kind of period we saw with the combination of Federated in May where sales and shipments were under pressure for well over a year?
Rick Kunes - EVP,CFO
In answer to our inventory position, normally in North America we have about a 10 to 12 week inventory position on average in our stores.
What has been happening and you have seen it in the numbers we talked about in our speech is that the retailers have been putting pressure on those inventory levels.
They have been destocking.
You saw the sell through number be much greater than the sell in number by us.
And part of that comes from the fact that the retailers can react quite quickly in stock levels on our particular product line because they take orders and we make shipments every week.
It is much easier for them to react quickly on inventory levels in our product category than maybe in some of the goods.
And we have seen that.
So I think that where we stand today, Connie, is that our inventory position in store is probably better than it has been in some time.
We do see continued destocking but probably not at the pace that we've seen in the last quarter going forward.
So we'll--further announcements by retail partners and if there are store closings and things like that, would that disrupt what our plans are?
I guess the answer to that certainly would be yes.
But as we have always said said, fewer points of distribution for our products in North America is an advantage to us and in all probability if they were closing a particular door it is probably not one of our most productive doors anyway.
So it works in our favor over the long term although it does short term volatility to the numbers.
William Lauder - President, CEO
And Connie, if I can add a little bit of flavor to that.
You have to look at retail inventory on a regional basis.
As Rick mentioned, in North America we are shipping on a weekly basis.
In many parts of Asia, we are shipping on a multi, on a daily basis often.
So the throughput of inventory in certain parts of the world as I said are extremely quick.
And then in other certain channels of distribution like Europe in the perfumerie markets where you see a slower cycle you will see some destocking.
But quite honestly for us, we'd rather see destocking and more velocity than see the retailers have too much inventory and not turn it quickly.
A faster turn is very healthy as you know.
For a retailer it is just as healthy for us to because we get better accuracy sell through data and what's selling.
Operator
Your next question is from the line of Neely Tamminga with Piper Jaffray.
Neely Tamminga - Analyst
Just following up a little bit on that and then I have a high level question for you guys.So Rick, if you're saying you guys normally run a 10 to 12 week supply with the department stores, then are you down by a full week or I am just trying to figure out order of magnitude there?
I have a high level question for William and for Fabrizio.
Rick Kunes - EVP,CFO
I think what is happening is that the department stores are reacting quickly to the slow down of their business and they're trying to at least maintain that--that level based on a future projection of lower sales which means that they are in a sense destocking the level of inventory in store that is will represent a 10 to 12 week supply on a much smaller forward sales projection if you will
Neely Tamminga - Analyst
Got it.
That's clear.
Okay.
High level question here.
So hearing a lot of the conversation that you guys are going back and forth about.
It seems to me the way you are talking about this consumer situation is more of a shock to consumer spending because of the recession et cetera.
But I am wondering how much internally there is a discussion or discourse just in general about how--what has transpired over the last year, what is ahead of us for the next eight years potentially-- has changed just the view on conspicuous spending, aspirational brands, et cetera overall.
I mean it would seem to us that what we are seeing is-- yes, a shock-- but it is also a whole change in paradigm toward brands and opulence and things like that.
So, just kind of if you could help frame up what your view is internally, with the consumers, and then maybe how that has been applied to your strategy and different from maybe even our September lunch, that would be helpful.
Thank you.
William Lauder - President, CEO
I think you put your finger on probably the single most important issue for us long term which is really understanding both the current consumer sentiments about her consumption and personal care and where she will feel comfortable in the future in spending for herself.
I think with the extraordinary of the decline in the economy, the extraordinary rapidity in the exit of many consumers and their level of confidence, it is very difficult to gauge right now whether she's on the sidelines waiting for permission to come out or whether she's on the sidelines basically having permanently changed her habits.
It perhaps is probably too early the to determine the answer to that question, but this is one of those things we are going to have to be examining in great detail before we can really understand what the future is like.
I would hate to use an eight to 12 week trend and extrapolate it over a multi-year period of time when you realize that the current--we got us to where we were did not happen with that same rapidity so it is kind of--to believe it is going to go away with the same rapidity, but I don't want to be in a position the say it is safe to come back out, they will come back out and spend the way they used to.
We have to understand what level of consumption the consumer will be comfortable with in the future.
What is her psychological or orientation toward brands, aspirational brands, more luxurious brands and, as you said, the notions of conspicuous consumption.
Those are extraordinarily different also on a regional basis and I would hesitate to apply the North American values to the European values or Asian values.
They're all very different working on very different timelines, and I think it really-- we have to make sure that we are understanding where she, the consumer, is today and where she wants to go in the future and adjust our messaging to her, our brand positioning to her accordingly.
I don't know if there's something you would like to add to that Fabrizio.
Fabrizio Freda - President, COO
Thank you, William.
Just to add on to what William said.
There are clear actions that we are taking the direction because this is a very element.
First of all, the consumer are changing their value equation and their values.
That's clear.
Now is this a fad that will come back, is this going to change in a way it will then not that will will really change the consumer behavior for the long term?
It is something that needs to be better understood.
We have put together research of the consumer that will happen every three months to monitor this trend and to understand how they think, how they will react.
Today, as William said, we see a very different reaction in North America with other markets particularly Asia and some European market or in Middle East where the conspicuous consumption concept for example is not changed but that definitely changed in North America in this moment.
you can add one silver bullet to it.
In practical terms, what we see is consumer trying to go with within the same brand or within the same challenge to entry price point level, trying to look for spending less and maybe spending less frequency.
For example for (inaudible) -- we rarely see consumer really trading down although there's a lot of speaking about that, this is not happening from the data I see-- is not trading down to lower quality or the lower--s rather waiting to spending lower frequency which could be an element that comes back easier.
There's some consumers that change behaviors in this case we need to adjust the proposition and trend but as I said very different by segment meaning the entry price or luxury versus the top lucks are luxury, very different by region.
This require a lot of monitoring.
I don't think add like a one silver bullet to solve all of these issues.
Operator
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